$500 Down For A New House ….A Good Idea?

With the house builders doing it tough you see all sorts of offers.

On the radio the other day I heard an advert saying “$500 down and you could be on the way to a new house and land package.”

If you feel tempted here are a few thoughts:

  • Deals like this mean you are borrowing more than 90% of the price of the house. This is a high risk mortgage so the provider will be charging extra interest and insurances which mean the overall cost will be higher.
  • When you buy a new house there are a lot of extras you need to budget for curtains, blind, furniture, gardens, the list goes on (See What Will It Cost?). Its not going to be easy in your new house if you have a huge mortgage, and your credit card maxed out on furniture and fittings.
  • Have you got a reserve of money in case you or your partner looses a job, gets pregnant, or becomes ill.
  • If property prices go down and things go wrong you may find that you owe more than the house is worth, This is known as Negative Equity!

I would be very reluctant to commit to a new house unless:

  1. I could put down a minimum deposit of 10%.
  2. Had the equivalent of at least 3 months wages saved for emergencies.
  3. Spoken to a bank or other lender to see what they would be prepared to lend  us, and knew it would cost less than 1/3 our combined incomes.

Do you think I am being too careful?
 

Budget has more posts about finding a house the right size for you.

 

How Much Can You Afford

So you want a new house?

Before you start going around display houses the first thing you need to figure out is how much you can afford. Get this wrong as a couple and it can damage your relationship, and you could finish up with a Ghost House.

Don’t let the marketing convince you to be too ambitious. Its better to get a smaller house and no financial stress than a big house and be struggling for the next ten years. After all its nice to be able to have some money left over after the bills have been paid to enjoy yourself.

The Barefoot Investor talks a lot of sense when he talks about the 20 -10 – 30 Rule. That’s have a 20% deposit, be prepared for a 10% interest rate rise, and don’t have mortgage repayment’s of more than 30% of your wages.

When we started off our approach was that we would borrow no more than I could pay off from my wages while leaving enough for living expenses. We also had mainly second hand furniture.

My wife’s wages went on buying new furniture, home improvements, holidays and luxuries. This meant that if she got pregnant or any other problems occurred we could still keep the house without major stress.

This meant that our first house was a small two bedroom house. Very much at the lower end of the housing ladder, but we were on the ladder, and building up equity for that next step. The running costs of the smaller house were also lower which certainly helped us pay off the mortgage faster before our next house.

Even if you already own a house and are looking to trade up the same financial considerations apply to your next house!

How big was your first House?

 

Budget has more posts about finding a house the right size for you

 

What Will It Cost?

When you are setting your budget for a new house, it’s not only the cost of the house and land, but all the other things that you might not have thought about.

If you haven’t considered these you might find that as well as a big mortgage your credit cards are all maxed out.

Here are some of the things you will need to consider based on Melbourne Outer Metro prices (say 35-40 km from CBD) in late 2010.

The costs are based on a small house with the builders basic fit out, say 15 square (140m2):

LAND

Cost of land $150,000 PLUS

Stamp duty say $5,000 PLUS

Legal fees say 2% $3,000

 

BUILDING

Basic cost of building say $150,000

Building cost are in the range $6,000 to $8,500 a square. Smaller houses have higher costs per square with cost per square reducing as the house gets bigger.

Site Cost say  5%  $7500

Excavation to level the site (See this link: Steeper Sites) and/or additional foundations (See this link: Poor Ground ) and costs can quadruple.

Extras say 5% $6,500 plus

Can includes extra electrical fittings, washing line, garden paths. If you want premium kitchen and bathroom units it could be $50,000 or more. (see this link: Love the Display Home)

Legal fees say 2% $3,000

Fence say $2,000

Light fittings, picture hooks, curtains, blinds and other bits and pieces say $5,000

Garden say $10,000 plus

Additional Furniture say $5,000 plus

Removal say $1,000

 

TOTAL

Land and House $348,000 plus

Remember even if you get a house and land package for $300,000 you will need to allow for at least another $40,000 before you have finished.

A big cost is the land. This cost will drop as you go further from the city.

When I first bought a house the rule was you could only borrow two and a half times your annual salary! If you were to go back to that rule the only way to go in the future would be to fit houses on smaller blocks.

 

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For similar posts see Starting Off