Budgeting guide for first home buyers

Written By Mojtaba Hasani

Understanding your budget is the essential first step in your property journey as a first home buyer. Setting your financial scope involves a careful examination of your financial position to determine what you can realistically afford. Working with an experienced Ryde mortgage broker, Parramatta mortgage broker, or your local area's specialist, you can gain clarity on your budget and explore the best financing options available. This comprehensive budgeting guide for first home buyers helps you establish realistic expectations, reduce financial stress, and make confident property purchasing decisions.

Quick overview: Understanding your budget gives you realistic expectations, reduces stress, strengthens your negotiating position, identifies better loan options, and protects your long-term financial security. A comprehensive budget assessment forms the foundation of successful property purchase and sustainable homeownership across NSW, including Gladesville, Baulkham Hills, Castle Hill, and throughout Sydney.

Setting your financial scope

Key concept: The first step in your property journey is finding out what you can afford. This crucial stage involves a careful examination of your financial position to provide you with clarity, confidence, and control over your home buying decision.

By taking a deep dive into your financial situation with a mortgage broker, you gain several important benefits when preparing to purchase your first home. Understanding your financial capability enables you to make informed decisions about your property investment strategy.

Benefits of comprehensive budget assessment

Working through your budget systematically provides clarity across multiple dimensions of your property purchase:

  • Realistic expectations: Understanding what you can afford helps you focus your property search within achievable price ranges, preventing wasted time viewing properties beyond your means.
  • Reduced stress: Knowing your financial boundaries prevents the disappointment and emotional toll of falling in love with properties beyond your reach.
  • Stronger negotiating position: Clear budget awareness allows you to make confident offers within your means and negotiate effectively with sellers.
  • Better loan options: A thorough understanding of your finances helps identify the most suitable financing solutions tailored to your situation.
  • Future financial security: Ensuring your purchase is affordable protects your long-term financial wellbeing and prevents overcommitment.

A comprehensive budget assessment forms the foundation of successful property purchase and sustainable homeownership. Whether you're searching in Ryde, Chatswood, or Penrith, working with an experienced mortgage broker helps you navigate this critical process with confidence.

Understanding your income

Money tip: Your net monthly income is the starting point for mapping out your financial capability and determining your borrowing capacity for a home loan.

The first step in budgeting involves calculating your total net monthly income. We start by adding up your income sources, including your primary salary, self-employed income, and returns from all investment sources. After subtracting taxes and other deductions, you arrive at your net monthly income—this figure is your starting point in mapping out your financial capability.

Income verification for lenders

Lenders require documentation to verify your income claims. This typically includes recent payslips, tax returns spanning the last two years, and recent bank statements. Having accurate records readily available streamlines the loan application process and demonstrates financial responsibility to your lender, increasing approval chances.

For self-employed individuals or those with variable income, lenders typically assess income based on the last two years of tax returns. This provides a more accurate picture of your earning potential than a single year's income and reflects your average earning capacity over time.

Understanding your monthly expenses

Budget insight: A thorough understanding of your monthly expenses reveals exactly what you can afford after essential costs, helping you identify your true disposable income.

The next critical step involves listing all your regular outgoings. This comprehensive list includes your current rent (if ongoing post-settlement), utility bills, insurance payments, grocery costs, transportation expenses, private health insurance, childcare costs, and any other recurring expenses like leisure activities or subscriptions.

Creating a detailed expense list

Creating a detailed expense list helps identify areas where you might reduce spending or reallocate funds towards your property goal. Many successful first home buyers use budgeting apps or spreadsheets to track their spending patterns over several months, revealing where money actually goes each month.

Don't overlook occasional expenses like annual travel, vehicle maintenance, or maintenance of a holiday home—these should be averaged into your monthly calculations. Understanding your complete spending picture is essential for accurate budget assessment and sustainable homeownership planning.

Working out your disposable income

Key calculation: Disposable income is what remains after covering essential costs and existing debt repayments, representing your true borrowing capacity.

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—this is your available borrowing capacity.

Credit limits and borrowing capacity

An important consideration is how credit facilities affect your disposable income. For example, if you have a $10,000 credit card limit with no outstanding balance, lenders will still include this amount as a potential debt and calculate a minimum repayment. This minimum repayment will reduce your borrowing capacity, even if you're not currently using the credit line.

Understanding this mechanism helps you strategically manage credit facilities before applying for a mortgage. Closing unused credit card accounts or reducing credit limits demonstrates financial discipline to lenders and improves your debt-to-income ratio, potentially increasing your borrowing capacity significantly.

Assessing affordability using the 28/36 rule

Financial rule: The 28/36 rule helps determine what you can comfortably afford by setting safe limits on housing and debt expenses relative to your gross income.

