Making the leap from tenant to home owner
It can be challenging saving a deposit when you’re renting, but take heart that paying rent can actually be a pretty good training ground for making home loan repayments. After all, you need the discipline to regularly pay the rent on time – or risk a “please explain” (breach notice) from the landlord.
But that’s not the only reason to stay on top of the rent. Some lenders may look at rent payments as evidence of your ability to manage home loan repayments. And every bit helps to get you over the line.
Nonetheless, there are some big differences between renting and paying a home loan that you need to be aware of.
Home loan repayments may not match your rent
Depending on where you buy, your loan repayments could be higher than the cost of renting. The only way to know exactly what you could be up for is to speak with your Aussie Broker, who can explain your borrowing power and likely home loan repayments. That way you have some clear numbers to start budgeting with.
Loan repayments pay for a major asset – your home
When you rent, you’re paying for the roof over your head but not much more. Hence the expression, “tenants pay off the landlord’s mortgage”. Home loan repayments on the other hand, steadily pay off a major asset that you own – your home.
When you take out a principal and interest home loan, each regular repayment is comprised of both interest plus a repayment of the loan balance (or principal). The good news is that the interest charged steadily reduces as the principal is paid off, and you gradually chip away at the loan balance. This steadily builds equity in your place, and at some stage you’ll own your home debt free.
Your home loan repayments can change
One aspect of being a home owner that you need to prepare for is the possibility that your loan repayments can change. Rent payments are fixed by a lease so they don’t normally vary until the lease expires or under certain circumstances, where you’re given plenty of notice. However, if you choose a variable rate home loan, the interest rate can rise or fall, and this can see your loan repayments vary too – either up or down.
This makes it important to allow some wiggle room in your budget in case interest rates rise.
One way around this is to consider a fixed rate loan, where the rate and repayments are locked in for a set period.
Add up the hidden costs
As a tenant you pay the rent but there are plenty of ‘behind the scenes’ costs that the landlord normally wears like insurance, council rates, strata levies. When you buy your home, the bills for these sorts of expenses become your responsibility and it will be up to you to cover the cost.
It can help to prepare for these outgoings by creating a future home budget that allows for regular living costs like groceries and transport as well as the add-ons of owning your home. You could try following this budget while you’re renting – think of it as a practice run for becoming a home owner.
Your home will need repairs
Even if you buy a brand new home, it’s Murphy’s Law that at some stage you’ll face repairs – anything from a leaky tap to an appliance breaking down.
As a tenant, repairs are usually the landlord’s problem, not yours. But the tables turn when you’re a home owner, and you’ll need to dip into your own pocket to pay for repairs and maintenance.
This can make it can be a good idea to have some emergency savings on hand. That way you have funds to dip into if an unexpected repair bill comes your way.
Another option is to make extra repayments on your home loan, and then redraw the money needed to cover any repair bills. If this could be right for you, your Aussie Broker can explain more about which loans offer redraw.
Talk to your Aussie Broker for more tips on switching from renter to home owner.
