Most Australians think renting is throwing away money. One of the arguments for buying over renting is that rent goes up each year, but some change their mind when they buy their own home.

Once a home owner, they discover that homeownership is more expensive than expected, and unless they bought wisely, when selling their home, they barely break even.

To many, buying a home is the great Australian dream. Homeownership is also considered one of the key factors in building wealth. Many stretch the limits of their budgets and often spend more than what would be considered reasonable to get their foot in the door.

Here are some factors that potential home owners need consider before buying their home:

The true costs of homeownership

For starters, you need as least 5% of the purchase price as a deposit and if you are a first home buyer, dependant on the property value, several thousand dollars in stamp duty and mortgage transfer cost.

In addition to your deposit and statutory cost, you may need to pay for lenders mortgage insurance (LMI) and if you got seduced into hiring a buyer’s agents, that’s another 3% of the property value down the drain.

Homeownership can be far more expensive than renting when you add up all of the costs. A good estimate of cost incurred at settlement is 2 to 5% of the home's value. 

The cost doesn’t stop once you settle and take possession. Aside from your mortgage repayment, you’ll need to insure your place, pay for utility services regularly to keep your home liveable and if your property is in a strata complex, body corporate levy is payable. Of course, let’s not forget all your home maintenance cost. 

Building equity (property wealth)

There are only two ways to build equity with a primary residence: paying down the principal on your mortgage and appreciation in the value of your home. Putting the minimum deposit down on a house and relying on appreciation alone is not a good strategy.

While some areas see higher appreciation in residential real estate than others, according to ABS data, the national average house value growth annually over the last decade is 3.62 percent.

With traditional mortgage amortization, you pay more interest than principal in the beginning. It takes years to get to the point where you start to pay down the principal at a significant pace. Either way, you need to stay in a home for close to 10 years before building meaningful equity.

While a home can be a good way to build wealth, it can also sabotage your finances. Home owners can easily wipe out the equity in their home when refinancing. If you take out equity in your home by doing cash-out refinances or use the equity in your home to consolidate debt large consumer debt, it becomes harder to build wealth through your home.

Even when you refinance to lower your interest rate, you start the amortization cycle all over again and most likely extend the loan term to increase your borrowing power.

Building equity in a home can help you build wealth, but it works only when you stay in the house long enough for the value to appreciate and you don't borrow against the equity.

And when you do increase the loan term, where possible keep paying the higher loan repayment amount as it will cut down the loan term and save you tens of thousands of dollars in interest.

Check how your home loan compares

When does it make sense to buy?

There are many times when buying a home makes sense. Having healthy finances going into a home purchase can prevent a lot of unnecessary stress and worry. A low debt-to-income ratio and good credit score are musts.

You should also be in a position where you can put at least contribute 10% deposit. A 20% down payment is ideal to avoid having to pay LMI, but 10% allows you to go into a home purchase with some equity, and it shows that you're financially prepared. 

Homeownership should fit your lifestyle needs. If you're looking to raise a family, have pets, make a home your own, or want to feel settled, homeownership is a good choice.

Finally, you should be prepared for the responsibility of homeownership. As described above, it's not for the unprepared or faint of heart.

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This article does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.