Dubai: If you were looking to buy your first ever home, you’d agree that a lot of times just because you fancy a particular home doesn’t always mean you’ll be able to afford it. That’s when a ‘starter home’ can help.
“A ‘starter home’, sometimes called an entry-level home, is typically the first home a novice homebuyer purchases, and is in the lower price range of homes in the market,” said Prakash Bhat, a real estate and mortgage consultant currently working out of Abu Dhabi.
“A ‘starter home’ can help ease into homeownership. You'll have the ability to build equity and maintain more financial flexibility in case your plans change. But if you are ready to settle down and can come up with a down payment quickly, then looking at ‘forever homes’ is a good option.”
The concept originated when entry-level home ownership was a preferred option for young families before they could afford moving to their dream ‘forever home’, which would most often cost a lot more. Plus, they can help you to build home equity, too. Here’s how that works.
Home equity is the value of a homeowner's financial stake in a home. It can increase over time if the property value increases or as you pay down the mortgage loan balance.
So building equity increases the amount of money you have in your home that you may be able to use now or in the future. You can borrow from your equity as a loan, invest it, build long-term wealth or sell your home for more than you owe and keep the difference.
How can a starter home help build home equity?
For many first-time homebuyers, ‘starter homes’ can lead to financial stability that homeownership can provide. They can help homeowners build equity through their mortgage payments and home price appreciation that they can later use to buy a home they'd like to live in for the long term.
“First-time buyers are better off purchasing a home that has been maintained and doesn't require a lot of repairs or upkeep. If major repairs or replacements are needed, it might be best to move onto better-maintained properties,” added Bhat.
“Homeowners usually stay in their starter home for three to five years before transitioning into a forever home. Starter homes are popular with younger homebuyers because they're less expensive and don't require years of saving for a down payment.”
How to find out how much home equity you have?
In most cases, the value of any kind of property increases over time, this includes ‘starter homes’. That means its current worth is the starting point for your new dream ‘forever home’.
Then, the amount you make on the sale of your current home combined with money you’ve been saving becomes the basis for your dream home search. But finding out your home’s equity will involve a little math. Here’s how you can calculate your home equity with an example.
Let’s say your home’s current value is Dh175,000. When you sell that house, you’ll have between 2 per cent and 5 per cent in closing costs and another 6 per cent in fees for the agent who helped you sell it. When deducting that from your home value, the equity for your new home is Dh155,750.
Knowing how to set your dream home budget
Now that you know your current home’s equity, you can calculate how much home you can afford based on your current salary after taking into account some of the below costs.
“Keep the mortgage payment at no more than 25 per cent of your pay on 15-year fixed-rate mortgage. Don’t do a 30-year mortgage even if the bank offers it. You’d pay a lot in interest—money that should go toward building your wealth,” Dubai-based investment planner Mohammad Shaan.
“When you set your budget for your new home, account for typical costs that come with a home upgrade, like higher utilities, and also the cost of features you’ve been dreaming of. Don’t leave out closing fees, moving expenses, and any upgrades or repairs you might need to make.”
Keep the mortgage payment at no more than 25 per cent of your pay on 15-year fixed-rate mortgage
When starter homes aren’t the best option for you?
‘Starter homes’ aren’t necessarily the best option for everyone. This is because, for some it may make more sense to keep renting and potentially save up more for a larger home purchase. Others may be in a financial position to purchase a long-term home without buying a ‘starter home’.
Additionally, depending on the trends in your housing market, buying a ‘starter home’ may not be in your financial best interest if you don’t plan on living in the home for at least three to five years, Shaan further noted.
“So if you’re considering buying a ‘starter home’, take time to calculate and compare your potential costs with each housing option, both in the short term and long term. You can also consider consulting a financial advisor to guide you through your options – but that too comes at a cost.”
COVID-19 saw more demand for ‘starter homes’
More than half of the UAE-based property professionals surveyed last year said that the pandemic had generated increased demand for ‘starter’ homes, as per a 2022 real estate report published by global real estate brokerage Berkshire Hathaway HomeServices.
This is primary because homeowners in the UAE have become more optimistic on the outlook for residential real estate in the coming 12 months, the survey cited, which meant that homeowners are looking to stay invested, buy new homes or earn by renting them out in the years to come.
Home-buying statistics also show that first-time homebuyers consistently make up a quarter of all homebuyers in the past decade worldwide, while the majority were those who bought their second home within five years of their first one. So clearly, buying a ‘starter home’ has helped more people.