Getting into your first home: Managing your home loan against the cost of living
An uptick in the cost of living means it's essential to look for ways to balance home loan repayments and everyday expenses.
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If you're thinking about buying your first home – or you've just bought one – you might be feeling a bit daunted. Rising interest rates and cost of living expenses mean that it's easy to get overwhelmed thinking about money management.
Today, we're going to talk you through some practical tips for balancing your home loan and the cost of living, whether you've just bought a place or you're looking to soon.
We'll discuss some of the key considerations, including sensible borrowing, better budgeting and managing repayments effectively.
1. Using LMI to purchase a home sooner
One of the big obstacles people tend to have when they buy their first home is saving a deposit.
Conventional wisdom has long held that you should save 20% or more of the house price before applying for a loan. However, that doesn't tend to be feasible for many people in today's housing market.
This approach shuts out a lot of people who are otherwise earning good incomes and may be more than capable of making home loan repayments.
Lenders' mortgage insurance – or LMI – can help bypass this issue.
LMI is a form of insurance that protects the lender if you're borrowing more than 80% of your purchase price on a home.
It does add an extra expense to your home loan. However, it doesn't need to be paid back immediately, and can be rolled into the loan repayments themselves.
To get an estimate of how much LMI would add to your repayments, you can use tools like the LMI calculator.
While the benefits of opting to borrow with less than 20% deposit need to be weighed up on a case-by-case basis, LMI can be an effective way to get into a home sooner.
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2. Leaving a buffer when you borrow
When the time does come to apply for a loan, consider whether you really need to borrow up to your maximum capacity.
Having a buffer in place can have a few benefits for borrowers, including:
- Reducing the risk of overstretching yourself if your expenses – or interest rates – rise.
- Allowing more wiggle room for refinancing down the track, if necessary
- More ability to borrow for other things (e.g. personal loans, car loans, renovations etc.)
By having a buffer in place, you can help increase your peace of mind, establish better financial habits and avoid problems throughout the lifespan of the loan.
3. Creating a budget – and sticking to it
Creating a household budget is Finance 101. Sticking to it though? That can be a bit trickier.
After all, life throws curveballs, new opportunities pop up and money simply needs to be spent sometimes.
A trap that many first home buyers fall into is over-budgeting. They try to budget down to the dollar, get disillusioned when a blowout inevitably occurs and then abandon the plan as a result.
But it's important to see a budget as a living document, rather than set in stone.
You need to leave yourself some room for unexpected expenses – as well as the occasional splurge, too.
However, if you do find budgeting consistently difficult to stick to, it may be worth seeking third-party advice and assistance, too. Sometimes an outside party – like an accountant or financial advisor – can help bring additional clarity to your situation.
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4. Setting aside funds for maintenance
One of the big things that tends to cause budget blowouts for first homeowners is unexpected maintenance expenses.
The broad rule of thumb is to set aside 1-4% of your home's purchase price for maintenance.
Obviously, this doesn't have to be all at once! Rather, it's something you can account for when putting together a household budget.
5. Reassessing your lifestyle and long-term financial goals
Part of putting together a budget is looking at your current lifestyle, expenses and overall financial goals.
There will likely be some obvious expenses that can be reduced, with the funds funneled elsewhere.
It's also important to look holistically at your goals, too.
For example, if you're thinking about buying your first home – are you viewing it as your forever home, or simply as a foot on the property ladder?
If it's the former, are you willing to keep spending on rent for several more years? Or would you be better served by buying now and putting money into building equity, which will make it easier to buy your dream home down the line?
If you're solely thinking about getting on the property ladder – how do you see yourself treating the property in years to come? Are you planning to build an investment portfolio, or do you have plans to gradually "trade up" through a series of homes for yourself?
These aren't necessarily easy questions with straightforward answers. Rather, they're meant to serve as jumping-off points for the way you approach your future financial planning.
6. Managing your repayments
An important part of managing your home loan is deciding how you tackle your repayments.
If your lender has an app available, you should be able to easily check how much you owe at any given time. This can help you make effective, real-time decisions about where to funnel your funds.
Extra repayments can be a useful way to pay off the loan more quickly. It can also be an effective way to build up funds in case you need to use cash redraw in the event of an emergency.
However, if you are thinking about making a switch to interest-only repayments, it's best to talk to your lender first. Interest-only repayments can lead to your loan costing you more over the lifespan of the loan.
It's important to remember that everyone's circumstances are different. Before making any major financial decisions, it's always worth talking to a professional.
Visit the QBE LMI hub to learn more about LMI today.
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