To understand how much you can comfortably spend on a property, consider the 28/36 rule. This financial principle suggests that your housing costs shouldn't surpass 28 per cent of your gross income, and your total debts, including your housing costs, should not exceed 36 per cent of your gross income.

Practical 28/36 rule example

For example, with a $5,000 gross monthly income, you should aim for housing costs of no more than $1,400 per month (28 per cent), keeping your total debt payments below $1,800 per month (36 per cent). This rule provides a safe framework to ensure your mortgage doesn't strain your finances and leaves room for other living expenses, savings, and unexpected costs.

Whilst some borrowers in high-cost areas like Sydney may exceed these percentages, the 28/36 rule remains an excellent guideline for maintaining long-term financial health and sustainability throughout your mortgage term.

How lenders assess your borrowing capacity

Lender criteria: Lenders assess your borrowing capacity using multiple factors including income, expenses, interest rates with buffer, existing debts, loan type, credit history, dependents, and property type.

Lenders assess your borrowing capacity based on multiple factors working together. These factors include your verified income (typically from payslips or tax returns), comprehensive expenses (verified through bank statements), existing debts and credit limits, serviceability buffer (usually 2-3 per cent above current interest rates), credit history and score, the number of dependents in your household, and the type of property you're purchasing.

Whilst online calculators offer useful estimates for your borrowing capacity, consulting a mortgage broker near you gives you a more accurate assessment based on specific lender criteria. Whether you're seeking a Ryde mortgage broker, Parramatta mortgage broker, Baulkham Hills mortgage broker, or specialist brokers in Kellyville, Epping, or Penrith, different lenders apply varying assessment methods that can significantly impact your loan eligibility. Our experienced brokers specialise in finding lenders with criteria that suit your unique financial situation.

Understanding upfront property purchase costs

Budget planning: Upfront costs typically add 2-5 per cent to the property price, but first home buyer concessions can help reduce this amount significantly.

When purchasing a property, it's essential to budget for several upfront costs beyond your deposit. Understanding these costs prevents financial surprises and ensures you have sufficient funds for a successful settlement.

Key upfront costs to budget for

  • Stamp duty: A significant cost when purchasing property, though concessions are available for eligible first home buyers in NSW and other states.
  • Legal and conveyancing fees: Typically ranging from $800 to $2,500, covering property transfer and legal documentation.
  • Building and pest inspections: Essential for identifying property issues, costs typically range from $300 to $800.
  • Loan application fees: Varies by lender, typically $200 to $600 depending on loan complexity.
  • Lenders Mortgage Insurance (LMI): Required if borrowing more than 80 per cent of the property's value; can add thousands to your loan.
  • Moving costs: Professional removal services or DIY expenses for relocating to your new home.
  • Initial repairs or renovations: Depends on property condition; budget for essential repairs discovered during inspection.
  • Furniture and appliances: Essential items for your new home if not already in your possession.

First home buyer concessions can help reduce these costs significantly. Research what assistance programmes are available in your state or territory to maximise your savings when purchasing your first home.

Ongoing property expenses beyond your mortgage

Important reminder: Homeownership involves ongoing expenses beyond your mortgage that can add up quickly and significantly impact your budget.

Homeownership involves ongoing expenses beyond your mortgage payment that many first home buyers underestimate. Understanding these costs ensures you budget appropriately and avoid financial stress after settlement.

Ongoing homeownership expenses

  • Council rates: Annual council rates typically range from $1,500 to $3,000, depending on property value and location.
  • Water rates: Annual water rates typically range from $800 to $1,200 plus usage charges.
  • Strata fees: For apartments or townhouses, these can range from $1,500 to $10,000+ annually, covering building maintenance and management.
  • Home and contents insurance: Essential protection, typically costing $1,000 to $3,000 annually depending on property value.
  • Maintenance and repairs: Budget approximately 1 per cent of property value annually for maintenance and repairs.
  • Utility bills: Electricity, gas, internet, and phone services vary by usage and location.
  • Garden and lawn maintenance: If applicable, professional maintenance or equipment costs add up over time.

As a general rule, budget approximately 1-2 per cent of your property's value annually for ongoing expenses beyond your mortgage. Your mortgage adviser can help you factor these expenses into your overall affordability assessment and ensure your budget accounts for all homeownership costs.

Strategies to improve your borrowing capacity

Action plan: Several proven strategies can enhance your borrowing capacity and make homeownership more achievable within your timeline.

If your initial budget assessment reveals a gap between what you can afford and your property goals, don't be discouraged. There are several practical strategies to improve your borrowing capacity and accelerate your path to homeownership.

