Preparing yourself for debt: 10 things to do now to make home ownership easier

Taking on a substantial amount of debt can be concerning, and rightly so – the added responsibility and requirements mean that you need to ensure you can always service your repayments or fear losing your home.

All being said and done, you do not need to enter into home ownership blind.

Here are 10 things you can do to prepare yourself for the debt and responsibility ahead:

• Find out what your repayments may be

If you’re still looking for a property, then get onto your bank’s calculator and estimate how much your repayments are going to be. Be honest with yourself about what you can afford and have a look at what you’ll be expected to pay.

Having a clear understanding of what owning a property means financially for you day in, day out is crucial.

• Have a budget plan

Now that you are away of the amount of funds required for your repayments, you can work out a debt management plan (here’s a good tool from Money Help), or a ‘budget’ that will ensure you can keep track of your outgoings. You may already have a good budget in place if you’ve been spending time saving for your deposit, so now you want to double check that it covers you enough.

• Practice paying your mortgage

If you know how much your loan repayment is likely to be, and your budget plan, then it’s time for you to practice what it would be like to pay it each fortnight or month. For instance, if the amount you’ll be required to pay is $350 a week, and your rent is currently $300 a week, see how you handle putting aside the extra $50.

If you’re living with your parents and not paying rent, or paying far less than your upcoming repayments, this becomes even more critical.

Property Observer recommends factoring in other costs, such as strata fees and rates, so you can really see how you’ll handle those costs. Make it a habit before you even get your property. If it means you’ll never be able to eat out socially, and this is a nightmare for you, then you need to come up with a different plan. Remember, this is paying off the bare minimum – most people will want to pay off more.

• Factor in a rate increase

You’ve practiced paying off your repayments as they’ll be when you own, but if you’re not on a fixed rather then you will need to ensure you can afford to keep paying in the event of a rate increase. Factor in up to an extra 2% on top of your current interest rate, and check whether or not this affects your ability to pay.

• Ensure you know how much debt is too much

Now that you know how much you can personally afford to pay for your loan, and your own habits and ability to pay it on time and in the full amount, be honest with yourself. This is a personal situation, and will be a different answer for every prospective property buyer.

Ask yourself these four questions:

1. Can I afford to do this for the length of the loan term?
   
   
2. How can I stop myself from continuing any bad financial habits?
   
   
3. What is my “tipping point” (the amount where you stop being able to afford the repayments)?
   
   
4. What parts of my lifestyle, if any, am I willing to sacrifice to keep up with the repayments?

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• Familiarise yourself with what to do if you miss a payment

If you do miss a repayment or find yourself suddenly struggling with hardship, then there are certainly things you can do. Here’s some information to assist you with understanding what to do if you get into this situation.

• Get income protection and necessary insurances

Do not wait until you own the property to take out insurances on your income. If you fall sick and are unable to pay your mortgage and associated bills, you will find yourself struggling. Research and get the required insurances early in the piece.

• Chat with a broker

Find yourself a good broker, and start talking about your options when it comes to mortgages and other home loan products. Understand what an offset account is, what LVR means and whether or not you’ll need LMI. You want to know how the frequency of repayments affects your overall loan, any associated costs and the limits to the product you’re choosing. Here’s how to pick the best mortgage broker to get you started.

The more you know now, the better prepared you will be later on - make sure you understand the requirements of your loan product and exactly what you're signing up for.

• Find out how other people are implicated

Yes, if you miss your mortgage repayments then you will be the one facing off against the lender. However, if you are sharing the repayments in a joint venture, have someone standing guarantor, or are buying on behalf of your family then it’s time to be honest with yourself.

How badly can things work out if you default? Could your parents lose their home? You need to prepare for the worst eventuality, and ensure those involved know that there is a possibility, even a small one, of this happening.

Be upfront, have the required paperwork, and understand expectations. For instance, in a joint venture where one person has stumped up the entire deposit, will you both be paying equal amounts of the mortgage? Do you own exactly equally? Answer these questions before you get to the property ownership stage.

• Get your documents together

You’re going to need quite a few documents to apply for your home loan, and now is the time to get everything in order.

Read through the requirements with the lender of your choice, however the majority of the time you will need identification, proof of earning and details about the property itself.

Make sure you know that your credit record is clean. Make sure you know what pre-approval is, and that you understand its limitations.

You can read Property Observer’s guide on getting your first loan here.