Buying your first home is not always that easy, so as a mortgage adviser I am sharing five tips to improve chances for first home buyers and enable them to buy a better home sooner.
Let’s look first at the major challenges that first home buyers have, and then we will share some ideas that improve chances for first home buyers.
The Major Challenges
It’s common to hear people that are renting saying that they could buy a house for the same as what they are paying in rent, and it’s often true. But those same people get frustrated as the banks say they cannot afford to buy a home.
The thing is banks look at things differently, and it’s important to understand this. As I step through the major challenges here I will try and explain what the banks are thinking too.
Deposits – the banks want you to have a 20% deposit and that can be hard especially in the major centres where houses are more expensive. To save a deposit takes time and at the same time you watch house prices increase; hence you need an even bigger deposit. When you are savings for a deposit you have to earn the money, pay tax and living expenses and then save what you can. On the average incomes this is hard, so you need to have a large enough income and manage your expenses and in particular minimise any unnecessary costs.
The reason that banks want you to have a 20% deposit is firstly because of rules set out by The Reserve Bank that limits how much they are able to lend with less than 20% deposits, and also because banks deem that a lower deposit increases the risk. While we expect house prices to continue to increase, there is the chance that they can decrease and if they did then the banks could potentially lose money if someone had to sell their home for less than they paid for it so the deposit gives a buffer to protect the bank.
Banks also apply harder criteria if you have less than a 20% deposit.
Income – the banks focus on your income when assessing your ability to borrow money. They want to know that you have a large enough income to pay all your expenses and then the mortgage too, but when they assess the mortgage repayments they apply a “test rate” which is generally about 2.50% higher than the actual rates being offered. As mortgages are a large and long-term financial commitment the banks want to “test” that you will still be able to afford the mortgage if interest rates increase.
Consider the difference – a $500,000 mortgage over 30-years would cost about $550 a week at an interest rate of 4.00% but if you did a “test” calculation at 6.50% then the same mortgage would cost about $730 per week which is another $180 per week. You might quite easily be able to afford the $550 per week and it might be similar to the rent that you are paying so you can even prove that you can afford this, but the extra $180 might push things too far.
The banks also focus a lot on sustainable income. They like people on wages and salaries, but struggle if you are not on a permanent contract, are self employed or have a lot of variable income like overtime, commissions etc.
Other Debt – often first home buyers will have some debt. It’s easy to get a credit card, a personal loan or vehicle loan and many first home buyers have some money owing on these. Then there are other debts like student loans that younger people tend to have.
The key issue with having any debt is that the repayments need to be allowed for when calculating what your expenses are.
These are some of the bigger challenges that often mean that the banks say “no” when trying to get your home loan.
It’s important that first home buyers understand the issues, but then you need to consider what you can do to improve your chances of getting a home loan approved.
Here’s Five Tips To Improve Chances
We have listed five tips here and while not all will apply to you, some probably do and will improve chances for first home buyers and enable you to buy a better home sooner.
1: What can you get for a deposit? You should consider all ways that might be available to get a larger deposit including selling things that you don’t need and seeing if family can help.
2: Increase your income – this might sound like a great idea but you believe is impossible. Lot’s of people do think that they are not able to earn any more, but that is not really true.
Lot’s of people will have a part-time job or side hustle in addition to their main income and this extra work might provide the extra $180 per week mentioned above, which could be the difference between being able to buy a home or not. As well as satisfying the bank criteria for the loan, extra income enables you to save a bigger deposit or pay off any debts, and then once you have a home loan it allows you to pay the loan off faster.
3: Review your debts – it is a good idea to review any debts and focus on what the repayments are rather than the interest rates. The banks do consider the number of debts that you have and also the repayment amount affects what you can afford. We will often arrange a debt consolidation loan in advance of applying for a home loan and the focus is to wrap up any debts, sometimes getting some extra funds that can help with the deposit and making sure that the repayments are as low as possible. It’s also important to make sure that you can pay extra or pay off the loan early without penalty. Contact us and we can help arrange this for you.
4: Check your student loan – we often have people that have a student loan which is interest free and therefore they don’t want to add this to an interest bearing debt consolidation loan; however the repayments for a student are based on your income and therefore they can be quite high compared to what the repayments might be for a standard personal loan.
5: Look outside of normal bank mortgages – while bank mortgages may seen to be the easiest and best, sometimes the criteria is too tough and therefore you can either give up, delaying buying your first home or look at alternatives. As mortgage advisers we are not limited to using just bank loans, and often will look at non-bank mortgages or other concepts like co-ownership which is proving popular.
The #1 Tip For First Home Buyers
So we have provided our five tips to improve your chances, but the other tip that we would suggest is to contact an adviser to assist. Of course you might expect someone like me (a mortgage adviser) to suggest this, but it really does make sense.
As an adviser I spend a lot of time looking at options that help people buy their first homes.
That includes constantly looking at bank criteria and considering ways to make home loan applications look better, and this includes some of the ideas discussed here.
I know some mortgage advisers don’t look past bank loans, but it’s something that I do all the time as I know how the banks operate and constantly hear of people that are disappointed by the criteria and lack of help. It’s important to me that you know what other options are available and therefore you know what is possible and what is not.