Reducing existing debts

Paying down credit cards, personal loans, and other debts can significantly increase your borrowing capacity. Even closing unused credit card accounts or reducing credit limits demonstrates financial discipline to lenders and improves your debt-to-income ratio. This is one of the fastest ways to boost your borrowing power before applying for a mortgage.

Increasing your income

Consider opportunities to boost your income through salary negotiations, additional employment, or side projects. Lenders typically require consistent income over several months, so start this process well before applying for a loan. Demonstrating stable increased income strengthens your application and improves your borrowing capacity.

Saving a larger deposit

A larger deposit reduces your loan amount and may help you avoid Lenders Mortgage Insurance, thereby reducing your ongoing costs significantly. Use our home equity calculator to understand how different deposit amounts affect your borrowing capacity and overall affordability.

Exploring government assistance programmes

Several government schemes can help first home buyers overcome deposit and affordability challenges. The Home Guarantee Scheme allows you to purchase with as little as a 5 per cent deposit without LMI. The Shared Equity Scheme helps eligible buyers purchase homes with smaller deposits and government support. The First Home Super Saver Scheme provides tax-advantaged deposit savings. State-specific incentives vary by location and eligibility.

It's important to research the programmes available in your state or territory and check your eligibility for each. Our mortgage brokers specialise in identifying which schemes suit your situation best.

Adjusting your property expectations

Sometimes the most practical approach is to adjust your property expectations strategically. Consider starting with a smaller property, exploring more affordable locations, or looking at different property types. Older properties may be more affordable than newer constructions, and exploring properties in developing areas often offers better value than established metropolitan locations.

Many successful property owners started with modest first homes and upgraded as their financial position improved. This approach reduces your initial financial burden whilst building valuable property ownership experience and equity for future upgrades.

Many successful property owners started with modest first homes and upgraded as their financial position improved. This approach reduces your initial financial burden whilst building valuable property ownership experience and equity for future upgrades.

Frequently asked questions

How much deposit do I need to buy my first home?

Whilst 20 per cent is the traditional deposit amount to avoid Lenders Mortgage Insurance (LMI), first home buyers have several options. With the Shared Equity Scheme you only require a 2 per cent deposit, and with the Home Guarantee Scheme, you can purchase with as little as a 5 per cent deposit. Many lenders also offer loans with 5-10 per cent 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.

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 per cent 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. Our mortgage brokers can help you find lenders whose criteria work best for your 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 this new legislation could ease the impact on your loan eligibility.

How much of my income should go toward mortgage repayments?

Financial experts typically recommend that mortgage repayments don't exceed 30 per cent of your gross income to maintain financial comfort. However, this varies based on your other expenses, lifestyle, and future plans. In high-cost areas like Sydney, some borrowers may allocate up to 40 per cent of their income to housing, though this leaves less flexibility for other expenses and savings. The key is ensuring your budget remains sustainable across all aspects of your financial life.

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.

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 offered, deposit requirements, loan features and flexibility, and the maximum loan amount available to you. 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.

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 programmes. 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 as your financial position improves.

How much should I budget for ongoing property expenses beyond the mortgage?

As a general rule, budget approximately 1-2 per cent of your property's value annually for ongoing expenses. This includes council rates (0.1-0.3 per cent 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 per cent 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.

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 like credit cards. Reducing or eliminating credit card limits, saving consistently, and ensuring your spending patterns align with your declared expenses will demonstrate financial discipline. Stabilising your employment situation and checking and improving your credit score are also crucial steps. Additionally, research and apply for applicable government assistance and work with our expert mortgage brokers to find the most suitable lender. Taking these steps before applying for a loan can significantly improve your borrowing capacity and loan terms.

Get expert guidance today

Don't navigate the budgeting process alone. Our experienced mortgage advisers are ready to help you create a realistic budget and find the best financing solution for your situation in Ryde, Parramatta, Baulkham Hills, and throughout Sydney.

Book consultation Call: 0426 002 202

📧 Email: hello@buyvest.com.au

Master your budget with Buyvest

At Buyvest, we believe in responsible lending and smart financial planning. By determining your budget comprehensively, 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 financial means.

Whether you're in Baulkham Hills, Gladesville, Castle Hill, or anywhere across Sydney, our team of experienced mortgage brokers is here to help you navigate the complexities of home loan financing with confidence and clarity. We specialise in helping first home buyers understand their true borrowing capacity and find the right property at the right price.

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Related resources for first home buyers

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First home buyer couple celebrating successful budget planning at home with a high-five.

Smart budgeting is the first step to owning your home.

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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.

All information on this website is subject to change without notice.

Mojtaba Hasani
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