Step 1 - Establishing What You Can Buy?
A Mortgage Broker or a Lender can assist you in establishing the maximum amount of money that a lender will lend you based on your income, savings, expenses, credit history and other assets.
Keep in mind that the maximum you can borrow is just that and you need to be diligent in ensuring that you consider your ability to meet the repayments on the loan on a monthly basis.
Also worth considering is the additional costs associated with purchasing a property including mortgage insurance (depending on how much you borrow), stamp duties, legal fees, search fees, pest and building inspection fees and loan application fees.
Prior to making your final decision on how much to borrow, ensure that you know your monthly repayments and you should factor in an interest rate increase of 1% to 2% to establish if your income and expenditure would cope with such a rate increase. You should also worth consider how long you can continue to repay your loan in the advent that for unforeseen reason you were to lose your job. Whilst this is a worst-case scenario, it is worth understanding how this would impact your ability to maintain your repayments.
A deposit is the amount of money you contribute from your savings towards the purchase. Allowing for a 20% deposit will lower your cost of purchase as it is enough to often avoid Mortgage insurance which can be rather costly.
A deposit under 20% of the purchase price can still be enough to purchase a property, providing that you are prepared to take up mortgage insurance.
If you are fortunate to have more than 20% deposit, then you can certainly borrow less than 80% of the purchase price and thereby reduce your ongoing interest bill each month. Alternatively, if you feel that you may need the additional money later for something you can put down a 20% deposit and place the balance of your money in a loan offset account. Loan offset accounts attract interest from the bank like any deposit, however the interest earned is offset against the interest the bank charges you on the same amount.
Using a loan offset account is a great way to reduce your bank interest costs whilst having the money available just in cases.
Establishing how much deposit you should save varies by person by property and is also influenced by market forces. For example, in a strong growth market, buying with a lower deposit and paying for mortgage brokers insurance may be feasible if the property value increases by 5% to 10% over 2 years.
The answer is Yes! Saving for a deposit requires sacrifice, compromise, discipline and determination. None of these words are fun, but they are the secret to saving for a home deposit.
The first step is to identify the amount of money you want to save. The second step is to look closely at your income and expenditure and then identify the areas in which your savings will come from.
One way to stay on top of your savings is to setup an account with your bank specifically for your deposit with a no withdraw facility. You will get a lot of satisfaction from watching this account grow each week as you execute your plan.
To save you can increase your income. A second job, a promotion at work, financial gifts from family for Birthdays and Xmas all create extra income. Where your income increases due to a pay rise or promotion, consider having your employer deposit the additional income directly into your separate deposit account so that it bypasses your normal income account.
The alternate way of saving is to reduce expenditure. There are many things that you could probably go without and how far you take this is up to the individual. As part of your planning, go back on your previous year’s expenditure, group it and add it all up. For example, how much do you spend each year on cinema, concerts, eating out, cocktails, gifts, holidays, make-up, after shave and perfumes, spa resorts, massages etc. Once you see your total spend per year you will quickly see areas that can be cut back to start saving.
Remember once your deposit bank account starts to grow, ensure that you secure the best interest rates possible.