Is a new home on the cards this year?

With homes in short supply and selling quickly, you want to make sure your finances are in order before hitting the market so you’re ready to act when you see a property you like.

Start prepping now, even if you aren’t thinking of buying until mid-year, that way you’ll be in a prime position when it comes to getting a loan and securing a new home.

Manage your expectations

Thirteen interest rate rises since May 2022 have changed the lending climate and reduced buyers’ borrowing capacity.

The average mortgage repayment is now about 47 per cent higher than when rates started rising – for example, the monthly repayment on a $500,000 loan has risen by nearly $1,000 since May 2022.

This means 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 several 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. If you’re applying for a loan with a variable rate of 7.0 per cent, they will need to assess your ability to repay with an interest rate of 10.0 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, lenders may consider potential borrowers’ use of buy now pay later services, such as Afterpay and Zip, in loan applications. 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 extras

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

Brokers can be invaluable when it comes to preparing to buy.

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.

*source: APRA, RBA