As a first home buyer knowing what you can afford to pay is the best place to start this process. You will need to be familiar with your budget to figure this out.
There are plenty of home loan calculators available that can help you work out repayment rates for your new potential home.
Start by exploring what price range you’d like to buy in by looking at the suburbs you interested in and the size of the house you’d require. This will give you a good starting point of what you’ll need to borrow. But don’t worry this figure will change as you do through the process.
Let’s say you decide that a house for $500,000 is a great starting point. With today’s average interest rate of approximately 3.02 per cent over a 30-year loan term on principal and interest (could be higher or lower depending on your deposit etc) you’d be expected to pay $2114 per month. Or just under $530 each week.
Explore how this would fit into your budget and adjust your expectations from there? You may also wish to use a budget planner to work out your current situation and start slotting in your future estimated finances.
Consolidate those debts and check your credit score
Once you have a list of your debts you can start to work out how to manage these more effectively.
Start paying off your credit cards, store cards, and personal loans. Or talk to your bank about consolidating them into one so it’s easier to manage.
One of the biggest reasons home loan applications get rejected is because of undisclosed debts. Forgetting that you have had a vet bill or an After Pay debt to pay back can hinder the process.
It’s also important to check your credit score as it’s something lenders will look at when you first apply for a home loan.
Not knowing about an unpaid Telstra or electricity bill from years ago might sound unimportant but it could definitely impact your borrowing capacity.
Timing your first home loan purchase
You should look at purchasing your first home when you’re in a reasonably stable position. That is, you’re not expecting any massive new bills coming your way and your employment prospects are stable.
It’s best not to have any major changes to your personal situation unless you absolutely have to during this period of time. This can be overcome sometimes, but it is a credit critical issue that the lenders will need to be covered off on.
Lenders will want to see your income and bank statements for the last three months. Bank statements are needed to show your living expenses. It’s important to know that you can’t just write down what you think it costs to run a household, it needs to be accurate.
How much deposit do I need?
Generally, a deposit of 20 percent of the property value is ideal, but not always needed. With a good credit rating and steady income, you could get away with less (sometimes as low as 5 percent).
However, if it’s less than 20 percent you may need to pay Lenders’ Mortgage Insurance (see our Research chapter for more information).
For our $500,000 home loan example, you would need up to $100,000 deposit, but as low as $25,000 plus fees and LMI.
Will a guarantor assist me?
Yes. A guarantor can offer some of the equity in their own property as a guarantee that you will be able to make your mortgage payments.
This can effectively provide you with your deposit too while reassuring the lender that the mortgage will be paid for.
If the borrower can’t make their repayments, then the guarantor becomes legally responsible for paying the loan.
The limits on who you can use as a guarantor will vary depending on the lender, but most will allow for immediate family members to take on this role (such as your spouse or your parents).
Some lenders broaden this definition to include extended family, which means that you could potentially use your in-laws, grandparents, siblings, or even an obliging ex-spouse.
The one thing all lenders will require is that the guarantor is a home-owner with sufficient equity (the value of the property minus the balance of any existing mortgage).
