Get finance fit before house hunting

Jan 5, 2023, 14:11 PM

Start prepping now, even if you aren’t thinking of buying until mid-year, that way you’ll be in top shape by the time you want to apply for a loan.

Title : Get finance fit before house hunting

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News date : Jan 5, 2023, 00:00 AM

If a new home is on the cards this year, your New Year’s resolution should be to get your finances as ‘fit’ as possible before hitting the market.

Start prepping now, even if you aren’t thinking of buying until mid-year, that way you’ll be in top shape by the time you want to apply for a loan.

Manage your expectations

Eight consecutive interest rate rises have changed the lending climate and reduced buyers’ borrowing capacity. For example, last year’s rate rises added about $800 per month to an average $500,000 mortgage. You may not be able to borrow as much as you could when interest rates were lower.

Even if you were pre-approved for a loan a couple of months ago, that will need to be reviewed following any subsequent rate rises.

In addition, lenders are legally required to consider an interest rate buffer of 3.0 per cent when assessing your ability to repay a loan. This means if you’re applying for a loan with a variable rate of 5.0 per cent, they will assess your ability to repay with an interest rate of 8.0 per cent. This reduces your borrowing capacity.

So, you may need to look at homes in lower price brackets, in different suburbs or different types of dwellings.

Reduce the credit and buy-now-pay-later

Any credit cards you have are considered potential debt, whether or not you use them wisely, and reduce your borrowing power further. Consider paying them off and closing the accounts or paying them down and reducing the limit.

In addition, at the end of last year, two lenders announced they will now consider potential borrowers’ use of buy now pay later services, such as Afterpay and Zip, in loan applications. Other lenders may follow suit. This means you may need to declare your limit, current balance and monthly repayments when applying for a loan. Pay them off and cancel them if you can and don’t use them in the lead up to applying for a loan.

Give yourself time

Just like preparing to run a marathon, getting your finances into shape takes time.

Lenders may want to see up to six months’ worth of genuine savings. Being gifted a lump sum for a deposit or receiving a windfall that puts a lump sum in your bank account isn’t enough. They will also want to review your bank statements for several months, so you’ll want to make sure they look their best.

If you haven’t already, start saving for a deposit. You don’t need to have 20 per cent, but the more you have the less you will need to borrow.

Cut the extra ‘calories’

Go through your spending with a fine-toothed comb and see where you can cut back.

Lenders will look at all of your expenditure including Uber Eats and subscriptions to streaming services like Netflix and Binge. Expenditure on gambling apps will also be scrutinised.

In the lead up to buying a home try to order less takeaway and reduce the subscriptions. If your budget allows, you can resubscribe once you’ve settled on the property.

Give your credit score a health check

Lenders look at your credit score when you apply for a home loan. Things such as paying bills on time and regularly paying down debt will help improve your credit score, while bankruptcies, defaults, unpaid bills and multiple unsuccessful loan applications will lower it. Once you know your score you can take steps to improve it if you need to.

Go see a broker

Consider them a personal trainer for your finances.

They will help you review your bank statements, spending and financial situation and tell you what changes need to be made before you apply for a loan. They will also help you find the best lender for your circumstances, for example if you need a low-doc loan or have a small deposit.

contenttypes : News

topics :

Advice

audiences :

Experienced buyer
First home buyer

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