Buying your first home is a monumental step in your life, filled with excitement and big decisions. However, the key to making this dream a reality without jeopardising your financial security lies in understanding the numbers behind the purchase. This guide provides essential tips for first time home buyers, from knowing how much you can afford to borrow to calculating all associated costs and improving your borrowing capacity. Whether it’s practicing loan affordability, planning ahead, or securing pre-approval before house hunting, these insights aim to prepare you for the financial aspects of home buying, ensuring a smoother path to owning your first home. Read on for part 1 of our 30 Tips for First Home Buyers series and learn how to be finance ready.

Tip 1: Know your numbers

The goal is to buy your first home. So the focus is rightly on the type of property, what it looks and feels like, where it is etc…BUT the key to successfully buying your first  home and it being the foundation of your future financial security comes down to mastering the numbers behind the purchase.

How much will a lender allow me to borrow? And even more importantly, how much can I afford to borrow?  What funds do you have to put towards the purchase? What are the costs associated with buying? What purchase price does this translate into?  What are the repayments on the loan amount at current rates? What do the repayments become if rates went up 2-3%?

If you need a hand to work all this out, then this is just one reason why you need a great mortgage broker

Tip 2: Hack your loan affordability

Before you make one of the most significant financial decisions of your life, you want to be sure that you can afford the commitment that you are about to make.  Buying your first home, only to discover 6 months down the track that you can’t afford the loan would be a costly mistake that you might never recover from.

Many clients have or create a budget to test the affordability of a loan. If you don’t have a budget but are inclined to set one up in preparation for buying your first home then you can download a template from Moneysmart.gov.au to help you on your way.

But budgets do not work for everyone. A hack I use to assess loan affordability is to add together the amounts that a client spends on rent and the amount they save each month and see if this total will cover the projected loan repayments and property costs.

Either way you need to test loan affordability before you buy and your testing should allow for the possibility that interest rates might rise. So it is best to use a repayment figure if rates went up 2-3%. 

If rent plus savings is greater than loan repayments plus property costs (Council Rates, Body Corporate expenses etc), then you are on the right path. If not, then you need to consider what changes you can make so that the equation works.  Can you trim discretionary spending? Do you need to consider a smaller loan amount? Realistically, what pay rises can you expect (and when) and will this be enough to change the equation.

Bonus tip: If you are unsure how much you are saving, look at how much you bank balances have gone up over the last 6 months and divide by 6 to get an average monthly savings figure

Tip 3: Calculate all the costs of buying a home 

The purchase price is the biggest and most obvious but it’s not the only cost. Other costs to account for:

  • Stamp duty (Vic Gov’t) – up to 5.5% of the purchase price (depends on the purchase price, $0 under $600K for first home buyers)
  • Transfer Fees (Vic Govt) – approx 0.25% of the purchase price
  • Your conveyancing costs (inc disbursements) – allow $1,800
  • Building inspection – allow $750
  • Removalists

Don’t forget about post purchase  costs such as Council Rates and Body Corporate expenses (apartments and units).

Tip 4: Improve your borrowing capacity by canceling or reducing credit card limits. 

Credit card limits diminish your borrowing capacity so if you are needing to maximise what a bank will lend you then reducing your credit card limits will make a difference. As a guide, a $5,000 credit card limit reduces your borrowing capacity by around $20,000. 

Tip 5: Clearing debt improves borrowing capacity. 

Ongoing commitments like car loans and HECS debts detract from your borrowing capacity (HECS is probably the greatest single factor getting in the way of people being able to get the loan they need to buy their first home). 

When a debt is large there is often little that can be done about this.  But if the debts are smaller then paying them off may add more to your overall position (by increasing your borrowing capacity) than detracting from it (by reducing the amount of savings available to put towards the purchase).  

Every situation is different, so this is where a good mortgage broker is handy. They can model different scenarios and show you which path is the right one for you.

Tip 6: If you fail to plan then you might never get there

Not everyone who wants to buy their first home can do so immediately. If you are not yet in a position to afford to buy but really want to own your home then take the time to understand your position.  

What are the strengths and weaknesses of your situation? What needs to change? What can you change? How long will it take to effect the necessary changes?  In other words, devise a plan!  

Identify what needs to be addressed to be in a position to buy your first home.  It may be you lack savings or income (sometimes both) or existing debt that is holding you back. Once you are clear on the challenge then devise a plan to remove the obstacle and the time frame in which you can realistically do this.

Increasingly I am doing planning with people who can’t yet afford to buy their first home but want to be able to do so in 12-24 months time.  It’s not easy a lot of the time but our clients are getting there and the outcome is very rewarding.

Tip 7: Practice makes perfect.  

If buying a home is 6-12 months away then in the meantime it is a great opportunity to practice putting aside the amount you expect to need for home loan repayment and property costs. Simply put this amount (less any rent you currently pay) into savings each month.  If you find this is a struggle then you might need to revisit your plans. If you can do this, then it gives you confidence that the loan you plan on taking is affordable.

Tip 8: Check your credit score is strong

Almost all lenders use credit reports to assess your creditworthiness. These reports show your conduct on credit held (existing loans, credit cards etc) and “score” you.

A low credit score can preclude you from borrowing or limit your lender options.

What drags your credit worthiness down?  Defaults on loans and credit cars, unpaid utility bills, missed/late payments on debts and too many credit inquiries.

Steps you can take to improve your credit score include; making payments on all debts in a timely manner, not applying for new loans/credit cards for a period, paying off debts or closing credit cards, getting errors on your credit file corrected (we have seen instances where defaults have been removed from credit files).

Tip 9: Get a pre-approval before you find a property

You would not believe how many people come to me wanting to talk about getting a home loan AFTER they have bought. 

If you buy a home and cannot provide the balance of funds at settlement, then you will lose your deposit AND you will likely be up for any costs associated with the vendor having to sell the property again AND any loss they suffer if they cannot sell the property for as much. Never buy a property without knowing you can 100% get the loan you need!

More commonly I get first home buyers who come to me having found a property that is about to go to auction wanting to know if they can get a loan.

Getting a pre-approval before you start seriously looking at property means you are ready to move quickly when you find a place you want to buy.  It positions you to move quickly and with confidence.  This might allow you to secure a property pre-auction or even before it goes on the market. And if you discover the dream home 3 days before auction you do not need to stress about the finance.

For more useful tips for first home buyers, check out our First Home Buyer page in the knowledge centre here.

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