“How much can I afford to pay?”
According to Colin Li, ME Bank’s Head of Product, Home Buying and Retail Bank, it’s “the question that is on every first home buyer’s lips”.
According to Mr Li it takes over a decade for the average income earner to save for a first home deposit of 20% and avoid paying Lenders’ Mortgage Insurance, as per the latest CoreLogic data.
“How much you can afford to pay will depend on how much you earn, your expenses and how much of a deposit you have access to,” Mr Li explains.
“All of these things need to be assessed, but that’s easy to do. Your first step should be to talk to your bank and figure out your ballpark shopping range so you can start house hunting with a realistic budget in mind.”
Speaking to the ANMJ, Mr Li says while the journey to securing a home loan is a long one, there are numerous things you can do before applying, during the process and after securing a home loan to make the journey a successful one.
Before: Plan to succeed
While some of these tips will seem deceptively simple, Mr Li says there are many things home buyers can do to ensure they get ahead of the curve.
- Start Early: “Building savings from the time you start earning an income – even if it’s your first part-time job – can mean you need to save less each month to reach the same savings target, and you establish good savings habits from the get-go.”
- Track your spending and set a budget: Get to know your spending habits – it’s a great way to identify areas where you can cut back. Take a look at all your direct debit outgoings and re-evaluate whether you need to keep them. If you haven’t been to the gym, think about cancelling the membership and exercise outside instead.
- Get serious about paying off any debt: If you’re thinking about putting your pennies away, the first thing you should consider is eliminating existing debt. Not only will you eliminate stress, you’ll be able to borrow a larger amount if you’re in the market for a home loan and you’ll be saving money on interest.
- Lock cash away to grow personal savings: “Automatically transferring a portion of your pay each week into a high-interest savings account such as ME’s Online Savings Account is a reasonably pain-free way to start saving. You also benefit from compounding interest returns.”
Mr Li says there are numerous options available to support home buyers while saving for a home, including the First Home Super Saver Scheme.
“Under the scheme, the government has increased the total amount of savings borrowers can release from super to make a deposit on a home from $30,000 to $50,000… In the right circumstances, it can help you save for a home quicker, but you’ll need to plan ahead to make it work for you,” Mr Li explains.
He also says for those looking to buy now, or in the not too distant future, schemes such as the Help to Buy Scheme, The First Home Guarantee (previously the First Home Loan Deposit Scheme), The Family Home Guarantee and The Regional First Home Buyer Support Scheme are all worth considering.
Mr Li also says that with interest rates an issue of concern, it is also worth considering what type of interest rate (variable or fixed) you apply for.
“If a modest rate hike would crimp your lifestyle, it’s worth thinking about locking in a fixed rate loan. Despite some banks increasing fixed rates recently, they remain at historically low levels. Look for a fixed loan that allows extra repayments so you can whittle down the balance sooner,” he says.
“It’s also worth paying for a feature called a ‘rate lock’, which allows borrowers to guarantee a competitive rate during the application or settlement period so you don’t miss out on securing it.”
However, he does caution that a fixed loan option comes with its own limitations.
“Borrowers with fixed loans in a high rate environment also need to be aware and budget for a possible rate increase at the end of their fixed loan term.”
After you secure your settlement
Once you purchase your home, Mr Li says it is prudent to ensure that you have savings prepared for the teething stages of home ownership.
“Far too often, emergency funds are a complete afterthought. For the first time, you’ll be responsible for the upkeep of all appliances and building maintenance so you need to make sure that you can cover the costs (in addition to your home loan) if things need to be repaired,” he says.
Additionally, while stamp duty, council rates, water rates and home insurance will all become a part of a new home owner’s budget, Mr Li says there are also a number of other factors to consider.
“You should budget for things like conveyancing costs (the legal process of transferring ownership of a property via a conveyancer or solicitor); building and home and contents insurance, plus strata searches and building and pest inspection costs,” he says.