This is something you’ll likely have heard before countless times over the years, but it bears repeating. The only way to save money is to spend less than you earn. This is a habit that lenders expect you to master before you take on a mortgage.
Most lenders will require entry-level borrowers to show they have a history of 'genuine savings' before they’ll approve a loan. These policies may vary as to the exact number and timeline, but they will all require evidence that you’ve been putting savings away over a certain period. This is especially true if your deposit is less than 20%.
Cash injections or gifts from your parents/other sources don’t prove that you’re able to manage your budget in a satisfactory way, even if you can. A lender wants to ensure you’ll make your mortgage payments each month, and the only way to demonstrate this is to prove that you can save.
Taking charge of your credit
In a similar vein, your credit history - or credit score - will tell your lender whether you can afford a home loan. Because of this, you want to make sure you’re paying your bills on time, every time. If you miss even a $100 monthly credit payment, it weakens the message you’re trying to send to the lender.
Your credit score compromises your borrowing and repayment history, as well as how often you’ve applied for credit in the past. In fact, a low credit score will probably affect your loan approval or interest rate.
You can typically access your credit report for free from an approved credit reporting body (CRB), but there are a few conditions where you can get additional free reports. These are:
- You have applied for and been refused credit in the last 90 days
- Your request pertains to a decision from a CRB or credit provider to correct information in your report
You can find further information about accessing your credit report by visiting the Office of the Australian Information Commissioner.
If you don’t end up putting 20% or more down for a deposit, you’ll likely have to pay Lenders Mortgage Insurance, or LMI. This applies when the mortgage is higher than 80% of the lender’s property valuation. LMI does not cover you - rather, it covers your vendor in the case of non-payment.
There are two factors to consider when determining the cost of LMI. These are:
- The size of your loan
- The loan to property value ratio
You can ask your broker to do the maths for you if your deposit falls short of the 20% mark. If the market is moving up, then it makes more financial sense for you to pay the LMI rather than saving for a bigger deposit. There’s a chance you’ll only be outpaced by increasing property costs.
LMI premiums can vary, so it’s best to speak to your broker and find the right loan for your circumstances.
If you’d like to avoid an LMI, some lenders will accept a family member as a guarantor.
The first home loan deposit scheme
Under the government’s first home loan deposit scheme, eligible first time home buyers will be able to buy a house with a deposit as low as 5% (lender criteria applies) without needing to pay LMI.
At the start of each financial year, the government releases 10,000 new scheme places, which means you need to act quickly. Each state, capital city, and regional centre will have its own price thresholds but even brand new homes are eligible for this scheme.
Note: this scheme is only available to owner occupiers and investment properties are not eligible. For more information, visit the National Housing Finance and Investment Corporation website.
Ditch your debt
If your goal is to get a home loan with a small deposit, then you’ll want to get rid of your debt fast. You may think you have more in your pocket if you’re just paying the minimum amount each month on your debts, but you’re only increasing how much you owe (as well as how long you owe it). This makes saving for your first home that much harder.
Let’s say, for example, that you have a balance of $6,000 on a card that has a 20% annual interest rate (assuming there are no other charges or minimum monthly payments). Your minimum payment each month is $100. If you pay only this amount each month, it will take you 75 years to get rid of this debt. You’ll also pay more than $30,000 in interest.
You’re far better increasing that monthly payment to $310 per month. You’ll get rid of your debt in around two years and pay only $1,308 in interest. Once you’re free of this debt, you’ll have that $310 each month to put into a deposit.
Low or no-interest rate credit cards may also put a dent in your debt faster. Plenty of balance transfers on credit cards have a zero-interest offer for a specific period (though keep an eye out on any transfer fees).
You could also ask your provider to lower your limit. This means there’s less temptation to spend, and lenders do also look at the limits on your cards when assessing your applications.
Find a loan that works for you
If you’ve stuck to your savings plan and put together a deposit, then it’s time to secure a loan. While looking for a low interest rate is ideal, it’s not the only factor you need to consider.
For example, if you want to start a family in a few years time, consider a loan with the flexibility to move from a variable rate to a fixed-rate mortgage, or from a principal-and-interest to an interest-only loan. This could help you manage your finances or make it easier to move if need be.
Talking to the professionals
Your broker has all the information you need, as well as access to a host of loan products to choose from. This takes the hassle out of shopping around and making your own comparisons.
To help them, share as much as you can about your financial situation and personal goals. The better equipped your broker is, the better they can find a loan that suits your needs.