You may be emotionally ready to put down roots, but there are a lot of things you need to know when getting a mortgage. After all, it's easily one of the biggest financial commitments you'll ever make.
Here are a few key things you need to know before getting approved for a mortgage.
Make sure that you’re well-aware of the responsibilities involved such as the ongoing expenses that need to be paid. These include your monthly mortgage repayments, rates, home insurance and utility bills. You should also know that buying a house is a huge financial commitment where you are responsible for all the repairs and maintenance your home needs.
If you're taking out a home loan, good money management skills are essential because homes come with a lot of expenses, like council rates, home insurance, maintenance - just to name a few.
That's why already knowing how to budget is an important skill to have in your arsenal. Chances are, if you're saving up for a deposit then you probably already know how to budget anyway.
There are also many expenses besides the deposit to budget for when buying a house. There's lenders mortgage insurance (LMI) if your deposit is under 20% of the purchase price, not to mention stamp duty, legal and conveyancing fees, and building and pest inspections.
If you don't already have a budget, there's no time like the present to learn.
Assess your financial situation by finding out your credit score. Do you have a history of paying off your credit card debts, car loans, student loans, or personal loans? Do you still have debts? Have you always paid your bills? Having a good credit score is important when you apply for a home loan since your lender will use this to assess how you handle credit.
If you have credit card or any other consumer debt (including buy now pay later debt) it's best to eliminate this before approaching a lender for a home loan.
It may seem counter-intuitive to put money elsewhere when you're saving up to buy a house, but having debt will lower your borrowing capacity when you apply for a mortgage. Some lenders may also be less willing to lend you money for a mortgage if you have too many debts.
Plus, the interest you're paying on your debt is eating into your house deposit savings because the interest is compounding (getting bigger) over time.
We all want to live in an amazing home in an expensive area but when you're considering home ownership it's important to think about what you can afford now and in the future.
Will you be buying as a single or as a couple? If you're buying on one income, you won't be able to borrow as much as someone who's buying with their partner because you have less income (generally) overall. If you are buying with your partner, you may be able to afford higher repayments but what happens if one of you stops working to start a family or go back to study?
Once you know how much money the banks will lend you, you can begin to narrow down your search to the areas and properties you can afford.
Pre-approval isn't a guarantee that you'll get a loan, but it does indicate what you could expect to borrow and gives you the confidence to make a bid on a home, subject to a finance clause.
Say for example, you've got your heart set on two properties. One is valued at $550,000 and the other at $625,000. If you've got preliminary-approval for a home loan of $550,000, the more expensive house may be outside your budget unless you can contribute more of your own funds.
Getting home loan pre-approval can also make you a more attractive buyer to a seller because it indicates that you're serious about buying the property and that your offer is less likely to be withdrawn due to a lack of financing.
When it comes to a house deposit, size matters. The bigger your deposit is, the better.
Most lenders will require a cash deposit of 15-20% of the purchase price of the property. If you can pay a deposit of 20% or more, you can avoid paying Lender’s Mortgage Insurance (LMI).
There may also be additional fees involved that you need to pay for such as settlement costs, legal fees, stamp duty, and home loan establishment fees. The costs of these fees will vary depending on the state you’re buying in and your mortgage provider.
At loans.com.au, the sweet spot is a 20% deposit (that's 20% of the purchase price of the property). So if the house you want to buy is $750,000, a 20% deposit would be $150,000.
Saving up a 20% deposit is the biggest hurdle for many first home buyers, but there are plenty of first home buyer initiatives to help. There's also LMI which allows potential buyers to get into the market with less than a 20% deposit.
LMI can either be paid as one upfront payment or built into the loan and paid off as part of your mortgage repayments.
One of the biggest benefits in having a big deposit is that you'll have more equity in your home right from the start, putting you in a better position if you need to sell or access money in an emergency.
Saving a hefty deposit is one thing but you need to prove that you can actually afford to repay the loan too.
You may already be forking out money for rent but your mortgage repayments are likely to be higher, particularly when you factor in other expenses that come with being a homeowner like insurance, rates and maintenance.
Before you sign over your life and buy a home, it's a good idea to run a pretend budget based on your estimated repayment amount. Set up an automatic transfer of the estimated home loan repayment amount from your bank account and put it into a separate savings account.
By doing this, you can work out if your monthly mortgage repayments are going to be achievable before you wind up stuck in a long-term commitment that you can't afford.
You can also use our mortgage calculator to estimate your monthly mortgage repayments.
Interest rates are at historic lows at the moment, but that doesn't mean they'll always be which is why it's wise to factor a rate rise into your budget. If your interest rate rose by 1% could you still afford to make your mortgage repayments?
Try upping your pretend mortgage repayments to factor in a 1% rate rise and see if it's something you can do easily or will struggle with.
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