At time where there is so much focus on rising interest rates, increased pressures on the cost of living and a perceived inability to save money, buying a home seems near impossible. But do you know that for certain?
Like anything worth doing or having in life, buying a home requires a strategy – and one that is manageable and within your reach.
It is not always how much you earn that is important, it is what you do with your money that makes a difference.
The below five tips will help you get ‘home loan ready’ for when that time comes.
1. You don’t need a 20% deposit but you must have savings
A common misconception in the market is that you need 20 per cent of the purchase price to buy a house.
While this would be an ideal scenario and the best way to avoid Lenders Mortgage Insurance (an insurance you pay that protects the bank in case you default on your repayments, given that you are deemed a higher risk with a lower deposit), many lenders will consider 5 per cent as ‘genuine savings’ for your deposit.
Some will even take your monthly rental payments (as long as they are to an agent, not between friends or family) as part of that genuine savings.
The key is to show a committed and disciplined pattern of putting a regular amount away in your accounts, in parallel with your monthly rent commitment.
Lenders not only assess you on your capacity to repay, but also your character. Demonstrating discipline will go a long way in your home loan application.
2. Be aware of your discretionary spending
Banks will assess your home loan application on the basis of their own pre-determined ‘HEM’, or Household Expenditure Measure.
This means that they have a baseline of expected expenses for your household, depending on your circumstances such as whether you have children, are single, married, de facto etc.
Discretionary spending is anything deemed as not essential, and it can really tip your application over the edge if you enjoy a few too many spoils every month.
Be very cautious of what you are spending your money on – lenders will look at every single line in your bank account before making any decisions about your loan application. Private school fees, health insurance costs, Uber Eats, the occasional flutter – they all get taken into consideration.
3. Avoid ‘Buy Now Pay Later’ schemes
You know the Buy Now, Pay Later schemes – you receive your goods now, for a fraction of the full cost, and pay back the remaining amount in increments.
Data shows that using these schemes encourages significantly increased spending than you otherwise would, given that you are not handing over your hard-earned cash in full. Avoid them. If you can’t afford it now, then wait until you can. Even better, question whether you actually need it.
Buy Now Pay Later schemes are also now treated similarly to credit cards by many lenders, which means they are viewed as liabilities and will therefore reduce your borrowing capacity. They are not viewed favourably by lenders and are best avoided.
4. Employment is more flexible than you think
While it’s important to show a secure and stable employment history, there are some lenders who are fine with a change in job prior to an application, as long as it isn’t a regular pattern.
Many lenders are also becoming more flexible with accepting applicants on probation however, it is very subjective and something to address upfront with a mortgage broker before making any hasty decisions.
The more stability you can demonstrate, the better – this even includes casual employment. Being employed casually is not a reason to not apply for a home loan. Many lenders will accept applicants who have at least six months’ history in a casual role.
5. Be mindful of your credit score
A credit score is often overlooked but is so important when applying for a home loan.
Did you know that every time you make an enquiry about any credit facility, points are taken off your credit score? This is even if you don’t take up the facility!
Enquiries about a Buy Now Pay Later scheme, credit cards, personal loans, and anything to do with credit will have an impact. Be very mindful of the fact that any enquiry you make will be recorded and too many will affect your ability to get a home loan.
It doesn’t take much for a score to become a concern – and keep in mind that many lenders will require each previous enquiry to be addressed upfront at the time of your application and advised of the outcome.
Prepare early to improve your chances of getting a home loan
Home loans can be complicated for anyone but buying a home is not impossible, it just requires the right level of education and support from a reliable expert.
People buy homes in all kinds of financial climates and for the first time in 12 years, we are in one of rising interest rates. For some, it may well provide opportunity.
Start preparing early to get yourself in the best ‘home loan ready’ position so that you are able to hit the market with confidence.
