When starting the search for your first or new home, the first thing you will want to ask is – how much can I borrow?
While you may be tempted to commit to a home at your maximum budget, buying a property brings a number of often overlooked expenses.
Your first step should be putting yourself in the best situation you can to improve your chances with your chosen lender, and there are four simple things you can do to start.
Pay Off Debt – Pay off all personal loans, credit cards, and store cards to minimise your expenses each month, and allow for greater borrowing power.
Get Your Credit Report – Check this report before applying for a loan and make sure there are no errors or surprises listed.
Start Saving – No matter how small, start saving a small amount each month to show you are able to stick to and maintain regular savings on top of your current living expenses.
Minimise Your Expenses – Take a close look at where you are spending your money each month and make adjustments where you can. Any small saving you can make adds up, and can increase the amount of your deposit.
How To Work Out Your Borrowing Power
There are a number of mortgage calculators online which will give you an idea of the amount you can borrow, however a mortgage broker of lender will give you the most accurate figure.
The first thing a lender will do is determine your loan to value ratio (LVR) which is the size of your deposit compared to the amount you wish to borrow. Most lenders require a deposit of 20% or more (an 80% LVR), however some will lend with a smaller deposit although you will be required to pay extra charges.
As a rule of thumb, your home load repayments should be 35% of your gross income, or less to allow for unforeseen charges, fees, and rate rises.
On the subject of fees… There are a number you will need to save for on top of your deposit as they cannot be added to your home loan.
Mortgage Fees – This is a processing fee and can be up to $600, however look out for specials as lenders often waive it to welcome new customers.
Home Loan Fees – An annual management, or processing, fee that should exceed $500 per annum.
Solicitors Fees – You will need to pay to have your solicitor look over the contract and the fees could go into the thousands.
Pest & Building Inspection – This is an essential step in the process of buying a property to ensure you are not hit with a nasty surprise later on.
Lenders Mortgage Insurance – In cases where your deposit is less than 20%, you will be required to LMI which can cost up to tens of thousands, depending on the size of your loan. This can be added to your home loan amount and protects the lender should you not make your repayments.
Insurances – Once you have committed to your home loan it is best to take out the necessary insurances; Home & Contents, and Income Protection.
Stamp Duty – The amount varies in each state and can be added to your home loan, or paid as an extra fee. If you are a first home owner you may be eligible for grants or relief from stamp duty.