Budgeting guide for first home buyers
Are you dreaming of owning your first home but unsure if your finances are ready for this significant step? Don’t worry, as Buyvest is here to simplify the process for you. Our easy-to-follow guide will provide you with the clarity and confidence needed to make your property buying journey a success. Let’s embark on this exciting adventure together.
Setting your financial scope
The first step in your property quest is to find out what you can afford. This crucial stage involves a careful examination of your financial position. By taking a deep dive into your financial situation, we can provide you several important benefits:
Realistic expectations: Understanding what you can afford helps you focus your property search within achievable price ranges
Reduced stress: Knowing your financial boundaries prevents the disappointment of falling in love with properties beyond your reach
Stronger negotiating position: Clear budget awareness allows you to make confident offers within your means
Better loan options: A thorough understanding of your finances helps identify the most suitable financing solutions
Future financial security: Ensuring your purchase is affordable protects your long-term financial wellbeing
A comprehensive budget assessment forms the foundation of a successful property purchase and sustainable homeownership.
Understanding your income
We start by adding up your income sources, such as your salary, self-employed income, and returns from all investment sources. After subtracting taxes and other deductions, we’ll arrive at your net monthly income. This figure is your starting point in mapping out your financial capability.
Understanding your monthly expenses
Next, we list down all your regular outgoings. This includes your current rent (if on-going post settlement), utility bills, insurance payments, grocery costs, transportation expenses, private health insurance and any other recurring costs like childcare or leisure activities. Don't overlook occasional expenses like travel or maintenance of a holiday home.
Working out your disposable income
Calculating your disposable income involves deducting your existing loan repayments and monthly living expenses from your net income. This calculation reveals the amount of money you have left each month after covering essential costs.
For instance, you have a $10,000 credit card limit with no outstanding balance, the bank will still include this amount as a potential debt and calculate a minimum repayment. This minimum repayment will reduce your borrowing capacity.
Assessing affordability
To understand how much you can comfortably spend on a property, consider the 28/36 rule. This principle suggests that your housing costs shouldn't surpass 28% of your gross income, and your total debts, including your housing costs, should not exceed 36% of this income. For instance, with a $5,000 gross monthly income, aim for housing costs of no more than $1,400, keeping your total debt payments below $1,800.
Lender assessment methods
Lenders assess your borrowing capacity based on factors like income, expenses, interest rates with a buffer, existing debts, loan type, credit history, dependents, and property type. While online calculators offer estimates, consulting a mortgage broker like Buyvest gives you a more accurate assessment based on specific lender criteria. With over a decade of experience, Buyvest ensures you secure the best loan.
Upfront Costs
When purchasing a property, it's essential to budget for several upfront costs, including stamp duty (with concessions for first home buyers), legal and conveyancing fees ($800-$2,500), building and pest inspections ($300-$800), loan application fees, Lenders Mortgage Insurance (if borrowing more than 80% of the property's value), moving costs, initial repairs or renovations, and furniture and appliances. These costs typically add 2-5% to the property price, but first home buyer concessions can help reduce this amount. Buyvest can guide you through these expenses and ensure you're fully prepared for the financial commitment of purchasing a home.
Ongoing property expenses
Homeownership involves ongoing expenses beyond your mortgage, including council rates ($1,500-$3,000 annually), water rates ($800-$1,200), strata fees for apartments or townhouses ($1,500-$10,000+), home and contents insurance ($1,000-$3,000), maintenance and repairs (around 1% of property value annually), and utilities like electricity, gas, and internet. If you don't factor in these costs, even manageable mortgage repayments can lead to financial stress. At Buyvest, we help you prepare for these expenses, ensuring you're financially stable throughout your homeownership journey.
Debt-to-Income Ratio (DTI)
Many lenders now use the Debt-to-Income (DTI) ratio as a key metric in assessing borrowing capacity. DTI is calculated by dividing your total debt (including the new mortgage) by your gross annual income. Most lenders prefer a DTI of 6 or lower, although some may approve loans with higher DTIs if other factors are favourable. For instance, if your income is $100,000 and you're considering a $500,000 mortgage, your DTI would be 5.0 ($500,000 ÷ $100,000). However, it’s important to remember that your budget should cover more than just mortgage repayments. Many first-time buyers overlook additional property costs, which can add up quickly. At Buyvest, we help you understand these costs and ensure you're financially prepared for your home purchase.
