Getting Your Finances Right - Tips for First Home Buyers
This is the first in a seven part series designed to help first home buyers achieve their goal of home ownership. We hope you enjoy the series and welcome any feedback.
Buying your first home is an exciting time for everyone and is that first step towards gaining your independence. Over the coming series of blogs, we’ll provide you with the information and tools to help to smooth the way and make the process as stress free as possible.
As with all major steps in life, entering the real estate market for first home buyers (and subsequent times) is one that should be well thought out with clear plans and goals. These should start with a savings plan, which is a realistic budget in terms of monthly loan repayments, as well as your other commitments and living expenses.
Don’t forget to allow enough
Let’s face it, you still need to enjoy life.
So, where do we start?
How much can you spend?
This is heavily dependent on not just your income but also what other loans and commitments you have. Car loans, personal loans and credit card limits (even if not drawn down) have a considerable impact on your overall home loan borrowing capacity. A good starting point is our handy borrowing capacity calculator so that you can establish your current position and what you might need to do to improve it.
Contributing a deposit of 20% of the purchase price avoids the requirement to pay for mortgage insurance which protects the lender in the case of loss. This 20% can be any combination of savings, gifts, inheritances etc. and you don’t generally need to demonstrate a long-term savings pattern. Of course, you do have to demonstrate an ability (and willingness) to service the loan amount to satisfy a lender.
Unfortunately, not all of us have the
near-term ability to put together a 20% deposit so
this is where Lenders’ Mortgage
Insurance (LMI) comes in.
With LMI many lenders will provide financing up to 95% of the (lesser of) purchase price or valuation – this is referred to as LVR. In some instances, they’ll even add the cost of the LMI to the loan up to 97% LVR or more. At these levels, the lender and mortgage insurers’ criteria is more stringent but achievable with proper planning. Also, they’ll be looking for a savings pattern going back six months from the date you lodge your application.
Credit cards are treated as fully drawn by most lenders because they can be drawn up to the full limit at any time. This means if you have a $10,000 credit card limit you will be deemed to have a $10,000 debt even if that card sits in a drawer and is never used.
As a part of getting
your finances in order,
you should cancel any unused limits
or reduce your limits
to the lowest amount
that is practical.
If you have cards that are maxed out and just never go away, consider a switch to a card offering an interest free period for up to a year or more and then put every effort into eliminating that commitment within the zero-interest period. If you do this, avoid the trap of using the card during the interest free period. This is because even if you pay a new transaction off straight away the amount you will pay will go directly to the interest free amount and not new transactions which will continue to accrue interest at the standard credit card rate.
Car and other loans
We all want a nice shiny new car but if you are serious about getting your first home soon you should seek advice as to the impact of a new loan on your overall home loan borrowing capacity.
Do you know what your credit file contains?
If you have any doubt whatsoever it may be worth obtaining a copy of your file. Visit Veda Advantage where you have options for free credit reports.
Applications with multiple lenders
More is not better in this instance. Many lenders have a ‘point score’ system and every application on your file impacts the score.
Too many applications
and you may find that
“computer says no”.
Do your research with the help of a broker, then choose and apply for the loan that is right for you. We can access around 30 lenders and literally hundreds of different loan products.
Get a pre-approval
With your plans in place, savings established, other loans and credit cards sorted it’s almost time to go house-hunting. However, before you do, you should get pre-approval for your finance so that you know exactly where you stand. Doing this means you’ve put your application to the test and can confidently go out and start negotiating.
In our next blog we are going to expand on some of these topics and talk about how, in some circumstances, assistance from families can help first home buyers get into their home earlier.
Want to check out potential loan repayment amounts? Get our FREE App here.
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Looking to buy a high quality new apartment or townhouse? Talk to our friends at Mosaic Property.
Disclaimer: This article is of a general nature and for information only and should not be taken as financial or credit advice.
©Portfolio Capital Pty Ltd. November 2016.