Since the interest rate may rise again, now is the time to protect your finances, check the pressure on your budget and increase your borrowing power.
If you’re hoping to get the keys to your property later this year, the work starts now, months before you put in an offer.
Borrowing capacity is under pressure, with the Reserve Bank raising interest rates this week for the second month in a row.
Interest rates are set to rise again in May, while national house prices rose 9.1% last year, meaning homes are worth about $90,000 more than they were 12 months ago.
In this competitive and uncertain environment, the next few months are about strengthening your finances, stress-testing your budget, and making sure you stack up when the bank is watching you.
1. Study the market
The first step to buying a home is understanding what your money can buy, says Mortgage Choice Perth agent Shannon Hassett.
“Start tracking sales in your target areas a few months before you’re ready to buy, you might be surprised how little you get to a million dollars,” he warns.
Once you see what homes are selling for, you’ll know if you’re in the game or not. Setting expectations early is important.”
2. Calculate how much you need
Start by using a mortgage calculator or talk to a realtor to find out how much you can borrow and how that stacks up to property prices in your chosen area.
“It’s good if people come to the dealership early and want to understand their numbers,” Ms. Hassett added. “They can see what their payment would be and they can compare that to their current rent.”
AMP senior economist Shane Oliver. Photo: News Corp Australia
AMP economist Shane Oliver says the type of loan matters.
“An interest-only loan can make it easier to pay off early, but you’ll pay more interest overall. A principal and interest loan costs more upfront but lowers long-term interest and helps you pay off your loan faster.”
Research available help
Mortgage brokers can explain government programs and first-time buyer grants you may be eligible for, which vary by state.
“Many clients think they don’t deserve support, then find out they do,” Ms Hassett said.
The Government’s First Home Guarantee, which allows qualified buyers to buy with just a 5% deposit, has become very popular since it opened six months ago.
However, Dr. Oliver advises saving a large deposit if possible to reduce the amount of interest you will pay later.
The First Home Super Saver Scheme (FHSS) is another option, which allows first-time home buyers to withdraw up to $50,000 (maximum $15,000 per year) of voluntary contributions, plus income, to use as a deposit.
The only fish? You need to live in the home immediately after purchase and before any consideration of using it as a rental property.
If you don’t qualify for government support, considering a parent guarantor or paying Lenders’ Mortgage Insurance (LMI) could be your way over the line.
LMI can help you buy faster, but it has pros and cons. High costs are a significant barrier – on a $1 million home with a 5% deposit, it can add up to around $40,000 up front.
With property prices rising so fast, some quick calculations will help you quickly figure out if it’s worth starting.
Your job may also improve your shopping opportunities this year. Some lenders waive LMI for high-income or low-risk professionals. This includes doctors, nurses, pharmacists, lawyers, engineers, refugees, miners, and emergency workers, allowing them to borrow up to 90–95% of the property value at no additional cost.
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Stamp duty fees can be very expensive and vary by country and state. Image: Getty
Factor in additional costs
Property ownership comes with upfront and ongoing costs that renters may not be aware of, warns Dr Oliver.
“The stamp duty alone can cost around $30,000, plus there are legal and appraisal fees, surveys and loan origination fees.
“You might also want to spend a few thousand on landscaping. You probably need an extra $50,000 to allow for all of these things,” he says.
“When you move from tenant to owner, you incur ongoing costs such as rates, land tax, maintenance costs and higher insurance premiums.”
The cost of running a home can add up quickly. Image: Getty
Stress-check your budget
Even if your mortgage payments seem lower than your current rent, interest and other costs can increase your monthly outgoings when everything is combined.
Dr. Oliver recommends that you practice for a few months as if you have already paid off your loan.
“If your loan is going to cost $2,000 a month, start putting it aside for savings now,” he said.
In today’s inflationary environment, you are suggesting a possible rate hike.
“Banks check whether you can handle 2% more than the amount you pay before approving a loan,” he said. “It’s a worst-case scenario, but if you budget that way, you’ll probably have some money left over.”
3. Reduce costs and improve savings
Before applying for a loan, make sure your finances are in good shape — no overdrafts, no debts, and a solid credit score, Ms. Hassett says.
Lenders generally prefer credit scores of 650–700+, which can help you secure lower interest rates and faster approval. A lower score may be acceptable but may mean a higher deposit, more fees or a professional loan.
He also recommends cutting down on unnecessary spending.
“A lot of people have unused gym memberships or forget direct debits — $10 here, $10 there — that really adds up.
Prospective buyers need to carefully monitor where they spend too much money. Image: Getty
“Now there are services that can track your subscriptions and show where your money is going, which can be really helpful.”
4. Don’t be afraid of rising prices
With one or two more currency hikes expected this year, it’s natural to feel cautious about buying, but if you’re well prepared, there’s no need to panic.
“When prices go up, it can actually be a good time to buy,” said Dr Oliver.
“There’s less competition, so you can think calmly, and banks looking for borrowers may offer better deals.
This article originally appeared on Mortgage Choice and has been republished with permission.