Strategies to improve your budget
If your initial budget assessment reveals limitations, several strategies can help improve your position.
Reducing existing debts
Reducing existing debts can significantly improve your borrowing capacity. Start by paying down high-interest debts first, consolidating multiple debts into a single lower-interest loan, and reducing or eliminating credit card limits. Avoid taking on new debt before applying for a mortgage. Even small reductions in your debt can lead to meaningful increases in your borrowing capacity. At Buyvest, we can help you develop a strategy to manage and reduce debt, boosting your chances of securing the right mortgage for your needs.
Increasing your deposit
Increasing your deposit can significantly improve your position when applying for a mortgage. A larger deposit reduces the loan amount needed, may eliminate the need for Lenders Mortgage Insurance, can lead to better interest rates, and demonstrates financial discipline to lenders. Consider strategies like the First Home Super Saver Scheme, which lets you save for a deposit within the tax-advantaged superannuation environment. At Buyvest, we can help you navigate these options to strengthen your financial standing and secure the best deal on your mortgage.
Exploring government assistance
Various government programs can improve your budget position and make homeownership more affordable. These include the First Home Owner Grant, Stamp Duty Concessions (under the First Home Buyers Assistance scheme), the Home Guarantee Scheme (which allows purchases with as little as a 2% to 5% deposit without LMI), Shared Equity Scheme helps eligible buyers buy homes with smaller deposits and government support, First Home Super Saver Scheme, and state-specific incentives and concessions. It's important to research the programs available in your state or territory and check your eligibility for each. Buyvest can help you navigate these options, ensuring you take full advantage of any available assistance to strengthen your home-buying position.
Adjusting Your property expectations
Sometimes the most practical approach is to adjust your property expectations. Consider starting with a smaller property, exploring more affordable locations, or looking at different property types, such as apartments versus houses. Older properties may also be more affordable, or you could consider properties that need renovation, especially if you have the skills or resources. Many successful property owners started with modest first homes and upgraded as their financial position improved. Buyvest can guide you through these options, helping you make a smart and sustainable start on your property journey.
Frequently asked questions
How much deposit do I need to buy my first home?
While 20% is the traditional deposit amount to avoid Lenders Mortgage Insurance (LMI), first home buyers have several options. With the Home Guarantee Scheme, you can purchase with as little as a 5% deposit. Many lenders also offer loans with 5-10% deposits, though LMI will apply. Some state-based initiatives provide additional deposit assistance, and guarantor loans may allow purchases with minimal deposits. The ideal deposit size depends on your financial situation, property goals, and eligibility for various schemes. Buyvest can help you explore the best options to maximize your deposit and secure the right mortgage.
How do lenders calculate my borrowing capacity?
Lenders assess your borrowing capacity based on factors like your income (typically verified with payslips or tax returns), expenses (verified through bank statements), existing debts and credit limits, a serviceability buffer (usually 2-3% above current interest rates), credit history and score, the number of dependents in your household, and the type of property you're purchasing. Keep in mind that different lenders may use varying assessment criteria, which can impact the loan amount you're eligible for. Buyvest can help you navigate these assessments and ensure you find the best lender for your financial situation.
Will my HECS/HELP debt affect my borrowing capacity?
Yes, your HECS/HELP debt can affect your borrowing capacity, as it is considered part of your existing liabilities. However, legislation has been introduced that may allow some banks to exclude HECS/HELP debt from their assessment or Debt-to-Income (DTI) calculation. This could improve your borrowing capacity by not factoring in the debt as a liability. Lenders may still consider the monthly repayments when assessing your serviceability, and these new legislation could ease the impact on your loan eligibility. At Buyvest, we stay updated on these changes and can help you navigate how they may benefit your mortgage application.
How much of my income should go toward mortgage repayments?
