>Financial considerations when buying a house from a tax consultant and accountants perspective (Part 1)

This edited article has been provided to Finance ViewPoint by Raj Kuckreja CA, of Kuckreja Accounting and Taxation Services Pty Ltd (Phone: 02-9708-6978). The information in this article is general in nature and DOES not represent individual financial or taxation advice. Liability limited by a scheme approved under the Professional Standards Legislation.

Purchasing a house has to be thought of from firstly from a financial perspective. The rest will come from there. Before even deciding on a location or any other issue, you need to consider financing. This will be the driving factor on how much you are willing to pay. Important financing considerations:

1. NEVER view this as how much the financial institution is willing to lend, rather go online, and work out your monthly repayments for different borrowing amounts. Consider how much you can afford to repay with one salary and an absolute worst case scenario interest rate (for example 4% higher than current rates or a 50% increase in your repayments)

2. Try and avoid paying mortgage insurance whenever possible. This insurance does nothing for you; rather it is to cover the bank’s risk – which you are charged (paying) for. The best way to avoid this is either:
1. Ensure you have saved 20% of the purchase price (which is the deposit you want to aim for) plus stamp duty and legal costs; or
2. Borrow the 20% plus on-costs using security of another property (e.g. parents property if they have surplus or full equity in their home).

3. The combination of factors described in points one and two will then determine how much you can afford , which will help determine if it is the right time to buy

4. If the above factors limit your choice too much, consider purchasing the property as a rental investment first and then eventually moving into it. There are taxation implications to consider, for which you should consult a taxation advisor. This strategy can be very effective in helping you afford the property you want. (In the interim period consider living with parents or renting a much cheaper place).

5. If your choices are limited try NOT to think of buying a house for a short term. Having seen many clients and friends do this, it makes no sense from a financial perspective in most cases. The cost of buying and selling can easily get up to the $40k mark (when you consider stamp duty, legal fees, borrowing costs and agent fees on sale).

6. In most cases purchasing a house makes no sense for a short term investment. Especially when you consider how cheap it is to rent in comparison to loan repayments. There are studies showing mortgage repayments are often close to double rental payments. When you consider how little principle you actually repay in the first two years of a loan – I am sure a financial consultant will be very wary of this strategy.

7. With this in mind obtain loan approval before you start and be patient. Also consider reviewing your budget / strategy with an appropriate advisor (e.g. you accountant or financial advisor).

This concludes part one of the article. Look for more taxation, financing and loan related items to consider in Part 2 (to be published shortly)