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It happened to me while I was reading a book. A light dawned and smacked me in the eyes. It came as a shock, like finding out Darth Vader was Luke’s father.
Your world does change when the penny finally drops about home ownership. A life with a mortgage and home ownership is definitely very different to a life of renting.
Exciting, yes. A bit scary, sure. And if you don’t have some little panic attacks, check your pulse. I locked my keys in the car for the first time ever on auction morning.
When the light switched on, I turned to (then girlfriend) Mrs DebtMan and told her I was buying a home. “No! You can’t buy a home until WE can buy a home,” she pleaded.
“Great … not”, I thought. Let’s just say her finances then were like her handbag now (a “Twilight Zone” for missing junk). Credit card debt, HECS debt, no savings. Near the home deposit starting line? Nope, still at the shops purchasing some Nike running gear, on credit, so she could look the part.
Ultimatum time – she had one year to get her act together. There were some nasty habits that needed breaking. To my shock, she smashed ’em! We bought our first home about 18 months later.
It typically takes people about a year or two from making the decision to catch that home-ownership train to actually boarding it.
In the meantime, however, there’s plenty to do? Understand that you need to “dress to impress”. By that, I mean you need to make sure your finances look smokin’ hot to banks.
You don’t need to impress your own bank anymore. Your aim is to impress many banks so they’re fighting to give you a loan.
How do you do that? Apart from the obvious deposit, here’s what else the banks are looking for.
Stability: Banks like stable incomes. You’ll need to explain changes of jobs or industries in the last three years, sometimes even where big pay rises have come with each. Too many jobs and you’ll have some explaining to do.
Self-employed: If you’re new to running your own business, few banks will take a risk, given new enterprise failure rates. Don’t be late with your tax paperwork and don’t fall behind in ATO payments.
Credit scoring: Order your free credit report online from Veda Advantage. If you’ve missed payments, have applied for a load of credit cards, or there are errors, work on these. Some banks “credit score” the second they receive your application and will knock you back solely on that score.
Credit cards #1: Here’s a little understood fact. When banks assess your loan application, they automatically assume all your cards are permanently maxed out. If you have $35,000 in limits over multiple cards, they assume you have $35,000 outstanding, even if pay it off in full each month. If you don’t use the cuts, cancel them and/or reduce the limits.
Credit cards #2: Don’t take free offers if you don’t need them. And don’t take free store credit either. They all add up on your credit report.
Cars: There is no other purchase in the world that destroys household wealth faster then motor vehicles. They depreciate rapidly. As you’re saving for your home deposit, hold on to your old car. If you upgrade, you will blow up, on average, $10,000 a year.
Budgeting: The biggest job is saving the deposit. A household budget has got to be a priority. Eat out less. Whoa back on App Store purchases. Do BBQs with mates, rathan than Sunday pub sessions. Halve your clothes bill. It’s easier to save money than to earn it.
Rent: Don’t increase your rent bill during this savings period. Staying in the dump for another year or two won’t kill you. And will probably save you another $5000-10,000. Better still, will Casa de Parents take you back in?
Do your calculations early: There are some great online calculators. But also chat to a mortgage broker. Banks have “policies”. Some are frustrating and make sod-all sense. Brokers can find them, but calculators are clueless here.
It’s not just about saving cash for a deposit. Each of the above can impact on your ability to get loans on good rates/terms. Take a holistic approach to preparing for your first mortgage.
Bruce Brammall is the author of Debt Man Walking and Mortgages Made Easy, a licensed financial adviser and mortgage broker. www.brucebrammallfinancial.com.au.