What I have been doing
Since my last update post, I have selected the mortgage broker and conveyancer who will support me on my home buying journey. I have also been researching a few more suburbs in north-east and south-east Melbourne and done a few more suburb tours, particularly inner north-east Melbourne which is potentially a nice area to live in.
Over the past few weeks, I have been looking at my borrowing capacity, or how much I can afford to borrow from a bank to buy my first home. I am doing that right now so that I can start researching the property market by looking at past sales over different suburbs. To determine my borrowing capacity, I have been seeing a few different mortgage brokers and ran a few calculations on the mortgage calculator at moneysmart.gov.au.
I had enough money saved to cover a 20% deposit of the median price of 2-bedroom units in different suburbs. I have also made a concerted effort to minimise my expenses by adopting the Fast and Slow System and diverting much of my excess savings towards my first home. Furthermore, even though I am currently working four days a week, I am looking to extend my working week to five days a week so that I can earn more money to save towards my first home.
A big hit on borrowing capacity
Unfortunately, from both a mortgage broker’s and mortgage calculator’s perspective, the increase in interest rates over the past few years have eroded my borrowing capacity, to the point where I cannot borrow enough money to buy a 2-bedroom unit in the suburb I want to live in. Assuming a 6.5% interest rate on the home loan, making fortnightly repayments over 30 years with no bank fees, my borrowing capacity according to the mortgage calculator ranges from $222,576 to $435,549. This is a reduction from $247,776 to $484,863 for a 5.5% interest rate. Assuming a $130,000 deposit, this means I would only be able to afford a $560,000 home at most which is below the median price for 2-bedroom units in suburbs I want to live in.
| Work days per week | % net income on repayments | Repayments per fortnight | Borrowing capacity at 6.5% interest | Borrowing capacity at 5.5% interest |
| 4 | 30 | $649 | $222,576 | $247,776 |
| 5 | 30 | $762 | $261,329 | $290,918 |
| 4 | 50 | $1,082 | $371,074 | $413,088 |
| 5 | 50 | $1,270 | $435,549 | $484,863 |
What’s worse is that assuming I earn $2,540 per fortnight by working five days a week, half of my weekly income would only cover the minimum repayments on my home loan. This does not give me any room to get ahead of my home loan or to build a buffer on my savings that I can rely on should I suddenly stop earning due to injury or unemployment.
The non-existent margin of error in my home loan repayments is what is putting me off from buying my first home more than not accumulating a large enough deposit. I can see why people are in despair of buying their first home, whether it is not having enough money to cover a 20% deposit or to keep up with the minimum repayments of their home loan.
My next steps
Despite this, I will keep saving more money in an effort to accumulate a bigger deposit so that I can reduce my home loan, allowing me to buy a better property that I can live in for a long time. I am also thinking about whether to go for one of the government initiatives to buy my first home sooner, versus the potential bigger repayments that I may need to make now and in the future.
I am also thinking about whether my first home is something that I would live in forever, or is a stepping stone to a better property in the future. That is something that I will consider as I start to do my research on the property market over different suburbs of Melbourne.
Given the above considerations, combined with other series that I am writing, I am putting regular updates on my First Home Buyer Journey on hold for now. However, I may continue to publish information and update posts on my First Home Buyer Journey if and when they arise.
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