Speak to your bank or broker
The first thing to do is realise that preparing to buy a home is a long process, at least six months, if you aren’t already armed with a deposit of 20% or more of the purchase price. Speaking to your bank or broker will help clarify how much you need to have saved, how long you need to be saving regular amounts for (typically a minimum of six months) and often they will even help with creating a household budget. Evidence of all this will be required when you fill in your home loan application.
Your savings goal will be around 20% of your estimated purchase price. You’ll need to work out how long it will take you to hit your goal based on what you can afford to put away each pay cycle. Lenders mortgage insurance (LMI) can be used to allow you to borrow more than 80% of your purchase price – speak to your bank or broker about this option and what it would mean for you.
First Home Owners Grant
Each state and territory has a First Home Owners Grant scheme, which can often be accessed if you are building your first home. To see the eligibility criteria and how much you could potentially shave off your savings goal, visit www.firsthome.gov.au and check your state’s scheme out.
Lenders will sometimes accept funds that have been gifted to you or allow another family member to go guarantor for you in lieu of cash. This brings your savings goal down even further. Again, it’s best to speak to your bank or broker regarding this option.
Tracking your spending might be confronting at first, but you will soon learn where all your cash goes. Using a tracking app or program will give you clarity around your spending habits and allow you to channel your funds into more useful areas – like your home deposit! Knowledge is power and when it comes to being able to save for your home deposit, that power will be priceless! (See what we did there?)
Use that not-so-scary tracking we just discussed to help create a budget. Make sure you include everything – groceries, medical, entertainment, phone/internet, registration, insurance etc – so you can see exactly how much is left over at the end of each pay cycle. Be realistic and don’t kid yourself – if you try to stick to $30 worth of groceries for the week, you probably aren’t going to be setting a realistic savings goal and you’ll be dipping into the savings every time you get hungry! Google is a great tool for finding budget planners, or even just a simple Excel spreadsheet will do the trick.
The amount you can borrow is termed you borrowing capacity. This is calculated using your income, living expenses and your liabilities – personal loans, credit cards, car loans and store credit like Gem, Latitude, Zip and Afterpay accounts all must be recorded. Even if you have no money owing, your credit limit is what you are assessed on. You can find borrowing capacity calculators on most bank websites to give you an idea of where you’re currently at.
If you check your borrowing capacity and find that you can borrow roughly enough for a takeaway meal, it might be best to first pay off as much of the small debt as you can. Afterpay, credit and store cards for example are usually faster to pay off than a car loan, leaving you extra to put towards those bigger debts once the smaller ones are paid. Tip: make sure you cancel or close your small accounts as you go to prevent temptation and improve your borrowing capacity at the same time.
With your successful home loan application comes fees – application fees, establishment fees, stamp duty fees (if you aren’t a first home owner), transfer fees – these can all add up to thousands of dollars very quickly. Do your homework and make sure you have budgeted by either upping your home loan amount or decreasing your purchase price to allow for these.
When you have done your homework, paid off your debts, saved your deposit and settled on a realistic borrowing amount, it’s time to present all your hard work to your broker or lender. If they can see your savings history, have a clear view of your income, expenses and liabilities and you meet the borrowing capacity, you’ll have a much smoother and faster lending experience.