How do I finance my new home? Four questions to ask

Finance
First Home Buyers

28 July 2020

Buying a new home is one of the biggest purchases you will ever make, but how do you know when you’re ready to take the plunge? While there are hundreds of factors to consider along the path to home ownership, every new home buyer should start by asking themselves these four questions:

How much do I need to save for a house deposit?
Saving for a home deposit can take years and it’s easy to get discouraged, so it’s important to have a clear goal in mind about how much you will need.

The Australian Government’s MoneySmart website recommends home buyers have a deposit of 20% of the total purchase price of the home. You can secure a loan with as little as 5% deposit, but you will also need to factor in stamp duty and other extra costs.

“The general understanding is a minimum deposit of 5%, but when you factor in those additional costs such as stamp duty, Lenders Mortgage Insurance (LMI) and legal fees, most people will need to save a deposit of around 8% of the total price of the home,” Ray says.

“A lot of people get stuck on that idea of 5%, so they’ll save $35,000 for a $750,000 home, and then get a shock when the deposit the lender requires is more like $55,000.”
Am I eligible for the First Home Buyer Grant?
If you’re a first home buyer or building a new home, you may be eligible for one or all of the state and federal government grants and concessions. Each state has different rules and requirements to qualify, but measures can include a contribution towards the cost of your home and a reduction in stamp duty.

In New South Wales, home buyers can benefit from the First Home Buyers Assistance Scheme, First Home Owner Grant, First Home Buyers Deposit Scheme. There is also the federal government’s Home Builder Grant and Super Saver Scheme to consider.

“Make sure you do your research as these grants and concessions can knock tens of thousands off the cost of your home now and in the long run,” Ray says.
How much can I afford to borrow?
There are many factors that banks and other lenders consider in determining the size of the loan they’re willing to offer you, but for the most part your borrowing capacity will come down to how much you earn and how much you spend.

“It’s really about how much the lender believes you’re capable of repaying, which means they’re looking at your income and expenditure,” Ray says.

Before deciding on a loan application, lenders are required by law to verify a borrower’s income (either through payslips or bank statements) and expenses (usually through three months of bank statements).

Income includes your salary, any bonus payments or additional work you’ve been paid for, as well as investment returns. Expenses include standard household living expenses, mortgage repayments on existing properties, as well as repayments on credit cards or personal loans.

The lender will also take into account your credit history, credit limits on cards in your name (these are viewed as potential debts) and whether you have any dependents.

“Some lenders might be willing to loan you more than others but it’s important to be realistic about what you can afford to repay,” Ray says.

“Make sure you factor in the potential for interest rate rises because your repayments will go up with them and set some money aside as a buffer in case of unexpected costs.”

Online mortgage calculators are a simple way to work out how much your repayments will be, but for advice on which home loan will work best for you in the long term, talk to a mortgage broker.

“Home loans come with lots of different options and features, but some might cost you more in the long run, so get a good broker who knows their stuff and treat them like your lawyer – tell them everything,” Ray says.

“If you’re upfront and honest about your situation and your financial goals, they should be able to find a great deal for you.”
Have I done a financial health check?

A financial health check is a great way to assess your current financial position and make sure you’re giving yourself the best possible chance of buying your dream home. Here are some of Ray’s tips to get your finances in great shape:

Cut your spending: “The fewer expenses and liabilities in your name, the better. If you can reduce your expenses by $500 per month, then you will have $6,000 more per year to service your debt, which may equate to an additional $30,000 to $50,000 on your loan.”
Check your credit score: “There are plenty of online companies that will calculate your credit score for free, and usually within a couple of minutes. I use Credit Savvy, but there’s a list of providers on the MoneySmart website. Make sure you run the check early on in the process, so you have more time to improve your score if you need to.”
Develop a good ‘savings character’: “Look at your bank statements and consider what they say about you. If you want to apply for a loan within the next six months, start cutting out unnecessary spending like food deliveries and weekends away. You can still enjoy life but if lenders can see you’re making an effort to curb your spending, it will serve as a good reflection of your character and capacity to save.”
Cancel your Afterpay: “Lenders don’t like to see ‘buy now, pay later’ services such as Afterpay and Zip on your bank statements because it suggests you’re making purchases without the funds to back them up. Unless you have large sums in the bank as proof that you can sustain the repayments, cancel your Afterpay and make purchases in cash instead.”
Pay bills on time: “Late credit card repayments and outstanding utility bills will have a negative impact on your credit score and are a big red flag for lenders.”
Reduce your debt: “Take note of how many credit cards you have and try to consolidate them with a balance transfer. The new interest rate on the balance you transfer may be either 0% or a special low rate for a limited time, which means you can reduce your debt as quickly as possible.”

