This is it, first home buyers: it's happening. Today is the day you get serious about your dreams of owning a home.
We want to help you move from thinking about, dreaming about, planning to one day own a home, to actually picking up the keys and opening the door to your own private sanctuary – a slab of bricks and mortar to call your very own.
So let's dive into Module 1. We think you're going to like it, because it's a deep dive into YOU and everything you need to do to get from where you are now (wishful home owner) to where you want to be (ecstatic mortgage-holder).
The best way to work through this module is to set aside 60 minutes with a cup of coffee (or tea, whatever floats your boat) and a notepad and pen, so you can jot down points and scribble down calculations as you go. On that note, you'll also need a calculator.
Let's start with working out your current situation:
1. What is your current income?
- The amount of money a bank is willing to lend you is directly related to how much you earn. The more you earn, the more you're eligible to borrow.
- When assessing your income, banks might also accept bonuses, overtime, freelance income and returns from investments, like shares.
- If you get a promotion or pay rise, or you know one is in the pipeline, let your lender know – it will help potentially increase how much you can borrow.
- Banks also want to see income security: they prefer you to have secure, full-time employment over casual, contract or freelance work.
- Fall into the latter category? Don't worry, it's still possible to get finance – learn more about getting home loan approval when you're a sole trader or self-employed.
Work out how much you are likely to be able to borrow, based on your current income level. You can do this using our simple borrowing power calculator.
Keep in mind, if you buy a property with someone else – your partner, a friend or a relative – this will increase the amount you can borrow.
You may also want to learn more about guarantor loans, where you buy a home with the backing of your parents.
2. What are your debts?
- The higher your personal debts (such as credit cards and personal loans), the lower your borrowing power.
- For instance: Did you know that having a credit card limit with $5,000 worth of debt can lower your borrowing power by up to $25,000?
- Banks and lenders don't expect you to have zero debt, but the less debt you have, the lower risk you are to the bank.
- To get into a position to buy a property, you ideally want to pay off all of your personal debts and build your savings balance.
- This takes time, so create a plan to pay off your debts over a specific timeframe.
Assess your current financial situation, and work out how to get yourself into the best possible position to be approved for a home loan. This could mean consolidating your personal loans and other small debts.
You may also need to pay down credit card debt – a great way to do this is to transfer the debt to a 0% interest card, then cancel your existing card.
Make sure you don't spend any more money on the new credit card, and work to pay the debt off as quickly as possible.
3. How much do you have in savings?
- Banks want to see evidence of what they call "genuine savings". This means they want to see you've established good savings habits.
- How much do you need to save? It depends on how much you plan to spend on a property, but at the absolute minimum, you'll need 5% of the property purchase price.
- You may need to save more, depending on the loan you qualify for. As a guide...
|Property purchase price||5% deposit||10% deposit||20% deposit|
After working out your borrowing power, you know how much you're likely to be approved to borrow. Let's say it was $500,000.
Now, you can work out how much you'll need as a home loan deposit. If you can get a $500,000 loan with a 10% deposit, this means you can buy a house worth around $555,000. You'll hand over your deposit of $55,500 to the bank, and get a home loan of $499,500.
If you currently have a decent stash of savings socked away, congrats!
If you haven't yet saved any money, that's fine. Now is the time to start a savings plan!
- How much can you realistically save?
- What can you do to ramp up your savings? Whether it's big (like moving home with parents to save rent) or small savings habits, every dollar saved is a step closer to owning a home.
- If you are buying in partnership with someone else: what is their savings plan?
- Can you discuss borrowing for a home with your parents/close relative as a guarantor, if it's an option for you?
- What timeline or savings goal are you setting? (This is key!)
- Are there any opportunities to boost your home loan deposit, such as side hustles, casual job income, asking for a pay rise or selling things you don't need any more?
To sum up:
By now you should have:
- A firm idea of your borrowing power
- A clear ballpark figure to aim for as a deposit
- A roadmap to pay off your debts
- A plan to boost your savings
Whatever your position right now: you are getting closer to your property ownership dream just by getting organised and understanding what your current state of play is.
In next week's module, we'll walk you through some of the grants, incentives and discounts that will help you more forward. While this week was all about working on the foundations, next week is where we start to turn some plans into action.