How to prepare your finances before buying a home

Experts say Australians should organise their finances before searching for a home.

Experts say Australians should organise their finances before searching for a home. Photo: Getty

Buying a home is no easy feat, but finance experts say preparation is the key to success for Australians looking to buy property.

Here’s the advice they had for aspiring home owners.

Check your credit rating

Canstar chief spokesperson Steve Mickenbecker said lenders look for a clean credit rating to figure out if a potential borrower will be able to repay their mortgage.

So before you apply for a home loan, make sure to check your credit score, which you can do for free online through companies such as Experian, Equifax, Canstar and Finder.

If you have a low score, Mr Mickenbecker said you should fix it before applying for a loan.

“If there’s been some dispute or a mistake, you [can] approach the provider and [ask them to remove it from your credit score],” he said.

“But if you have an actual problem … you might have some repair work to do over time.”

Save up

Experity director Clint Howen said preparing to buy a house was like getting in shape.

“If I knew I was going into a bikini contest or a model show and I needed to be in tip-top shape, it’s better to know that two years out rather than a month out … it’s the same [with finances].”

Mr Mickenbecker said more people needed to factor in the costs of stamp duty – which vary from state to state – before buying a home.

He told The New Daily first-home buyers are usually eligible for discounts, but people buying subsequent homes have to pay full fees.

He said if a home buyer has a deposit that is lower than 20 per cent of the purchase price, they will likely have to pay for lender’s mortgage insurance (LMI), which can be included in their loan.

LMI protects the lender from financial loss if the borrower fails to meet their loan repayments and can cost between $10,000 and $15,000, according to Mr Mickenbecker.

The exact amount will depend on the size of the loan, the type of property the borrower is buying, and how much they can put down as a deposit.

Mr Howen said home buyers should also take into account conveyancing fees, application fees, valuation fees and exit fees for people who are refinancing.

He said lenders scrutinise incomes and expenses, so prospective home buyers should create a budget and a savings plan.

Mr Mickenbecker recommended working out the loan repayments you will likely be making in the future up to two years before you apply for a loan, so that you can set aside this amount every month.

He said this would prove to your lender that you can afford the loan.

“You can satisfy yourself [and the bank] you can do without that … extra money,” he said.

Home buyers finance

Experts say prospective home buyers should save for more than a deposit. Photo: Getty

Consider future interest rate changes

Mr Mickenbecker said it was “absolutely critical” that prospective home buyers think about whether they will be able to afford home loan repayments if interest rates go up.

Start by checking out the interest rates available today, he said.

Then use an online calculator to find out what your loan repayment will be over 30 years.

To make sure you can repay the loan if interest rates go up, he recommended working out whether you could repay the loan if your interest rate increased by 2.5 percentage points.

Get pre-approval before searching

Mr Howen said going through the process of getting a loan pre-approval could help people avoid overspending on properties by giving them a better understanding of their circumstances.

“The major risk is you go and put a deposit on a place, and [it later] turns out you can’t borrow that money, so you lose your deposit,” Mr Howen said.

“Pre-approval [and conditional approval] will help you understand what you can actually afford.”

Think about location

Mr Mickenbecker said the location of your property could affect the amount that lenders will allow you to borrow if prices are unstable there.

“If you’re buying a three-bedroom home in the [suburbs], that’s unlikely to cause you any drama,” he said.

But if you want to buy a house in a small mining town, or a small inner-city apartment in cities such as Melbourne, lenders will be reluctant to lend or could ask for a larger deposit.

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