You’ve decided it’s time to become a first home buyer. Congrats! This is an exciting milestone. But before you start touring houses, get your finances in order. Buying a home is a big commitment, and you’ll need to prove to lenders that you’re ready. Don’t stress; we have boiled it down to 8 steps to get your finances first home buyer ready.
First Home Buyer Strategies
Build Your First Home Deposit
Saving a deposit for a home is one of the biggest hurdles to homeownership. The more you can put down, the better – aim for 20% of the purchase price. Start saving automatically. Set up an automatic monthly transfer to move money to your savings account. Putting aside $200 or $500 monthly will add up over time. Cut out unnecessary expenses or look for a second job to earn more for your deposit. Every little bit helps. If a 20% deposit seems beyond reach, speak to your Mortgage Broker about the options you have to get into the property market sooner.
Understand Government Grants and Other First Home Buyer Assistance Programs
Depending on which state or territory you are looking to purchase, there are several different Government First-home buyer assistance programs that you may be able to access. The First Home Owners Grant and Stamp Duty exemptions are the most commonly known, but other programs exist. Many lenders have policies and promotions to assist borrowers get into the market. Cash incentives and fee waivers (including for Lender’s Mortgage Insurance) can be substantial and save you thousands.
Create a Realistic Budget for a First Home Buyer
A budget is essential for getting your finances in shape to buy a home. To make an honest budget, look at your income and spending over the last 3-6 months to see where your money is going. Be realistic – if you’ve been overspending, now’s the time to make changes. Top tips for a realistic budget:
- Track your income and expenses – see how much you earn each month, and list your essentials like rent, utilities, loan payments, groceries, and fuel. Don’t forget occasional costs like medical bills or gifts. Total your income and expenses to see if you’re overspending.
- Cut down on excess spending – look for expenses you can reduce or eliminate, like dining out, entertainment, and hobbies. Even saving $20-$50 a week can make a big difference. Ask yourself if each purchase is a “want” or a “need”. Buy generic or store-brand items instead of name brands. Cook meals at home using leftovers instead of getting takeout.
- Pay off high-interest debts – Make extra payments on credit cards, personal loans, and other debts charging high-interest rates.
Close Credit Facilities you don’t need.
Before you start house hunting, it’s a good idea to close or reduce the credit limits of any credit cards, personal loans, or Buy Now Pay Later facilities you don’t need. Even if you never use them, the credit facilities available will reduce your borrowing capacity for a home loan. Closing them may even improve your credit score.
Maintain Stable Employment and a Regular Income
Lenders want to see that you have a steady job and income to qualify for a mortgage. Maintaining employment in the same company or industry for 2-3 years will be viewed more favourably than job hopping. If you are on probation, this will be a risk for some lenders, particularly if you don’t have experience in that type of role.
However, a new job with a significant pay rise may be just the tonic required to increase your borrowing capacity. Each borrower’s situation is unique, so getting good advice before changing jobs can be valuable.
Not all income is treated equally. Banks will assess the likelihood of that income continuing in the future. There are also significant differences between the policies of each bank, so just because your bank told you no does not mean there are not many other lenders who will embrace your business.
Employment income comes in many forms, and the advice of a Mortgage Broker to assess your circumstances will be crucial to finding the right deal for you, mainly if you rely on non-standard income sources such as bonuses, commissions, or rental property income.
Understand the Costs of Purchasing and Owning Property
Purchasing a property isn’t limited to paying the seller the agreed price. You must pay Government fees such as stamp duty, and mortgage registration at settlement. The bank may charge an upfront fee for writing your loan; other professionals, such as conveyancers, and building and pest inspectors, may need to be engaged. These need to be considered when calculating the funds required for your purchase.
Once you take ownership of the property, you can say goodbye to the rent cheque, but your budget needs to be updated to account for new costs such as building and contents insurance, maintenance, and repairs. If you are purchasing an apartment or unit, Strata and Body Corporate fees can be a material cost.
Calculate your borrowing capacity and set a target Purchase Price
When preparing to buy a home in Australia, it’s essential to understand your borrowing capacity and set a realistic target purchase price. Here are the main steps:
As a rule of thumb, Lenders can typically consider loans of up to 5 to 6 times your annual income, so if you earn $90,000 a year, your borrowing capacity would be a little over $450,000.
However, lenders will also consider your existing debts and living expenses to determine how much you can safely repay each month. If you have other loans or debt like credit cards, car loans, or even student debt, this will reduce how much you can borrow.
With your borrowing capacity and deposit known, you can set a target purchase price for your property search.
Get Pre-Approved for a Mortgage
Getting pre-approved for a mortgage is the final step in getting your finances ready to buy a home. This means working with a Mortgage Broker and going through the process of applying for a mortgage before you start seriously house hunting.
Pre-approval has many benefits. First, you have a limit to how much you can borrow and your price range as you search for homes. This way, you won’t waste time looking at places you can’t afford. It also shows home sellers that you’re serious, making your offer more attractive. Finally, it streamlines the process once you’ve found a place because the lender already has your information on file.
To get pre-approved, your Mortgage Broker will work with you to gather documents like your identification, pay slips, bank statements, and information on any debts you owe. The lender will evaluate your income, debts, assets, and credit score to determine how much they will lend you.
The pre-approval process typically takes a few weeks. Once pre-approved, shop confidently, knowing how much you can spend. When you find a home you want to buy, the lender will conduct an appraisal to ensure the value aligns with the selling price. If everything checks out, you’ll provide a down payment, usually 3-10% of the purchase price, and you’ll be well on your way to owning your new home!