Buying a home depends largely on your ability to save for a deposit. The more money you put down upfront, the less you'll have to borrow, according to ASIC's MoneySmart.
But to get into the market you should also be realistic, says MoneySmart. This means considering a smaller or older property, or a property in a different area, where, hopefully, the prices aren't as big a strain on your budget.
Here's a tip: your ongoing mortgage repayments shouldn’t exceed 30% of your after-tax salary, says CommBank.
So, as an example, let's take a small one bedroom unit in Bondi Junction. The median price on these types of properties is $750,000, says REA Group. That's not cheap, of course, but at least it's not $1m like many homes across Sydney.
And older units, like this one, sometimes sell for less than the median.
Now, the price is one thing, the cost of your loan is another. To that end, another important part of working out what you can afford is checking your (LVR), which is basically the proportion of money you need to borrow compared to the property's actual value.
It's calculated by dividing your home loan amount by the purchase price of the property. So, if you don't have a 20% deposit (borrowing 80% of the purchase price from your lender), you usually need to pay lender's mortgage insurance (LMI). This is a one-off insurance premium to protect the lender, should you default on your home loan.
Back to that one-bedder in Bondi Junction for $750,000 …
You'd need $150,000 to make an initial 20% deposit on this property – not out of the question for a dual income family or couple. You'd also need to factor in stamp duty, which comes to about $21,000 for that price point when I ran the numbers in the Stamp Duty Calculator (NSW).
This, together with some other minor costs, means your loan would come to about $623,700, based on numbers entered into the Loan Market site.
Your home loan type matters, too
Working out these figures is just the start. Affording a home is a long-term commitment in which you need to weigh up your ability to make ongoing loan repayments. And these repayments (typically monthly), will vary based on your type of loan and the rate of interest you pay on it.
For example, with a variable interest rate, your loan rate can go up or down, generally in line with a change to the official cash rate, set by the Reserve Bank. Meanwhile, a fixed interest rate will remain unchanged for the fixed period – about 2-5 years, after which your loan will usually revert to a variable rate loan.
So what happens when rates rise?
Property experts will tell you to always factor in a 2–3% rise in interest rate when you're deciding whether or not a loan will be affordable. This gives you a buffer.
To illustrate the point, consider how a 2% higher rate on a home loan might affect the amount you would have to repay down the road.
Scenario A: Imagine you have a $300,000 home loan, with a consistent 5% interest rate over 25 years. Your monthly repayments, inclusive of a $10 monthly fee, would be $1,764 for the life of the loan. The total value of your repayments would come to $529,131.
Scenario B: Imagine you have a $300,000 home loan, with a consistent 7% interest rate over 25 years. Your monthly repayments, inclusive of a $10 monthly fee, would be $2,130 for the life of the loan. The total value of your repayments would come to $639,101.
Keep in mind, these are just some examples and scenarios. Buying a home requires loads of research and it's always best to talk to a financial expert first.