Just because your family lives on a single income doesn’t mean you won’t be able to find a home loan.
Single incomes and mortgages are not mutually exclusive, but to be approved for a loan and then be able to meet your monthly repayments may require some extra planning. Families on a single income are just as entitled to own their own home as two-parent families and there are financial structures to help out—you just need to know where to look and what for.
Before you start, it might be wise to speak with a mortgage broker who understands the current market and can give you helpful advice. Be sure to do your homework, not just about the different rates and conditions offered by banks and lenders, but also about savings and budgeting tools like mortgage offset accounts, first home buyers grants and family home guarantees.
How much do I need to save?
Many costs associated with buying a home can be easily overlooked, but it’s these extra expenses that can really add up. If you weren’t expecting them and hadn’t included them in your home loan budget, they can come as a nasty surprise.
- Deposit. The more money you have saved to pay upfront, the more likely you are to avoid charges like Lenders’ Mortgage Insurance (LMI). Aim to save 20% of the total cost of the home in order to avoid LMI.
- Checks. Conveyancing, pest inspections and an independent valuation are all essential expenses that can really set you back.
- Government costs. Stamp duty varies from state to state and is another cost that is often overlooked. You may also have to pay a mortgage registration or transfer fees and any applicable land taxes or rates. You can find out how much stamp duty you might have to pay using our stamp duty calculator.
- Bank fees. Bank fees can be crippling so it really pays to shop around. The cost of application fees, bank valuation fees and lenders’ mortgage insurance can run into the thousands. While not applicable in some cases, LMI protects lenders when borrowers who pay less than 20% deposit default on their loan.
- Set-up costs. Don’t be tempted to spend everything you have before you have even moved in. Costs like minor renovations, furniture, removalist fees and home and contents insurance are easy to overlook, but they generally come with the territory when you buy a home and can be expensive.
- Loan repayments. You are moved in, insured, the fees are paid and you’ve painted the walls, but don’t forget about your regular repayments, which will come the moment you are settled in. If you have budgeted correctly you should be able to comfortably meet the monthly amount.
How to save for your deposit
Generally speaking, if you have a smaller amount saved for a deposit, you may incur extra fees and charges such as LMI. To avoid this, save as much as possible so that when the time comes you are prepared for the expenses. You need to save 20% of the total cost of your home as a deposit to avoid extra charges and be able to afford upfront fees. When you are saving for your deposit there are some tried and true tips and tricks to help you stay on track:
- Goal setting. Make short, medium and long term goals for saving money and try to stick to them. Reward yourself with something non-financial as you achieve small milestones along the way.
- Re-evaluate your expenses. When you are saving for a home loan deposit, every little bit counts. If you cut out the fluff, you’ll be surprised at how quickly you are able to save. Have a look at your major outgoings. One of your biggest expenses will most likely be rent. If its possible for a short time, consider moving back home with your parents—the amount you will save in rent will help you take huge strides closer to that deposit.
- Make use of designated savings and budgeting accounts. One helpful budgeting tool could be using a mortgage offset account, with the amount in your account being taken off the principal amount of your loan and reducing your interest. If you’re a first home buyer, first home saver accounts are dedicated accounts that allow you to keep a track of your savings and make reaching your financial goals a more manageable task.
- Be aware of extra costs and utilise all of your options to save. If you think saving 20% of the total amount of your home will be hard to manage, options like a family guarantee could help you avoid crippling costs like LMI. If this will be your first home purchase, check the eligibility requirements for a first home owners grant.
Once you are settled in and have paid all the initial fees, mock up a weekly budget to help you keep on track with your repayments. Some tips for keeping up include:
Make use of a mortgage offset account. This can reduce the amount of interest you pay and shorten the length of your loan.
Communicate with your bank or lender. If you are struggling to make your repayments or think its likely that you might miss a repayment, contact your bank or lender immediately to arrange a budgeting plan or alternative repayment options.
Make additional repayments whenever possible. This may especially come in handy if you are able to withdraw from your mortgage, or if personal circumstances require you to take a loan holiday (missing a planned repayment and using your additional repayments to pay it in instead) to finance something like an overseas trip.
Budget honestly and consider a savings account. When you are in debt, paying off that debt as quickly as possible seems like your most important financial goal, but saving for a rainy day is also worthwhile. If something goes wrong, not having to borrow from a family member or skipping a repayment for lack of funds will help you get back on track quicker.
If you do find yourself struggling, evaluate your current living situation and lifestyle. If you have a spare room, consider renting it out. Any extra income you make to help you stay on track and still allow you enough for a high quality of life will be worthwhile.
How to apply for a single income home loan
If you are considering taking out a loan, search the big banks as well as other home loan lenders to find the best rates and the most appropriate loan for your life and circumstances. If you are unsure about your options, speak with a mortgage broker to get some good advice.
To be eligible for a home loan you need to:
- Have enough funds upfront, or a have a guarantor. You’ll usually need a deposit to be eligible for a home loan, with a 20% deposit helping you to avoid LMI. If you don’t have enough, you might be able to use your parents’ or another family member’s home as a guarantee to help you meet eligibility requirements.
- Meet income requirements. In order to be eligible for a home loan, you may need to have a proven steady income. This is where some single income families can have trouble.
- Meet credit requirements. You generally need to have a good credit history, although some lenders and mortgage brokers will specialise in those looking for a loan with bad credit.
You will also be required to provide the following documents or evidence:
- Proof of identity. This can include your driver’s licence, passport, medicare information or other similar documents.
- Proof of income. You may need to provide payslips or tax information.
- Debts and assets. You may also need to provide information about any assets you have, such as a car, a home or a trust. Any outstanding debts you have, such as credit cards, store cards or personal loans, may also need to be disclosed.
- Grants or guarantors. If you are eligible for and planning to use a first home owners grant, you will need to include the completed application form along with any supporting documents required. If you are applying with the security of a guarantor or using a financial gift to buy your home, you will usually need to provide details of these.
Buying a home on a single income can be a scary proposition, but if you have the income and the deposit there is no reason why it can’t be done. Banks and lenders are competing for your business, which is an advantageous position to be in. Take the time to compare rates, fees and repayment options to make sure that that your home loan is specifically suited to your needs.