4 simple steps to follow before you put down your deposit for your first home
Buying a home and securing a mortgage is a significant life milestone that will not just happen overnight. Banks need to see that you can be disciplined in your approach to saving money by demonstrating this through your lifestyle behaviours and habits.
To help get you on the right track, I have outlined four tips to prepare you for buying your first property. Every dollar you save will reduce the amount you need to borrow from a bank, with a deposit of 20% or more negating the need for lenders mortgage insurance.
Cull unnecessary expenses to reduce spending
Reducing your outgoing funds is the first step to build the foundation for entering the property market. Consider cancelling subscriptions – such as streaming platforms and unused gym memberships – and try to negotiate cheaper rates on any recurring payments. For example, you could reduce your mobile plan, internet package or stop paying for entertainment subscriptions such as Spotify, Netflix or Stan. Often, first home buyers end up doing this after they already have a mortgage and are struggling to make repayments – so why not get a head start by culling the expense early and boosting your savings account further?
Pay off your debts and close lines of credit
When considering how much a bank will lend, they assess how much debt you currently have. Not only is the amount of debt currently owed investigated, but ‘available credit’ is also looked at. This means the limits on your credit cards and what you could hypothetically spend is taken into account. Aim to pay off (and close) all sources of debt to put yourself in favour with the banks. If you don’t like the idea of parting with your credit card, many mortgage agreements include one anyway so you may have it reinstated in the near future.
Organise your bank accounts
The money that you save by reducing your spending is best streamlined into a savings account. Consider setting up a separate high-interest savings account through your bank of choice (or whichever has the best rates at the time). Ideally, this will be an account that is harder to access (such as a Term Deposit) to reduce the temptation of dipping into your hard-earned cash. Use the Money.com.au compound interest calculator to see how much interest you can earn on your deposit over the course of your savings term.
Save the same amount that equates to your potential mortgage repayments
If you know how much you are aiming to borrow for your mortgage, demonstrate that you can meet your monthly repayments by saving the same amount now, if you live at home. By using an online principle and interest home loan calculator, you can see how much your regular repayment would be. To prove that you can afford to take out a home loan, try putting the amount into your savings account for 6-months. However, if you are already paying rent, demonstrate that you can pay your potential loan repayments by saving the difference in amount. For instance, if your monthly loan repayments are expected to be $1500 and you currently pay $1000 a month in rent, set aside the $500 difference in your savings. Not only will your savings account grow, but it will give lenders the confidence to approve your loan knowing you can afford the repayments.
