3 tips for first home buyers

If you’re a first-home buyer, your budget will be based on how much money you can borrow, so it’s wise to speak to a bank, lender or mortgage broker at the beginning of your home-buying journey.

Even if you don’t have a lot of money saved, they will be able to advise on how much you will need for a deposit for the kind of properties you are interested in, giving you a goal to aim at.

Lenders can also help you realign your expectations, as your ideal suburb or property type may be more expensive than you can afford as a first-home buyer.
Tip 1 – How much can I borrow?

Lenders calculate a maximum loan amount based on your income, savings, assets, expenses and credit history.

Although lenders will tell you the maximum amount you can borrow, this doesn’t necessarily mean you should borrow up to your limit, because ongoing mortgage repayments are higher for bigger loans.

Compare your after-tax income with your estimated ownership costs, as well as general household expenses such as groceries, bills, transport, schooling and leisure.

If there is only a small amount left over for non-essential purchases like dining out or holidays, you might want to consider a smaller loan.

Alternatively, think about whether you can cut back on expenses and live more frugally as a home owner until your income rises.

It’s wise to “stress test” your finances before committing to a large loan. Ask your lender what your repayments would be if interest rates rose by 2 per cent, and calculate how much money you would need to have set aside to make your mortgage repayments for a few months if you lost your job.

Being ready for the worst will ensure you land safely on your feet if or when it does happen.

Tip 2 – How much deposit do I need?

The deposit is the amount of money you contribute from your savings towards the purchase. The typical deposit is 20 per cent of the purchase price, although it’s possible to buy a home with a deposit as low as 5 per cent.

Buying with a larger deposit allows you to take out a smaller loan with smaller repayments, and you’ll generally get a better interest rate. A bigger deposit also means you’ll start your home-ownership journey with more equity, which is important when it comes time to upgrade further down the track.

If your deposit is less than 20 per cent, you may have to pay lender’s mortgage insurance (LMI). This protects lenders in case you default on your loan. The cost is generally added to your loan as a lump sum, but you’ll also pay interest on that amount over the life of the loan.

Tip 3 – How do I save faster?

Saving a property deposit has never been easy and requires discipline, usually at a time when you’re finally earning a decent salary and have more money to spend.

The first thing you need is a goal. Once you have determined how much you need for a deposit, research any government incentives that could give you an added boost.

Transferring money to a high-interest savings account that is separate from your everyday account makes it a little bit harder to access that money easily, meaning you won’t be as tempted to take it back out again.

Having a set portion of your salary paid into this account gives you a clear idea of how much you are saving, and further reduces temptation.

Also think about ways you can increase your income to save faster. That might mean asking for a promotion at work, taking on additional hours or even selling unwanted items.

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