Financial experts typically recommend that mortgage repayments don't exceed 30% of your gross income to maintain financial comfort. However, this varies based on your other expenses, lifestyle, and future plans. In high-cost areas, some borrowers may allocate up to 40% of their income to housing, though this leaves less flexibility for other expenses and savings.
Should I include my partner's income in my budget?
If you're purchasing with a partner, combining both incomes can significantly increase your borrowing capacity. However, it's important to consider that both parties become legally responsible for the loan. The lender will assess both credit histories, and any changes in either person’s employment could affect loan serviceability. Future life changes, such as having children, might reduce one income. It's crucial to discuss these considerations openly with your partner and ensure both of you are comfortable with the shared financial commitment. At Buyvest, we can help you navigate these factors to make informed decisions about joint homeownership.
How will my credit score affect my budget and borrowing capacity?
Your credit score plays a key role in loan approval and can influence various aspects of your mortgage, including loan approval prospects, interest rates, deposit requirements, loan features, flexibility, and the maximum loan amount. A higher credit score generally leads to better loan terms, faster approval, and may even result in policy exceptions. Before applying for a home loan, it's important to check your credit report for any errors and take steps to improve your score if needed. At Buyvest, we can guide you through the process and help you secure the best possible mortgage terms.
What if my budget assessment shows I can't afford the property I want?
If there's a gap between your budget and property goals, consider delaying your purchase to save a larger deposit or exploring government assistance programs. You could also look at more affordable locations or property types, investigate alternative financing options like guarantor loans, or work on improving your financial position by reducing debt or increasing income. Starting with a more modest property can also be a stepping stone, allowing you to build equity for a future upgrade. Many successful property owners began with homes that weren’t their dream but provided a solid entry into the market. Buyvest can help you navigate these options to make a smart, sustainable decision.
How much should I budget for ongoing property expenses beyond the mortgage?
As a general rule, budget approximately 1 to 2% of your property's value annually for ongoing expenses. This includes council rates (0.1-0.3% of property value), water rates ($800-$1,200 annually), strata fees (if applicable, $1,500-$10,000+ annually), insurance ($1,000-$3,000 annually), and maintenance and repairs (0.5-1% of property value annually). These costs can vary significantly based on the property type, location, and condition, so it’s important to research specific costs for your target property. Buyvest can help you understand these ongoing expenses and ensure you're financially prepared for homeownership.
How can I improve my budget position before applying for a home loan?
To strengthen your budget position, start by paying down existing debts, particularly high-interest ones. Reducing or eliminating credit card limits, saving consistently, and ensuring your spending patterns align with your declared expenses will demonstrate financial discipline. Stabilizing your employment situation and checking and improving your credit score are also crucial steps. Additionally, research and apply for applicable government assistance and working with our expert mortgage broker to find the most suitable lender. Taking these steps before applying for a loan can significantly improve your borrowing capacity and loan terms, setting you up for a more successful home purchase.
Master your budget with Buyvest
At Buyvest, we believe in responsible lending. By determining your budget, you can confidently step into the property market, knowing exactly what you can afford. This approach not only safeguards you from financial overreach but also steers you towards a property that aligns with both your needs and your means.
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Smart budgeting is the first step to owning your home.
With Buyvest, clarity brings confidence.
Important stuff:
Please note that the views and opinions expressed in this post are general information only, and this is not financial advice.
Any advice and information is provided by Buyvest Pty Ltd ABN 91 684 841 496, Australia Credit Licence No. 567392 and is general in nature, for educational purposes only and is not intended to constitute specialist or personal advice. This website has been prepared without considering your objectives, financial situation or needs. Therefore, consider the appropriateness of the advice for your situation and needs before taking any action. It should not be relied upon to enter into any legal or financial commitments. Specific investment advice should be obtained from a suitably qualified professional before adopting any investment strategy. If any financial product has been mentioned, you should obtain and read a copy of the relevant Product Disclosure Statement and consider the information contained within that Statement concerning your circumstances before deciding whether to acquire the product. You can obtain a copy of the PDS by emailing hello@buyvest.com.au. If you want to change your financial circumstances, such as applying for a loan, all loan applications are subject to credit approval.
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