With falling property prices and interest rates at record lows, the time is ripe for first home buyers to strike. But buying a home goes well beyond getting a deposit together. In such a competitive market, it’s important to be prepared in the lead up to buying – let’s face it you don’t want to miss out on your dream home because you failed to seek pre-approval, or your credit history wasn’t up to scratch.
But don’t stress, it’s all pretty easy to do if you follow the steps below. If you do, you’ll be setting yourself up for success and putting yourself in the best position to buy your first home.
Maintain a good credit score
This three-digit number can make or break your loan application. If you’re always late with your bills and frequently up the limit on your credit card, you might want to check your credit score. A good score ranges between 622 and 725; an excellent one is between 833 and 1,200.
Lenders will assess your score to determine how risky you are as a borrower. Keeping out of debt, paying your bills on time and minimising your credit applications all contribute to a good score. If you’re unsure what your score is, you can access your credit report and view it for free online.
Keep in mind that having a good credit score is just part of the assessment process. Lenders will also look at factors like the deposit amount saved, affordability of the property, loan-to-value ratio (LVR), your employment history and your general savings.
Get a deposit together
This might sound obvious but did you know your deposit should be around 20% of the property’s overall value if you want to avoid forking out for lenders mortgage insurance (LMI)? For a property worth $460,000 for example, you’d need to save around $92,000. Make sure to have your funds sitting in a high-interest savings account to speed up the process.
Avoid common money sinkholes
We’re all guilty of splurging on Uber, food delivery or online shopping from time to time. But if these purchases are popping up in your transaction history all too often, it’s time to rein it in if you want to conquer the property market. To help put it into perspective, we’ve crunched some numbers:
- Two weekend Uber trips at $13.90 per trip will set you back $1,445.60 per year
- A daily flat white at $4.00 will set you back $1,460 per year
- A cafe breakfast once a week at $20.00 will set you back $1,040 per year
By avoiding these money traps and putting the funds in a savings account instead, you could be saving an extra $3,967.50 per year without even trying! Future homeowners, it’s time to break up with your barista.
Remember your (hidden) costs
Buying a property goes beyond the sale price. You’ll need to budget for a stamp duty fee as well as a loan establishment fee. You may also be up for Lenders Mortgage Insurance if you need to borrow more than 80% of the property’s overall value. Smaller costs can include things like valuation fees, solicitor or conveyancer fees and removalist hire. Planning for these costs ahead of time means you can make room for them in your budget, and you won’t fall short when it’s showtime.
Consider a guarantor
If you don’t have enough money saved to reach a deposit of 20%, a guarantor can help you out if you’re lucky enough. This is usually a parent or family member, and a guarantor can use the equity on their own property as security against your loan. This means you can avoid forking out for LMI and enter the property market quicker (so remember to be nice to your parents).
The equity offered by a guarantor doesn’t cover the entire loan amount, only the portion needed to get your loan-to-value ratio to 80%. Once you’ve paid off enough of your loan to cover the 20% deposit amount, you can release the guarantor.
Once you have a sizeable deposit stashed away, seek out pre-approval from your lender. This will give you the power to act immediately if and when you find the right home. You’ll be able to put in an offer straight away, rather than spend precious time scrambling around for finance. Pre-approval also gives you a solid price range to stick to and can help with negotiating. If you ask the seller to lower the price, they’ll be more likely to do so if they know how much you can afford and see that you’re serious about buying.
Entering the property market can be a challenge – albeit an exciting one! And remember taking small doable steps to set yourself up now, can make a huge difference in your ability to buy a home in the future.
Last updated: 18 July 2019
The information contained in this article is only correct at the point of time of publication. It is general information and has been prepared without taking into account your personal circumstances, objectives or needs. Please consider if this information is right for you before making a decision to acquire any product.