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How much do I need to save for a house deposit?
Saving for a home deposit can take years and it’s easy to get discouraged, so it’s important to have a clear goal in mind about how much you will need.

The Australian Government’s MoneySmart website recommends home buyers have a deposit of 20% of the total purchase price of the home. You can secure a loan with as little as 5% deposit, but you will also need to factor in stamp duty and other extra costs.

“The general understanding is a minimum deposit of 5%, but when you factor in those additional costs such as stamp duty, Lenders Mortgage Insurance (LMI) and legal fees, most people will need to save a deposit of around 8% of the total price of the home,” Ray says.

“A lot of people get stuck on that idea of 5%, so they’ll save $35,000 for a $750,000 home, and then get a shock when the deposit the lender requires is more like $55,000.”
Am I eligible for the First Home Buyer Grant?
If you’re a first home buyer or building a new home, you may be eligible for one or all of the state and federal government grants and concessions. Each state has different rules and requirements to qualify, but measures can include a contribution towards the cost of your home and a reduction in stamp duty.

In New South Wales, home buyers can benefit from the First Home Buyers Assistance Scheme, First Home Owner Grant, First Home Buyers Deposit Scheme. There is also the federal government’s Home Builder Grant and Super Saver Scheme to consider.

“Make sure you do your research as these grants and concessions can knock tens of thousands off the cost of your home now and in the long run,” Ray says.
How much can I afford to borrow?
There are many factors that banks and other lenders consider in determining the size of the loan they’re willing to offer you, but for the most part your borrowing capacity will come down to how much you earn and how much you spend.

“It’s really about how much the lender believes you’re capable of repaying, which means they’re looking at your income and expenditure,” Ray says.

Before deciding on a loan application, lenders are required by law to verify a borrower’s income (either through payslips or bank statements) and expenses (usually through three months of bank statements).

Income includes your salary, any bonus payments or additional work you’ve been paid for, as well as investment returns. Expenses include standard household living expenses, mortgage repayments on existing properties, as well as repayments on credit cards or personal loans.

The lender will also take into account your credit history, credit limits on cards in your name (these are viewed as potential debts) and whether you have any dependents.

“Some lenders might be willing to loan you more than others but it’s important to be realistic about what you can afford to repay,” Ray says.

“Make sure you factor in the potential for interest rate rises because your repayments will go up with them and set some money aside as a buffer in case of unexpected costs.”

Online mortgage calculators are a simple way to work out how much your repayments will be, but for advice on which home loan will work best for you in the long term, talk to a mortgage broker.

“Home loans come with lots of different options and features, but some might cost you more in the long run, so get a good broker who knows their stuff and treat them like your lawyer – tell them everything,” Ray says.

“If you’re upfront and honest about your situation and your financial goals, they should be able to find a great deal for you.”
Have I done a financial health check?

Cut your spending: “The fewer expenses and liabilities in your name, the better. If you can reduce your expenses by $500 per month, then you will have $6,000 more per year to service your debt, which may equate to an additional $30,000 to $50,000 on your loan.”
Check your credit score: “There are plenty of online companies that will calculate your credit score for free, and usually within a couple of minutes. I use Credit Savvy, but there’s a list of providers on the MoneySmart website. Make sure you run the check early on in the process, so you have more time to improve your score if you need to.”
Develop a good ‘savings character’: “Look at your bank statements and consider what they say about you. If you want to apply for a loan within the next six months, start cutting out unnecessary spending like food deliveries and weekends away. You can still enjoy life but if lenders can see you’re making an effort to curb your spending, it will serve as a good reflection of your character and capacity to save.”
Cancel your Afterpay: “Lenders don’t like to see ‘buy now, pay later’ services such as Afterpay and Zip on your bank statements because it suggests you’re making purchases without the funds to back them up. Unless you have large sums in the bank as proof that you can sustain the repayments, cancel your Afterpay and make purchases in cash instead.”
Pay bills on time: “Late credit card repayments and outstanding utility bills will have a negative impact on your credit score and are a big red flag for lenders.”
Reduce your debt: “Take note of how many credit cards you have and try to consolidate them with a balance transfer. The new interest rate on the balance you transfer may be either 0% or a special low rate for a limited time, which means you can reduce your debt as quickly as possible.”