Want to buy a home but have no idea where to start your search for a loan? Take a deep breath: here are the most important tips for first home buyers seeking out the right home loan for their financial circumstances.
First home buyers tip 1: Reduce your debt
One of the biggest mistakes first home buyers make is not considering their financial situation before applying for a home loan. Sure, you know exactly how much you earn, but have you considered your outstanding personal loans and credit card limits or those store accounts, and the impact these will have on your borrowing power?
If not, it’s time to take stock of what you owe. To do this, create a debt reduction table – here’s an example you can use:
|Debt||Balance||Interest rate||Monthly minimum repayment||Months to pay off|
Once you’ve worked out exactly what you owe, it’s time to plan how you’re going to pay off these debts faster. To do this, start with the debt that has the most amount of interest, which in the example above is the credit card. It’s also advisable to pay more off one debt to clear it out, before moving onto the next.
Next, calculate what you earn per month, and then subtract your cost of living, which should include your minimum monthly debt repayments. For instance, let’s say you earn $5,000 per month. Weekly you pay:
- $350 rent
- $120 food
- $20 electricity
- $10 internet
- $200 for vehicle running costs and any unexpected expenses
- $200 entertainment
- $530 debt repayments (as listed in the above table)
All up these figures total $4,130. Therefore, you’ll have $800 left a month, which you’ve been putting into a high investment account to save for your home deposit.
But, rather than paying this $800 into your savings account, you’re now going to use this to pay off your debt.
|Debt repayment order||Balance||Interest rate||Monthly minimum repayment||Extra repayment monthly||Months to pay off|
|Credit card||$3,000||19.00%||$100||$800 (first 3 months)||3|
|Car loan||$7,000||9.53%||$230||$800 (next 7 months)||7|
|Store card||$2,500||9.00%||$100||$800 (next 3 months)||3|
|Personal loan||$5,000||6.2%||$200||$800 (next 5 months)||5|
Using the example, instead of it taking 41-months or three-and-a-half years to pay off all debts, it will now only take 18-months. Plus, once you’ve paid off your debt you can then put an extra $530 or the cost of your debt repayments into your savings account monthly, increasing your savings to $1,330 a month.
First home buyers tip 2: Look into first home buyer grants
All Australian states and territories have a first home buyer grant that applies to certain types of property. Typically these schemes offer you a rebate of between $7,000 to $15,000, depending on the property type and the property’s location. By knowing all about the grant and its guidelines, you’ll ensure that you look at the right type of property to be eligible for the grant.
First home buyers tip 3: Find out what you can borrow
Before you look at buying a home, you need to calculate what you can realistically afford to borrow. The simplest way of doing this is to use a borrowing calculator. These typically consider:
- How many dependents (children) you have
- The number of borrowers applying for the loan
- Your marital status
- The amount you earn monthly
- Your existing debts
- The number of credit cards you have and their limits
- Your monthly living expenses
- Whether you’re buying as an owner-occupier or an investor
- The loan term and the property location
- An estimated rate of interest
While these calculators aren’t exact, they let you know that you’re eligible for a home loan and they give you an indication of what you can afford to borrow.
First home buyers tip 4: Save more to reduce your home loan costs
The more you save, the less you have to borrow, which can save you thousands in interest. So, it makes sense to take a little longer and to save a bigger deposit. If you’re buying your first home and have saved less than 20% of the purchase price of your property, then you may have to pay Lender’s Mortgage Insurance (LMI). This insurance can add thousands to the cost of your home loan.
First home buyers tip 5: Contact a mortgage broker
Professional advice when you’re buying a property is vital to ensuring that you get the best possible deal. Mortgage brokers carry out home loan comparisons for you, assist you to understand the often complicated world of home loans and they fill in and lodge any applications for you giving you the best opportunity to gain loan approval.
First home buyers tip 6. Get home loan pre-approval
Getting home loan pre-approval lets you know exactly how much you can borrow. While it’s not a firm offer of finance approval, pre-approval means that a lender has assessed you based on the information that you’ve supplied, and they’ve suggested that you can borrow a said amount providing you can substantiate any claims that you’ve made.
If you’re saving for a home loan deposit, then it’s worth discussing your borrowing power and potential mortgage repayment with an eChoice Home Loan Consultant. We have access to hundreds of products across a panel of multiple lenders, so once you’re ready to buy we can help you find a competitive mortgage.