It should come as no surprise that home ownership is expensive. However, what may be surprising is the dollar value that you would need to buying a home.
The media constantly portrays millennials as being victim to an overpriced housing market. Millennials also represent a material portion of the working population and have decades of future earning potential.
Perhaps part of the issue is a lack of understanding of how much is needed to buy a home. I’ve prepared an example below on the true upfront costs involved in buying a home. Please note that this example is for illustrative purposes only and is not intended to be professional advice.
First, a few assumptions…
I am modelling the following example based on a hypothetical millennial couple with no dependents. This couple is based in Perth and has a combined taxable income of $100,000. This is not unrealistic by today’s standards, given the average individual salary is just over $60,000.
I’ve also assumed that this couple has household expenses of $50,000. This is on the basis that the average Australian household spends approximately $57,000 per year on living expenses. I would like to think that my couple is slightly more frugal than the average household!
Furthermore, I’ve assumed that this couple has stable income streams and a 20 percent monthly savings rate. They are interested in buying a home worth $500,000, which coincidentally is the median house price in Perth.
I would caveat that there are inherent flaws with relying on averages compared to median income values. Specifically, the assumptions outlined above may be disproportionately impacted by extremely high income earners. However, in the absence of reliable median data, I’ve stuck with averages for this example.
Obtaining a Mortgage
Using the information above, the couple would be able to obtain a mortgage of nearly $630,000, at a 4% interest rate. You can find more details on the calculation below:
This suggests that a $500,000 home is well within reach. However, remember that a mortgage is conditional on the buyer contributing equity of at least 20%. Buyers can choose to contribute less and bridge the difference with lenders mortgage insurance (LMI). However, the Australian government recently reduced this threshold, as outlined below.
Let’s assume the couple do not wish to obtain LMI. In that case, they will need at least $100,000 for their home deposit/equity contribution. While this may seem steep, remember that this couple has the potential to save nearly $50,000 each year (i.e. have a net income of $100,000 with $50,000 of living expenses). Therefore, they can secure a deposit within 2-3 years, which is not long at all!
What about Stamp Duty?
Stamp duty on a $500,000 home will be just north of $18,000, according to ‘Stamp Duty Calculator’. Buying a home also leads to legal and conveyancing fees. As I mentioned in an earlier post, these are costs you can’t avoid when purchasing a home.
The great news is that first home buyers do not pay stamp duty on properties valued up to $430,000. Further discounts are applied between $430,000 and $530,000. Therefore, our couple can save some precious coin with this being their first home.
Don’t forget about Broker Fees
If purchasing an established property, our couple may request assistance from a real estate agent. These agents will help identify suitable supply, meet potential sellers on your behalf, and negotiate the final sales price. In return for these services, they can charge you up to 3% of the home purchase price.
That translates to $15,000 of added expenses for our young couple. The good news is that your mortgage value may cover these expenses. Alternatively, the couple can forgo a broker and try purchasing a home on their own. However, this option may be to their detriment, particularly if they lack the experience or knowledge of purchasing a home. Depending on your outlook, the 3% fee may be worth it just for the education.
In my experience, brokers often represent the buyer and seller, or can work closely with one another. This is to the buyer’s benefit, as that 3% fee is typically shared between the two agents.
The silver lining is…
If you’ve been keeping tab, our young couple is looking at over $100,000 of upfront purchase costs. While this may seem daunting, there is good news that has been available for decades. That good news is in the form of government incentives.
At least since I’ve been in Australia, the government has offered first home owner grants. In the last year, there have been additional incentives to supplement this program. For example, the First Home Loan Deposit Scheme (FHLDS) allowed 10,000 first home buyers to put down a 5% deposit without being subject to LMI. These types of incentives aren’t expected to disappear any time soon.
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Yes, owning a home is expensive. It may also seem out of reach. However, it should still be achievable for a large portion of our prosperous population. Further, in my opinion, young working Australians are not out of the conversation on home ownership, given their upside earning potential and the availability of government support.
The content outlined above was written, edited and published by the Lost Realtor. The author has over 20 years or real estate sales and investing experience in the Australian property market. He has held senior positions in Australian building companies, including being the General Manager of the residential sales division of Collier Homes. His qualifications include a Bachelor of Commerce degree and a Graduate Diploma in Building and Construction Law.