When thinking of buying a new home, especially for a first home buyer, it is crucial to borrow responsibly and within your means. Overcommitting to a loan will mean compromising on lifestyle. A mortgage should not strain your finances, which is why we have created a handy guide to help in securing a realistic home loan.
Know Your Property Criteria
Once you have an idea of your borrowing-power, ‘pre-shopping’ is a fantastic way to finalise your budgetary goals. This process involves researching the relevant listings in your ideal area. ‘Pre-shopping’ will help give you a sense of the cost of homes in your desired suburb and will inform how much you need to begin saving. It will also give you a better idea of your potential mortgage repayments long-term.
You should work out how much you can afford to spend before you even look and always check the potential costs that may be added to the base price of your house design. There is no need to waste your energy looking in the wrong suburb so look at as many house plans as possible in your ideal area and price range to get an idea of what you can afford.
Speak To The Experts
Most first home buyers will need assistance with financing. In this case, it pays to get professional help up-front. The best step you can take is to get pre-approval for a loan so you know exactly what you can afford. Even if you are at the beginning of the home-buying process, a bank or lender will be able to advise you on your borrowing capacity, and how much you will need to save for a down-payment.
Your Income
For the average-income earning Australian couple, it takes approximately five years to save for a down-payment in one of our capital cities. Diligently managing expenses for this amount of time requires extensive and well-researched planning. Successful budgeting is a tricky skill to hone and requires commitment, especially for first home buyers.
Your income is a crucial contributor to your borrowing power. A lender will want surety that your income is secure and dependable. Generally, banks will calculate your lending capacity by subtracting expenses from your net income.
Other Financial Commitments & Assets
When a lender is considering your home loan application, they will deduct any liabilities from your income, this will affect your borrowing power. These financial commitments might include:
– Properties
– Mortgages
– Car loans
– HECs debt
– Credit card limits
– Personal loans
To determine your borrowing capacity, your lender should also scrutinise your ongoing lifestyle expenses. This will include the number of dependents in your family, in addition to:
– Insurances
– Mobile phone plans
– Childcare
– Gym memberships
– Additional cars
Possessing assets (such as investment properties, superannuation or cars) might improve your borrowing power.
Create A Savings Plan
Once you have a clear understanding of the amount that you will need to borrow and deposit, it is time to reassess your monthly expenses accordingly. While your mortgage should never be a source of financial stress, it will often require compromising on some weekly spending and creating strict financial boundaries.
This means sorting out the small stuff; consider how often you eat out per-week and how many visits you make to the pub or the movies. Keep a financial diary and, at the end of each month, review what spending can be slashed. Small cut-backs can accumulate into big savings.
Borrowing Correctly
Just because you can borrow up to a maximum amount, does not necessarily mean you should. To avoid mortgage stress, it is advised that you do not use more than 30% of your pre-tax income on home loan repayments. It is important for a first home buyer to reduce their risk and ensure that their finances could cover any repayments should their circumstances change. When working out the best home loan for you, check the ongoing payments, especially in the fine print for monthly service fees and other charges.
Specifically, consider the potential for rate rises or job loss to impact your capacity to meet repayments. Many lenders will also enforce a buffer, ensuring that you have money left over (after living expenses and repayments) to accommodate for any situational changes.
Committing to a mortgage should not mean compromising on lifestyle. Spending any more than 30% of your pre-tax income on a mortgage might tip you into the ‘mortgage stress’ category, wherein families struggle to meet ongoing expenses such as utility bills. Before borrowing the maximum amount, consider the aspects of your life that you are willing to sacrifice. If you still want to eat out and take your family on holiday, it might be useful to opt for a smaller loan.
Planning Your Budget
Once you have assessed your monthly expenses, it is time to start rationalising your cashflow into a manageable, long-term budget. Budgets are relative and circumstantial; it might take some experimentation to determine what works for you on a month-to-month basis. It is a good idea to trial-run your mortgage repayments for six months before committing to a loan. Any savings made can contribute to your down-payment. A successful budget will ensure that your monthly income is surplus to projected expenses. Every bank has an online budgeting tool that can help you arrange your finances.
How are you managing your current rental expenses? Being able to comfortably make rent each month is a good indication of a suitable monthly mortgage repayment. Substituting your rental expenses for a mortgage will minimise lifestyle compromises!
When budgeting for a home, it is also important to consider your future circumstances and monetary concerns. You could be tethered to a mortgage for decades. Will you make fortnightly payments rather than monthly payments, so the interest on your mortgage does not add up? Will you still be able to meet the repayments with a growing family? How about a change in job-status? Budget in a monthly ‘buffer’; a savings pool that you can dip into when faced with an unexpected expense.
Managing Your Budget
It helps to establish a few savings accounts that remain untouched and are designated to a certain budgetary purpose. These can interact automatically to ensure that money is diverted into the appropriate (untouchable) accounts, where it can then be accessed via direct debit.
For example, a portion of your income may be diverted into a ‘house’ savings account, or an account dedicated to mortgage repayment. This is a useful way of structuring your budget and ensuring that the allocated funds remain where they need to be.
Be prepared for the monthly repayments to rise and fall during the life of your loan. Make sure there is some financial room to move if rates rise. If rates fall, keep paying the same amount each month or fortnight. Each month you should aim to be in a stronger financial position than the month prior.
The First Home Super Savings Scheme
The First Home Super Savings Scheme is a useful resource for first home buyers. This scheme allows prospective buyers to save for a home inside their superannuation fund. This can contribute directly towards a house deposit. If you are considering saving for a first house, it is worthwhile making small, voluntary super contributions.
Interest Rates
It is important to factor in potential rate rises and the impact they will have on your loan. If you are worried about interest rate rises, did you want to split your loan between variable and fixed rates? If the RBA increases rates, will you realistically be able to make your repayments?
Remember a low start-up interest rate does not mean you will be paying less for your property in the long term. To help mitigate this risk, ensure that you could handle a potential rate-rise of up to 2% on your current home-loan or organise a fixed interest rate.
Future Plans
Are kids in your pipeline? Could your financial and family circumstances shift from a two-income household to a single-income household with dependents? As a first home buyer, this is something to consider before taking out a home loan, as a mortgage is a long-term financial commitment. Visit the RACV website for a home insurance quote to protect yourself from unforeseen events that could arise in the future.
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