With interest rates likely to rise again, now's the time to bulletproof your finances, stress-test your budget and maximise your borrowing power.
If you’re hoping to get the keys to your own place later this year, the work starts now, months before you put an offer in.
Borrowing power is under pressure, with the Reserve Bank hiking the cash rate this week for a second month in a row.
Interest rates are tipped to rise again as soon as May, while national home prices up also 9.1% on a year ago, meaning homes have around $90,000 more value than they did just 12 months ago.
In this competitive and uncertain environment, the next few months are about tightening your finances, stress-testing your budget, and making sure you stack up when the bank takes a closer look.
1. Study the market
The first step in buying a home is understanding what your money can buy, says Perth-based Mortgage Choice broker, Shannon Hassett.
"Start tracking sales in your target suburbs a few months before you’re ready to buy, you might be surprised how little a million dollars gets you," she warns.
Once you see what homes actually sell for, you’ll know whether you’re in the game or not. Setting expectations early is crucial."
2. Work out how much money you need
Start by using a mortgage calculator or speaking with a broker to find out how much you can borrow and how that stacks up against property prices in your chosen area.
"It’s great when people come to a broker early and want to understand their numbers," Ms Hassett adds. "They can see what their repayments might be and can compare that to their current rent."
AMP Research chief economist Shane Oliver. Picture: News Corp Australia
AMP Research chief economist Shane Oliver says the type of loan also matters.
"An interest-only loan can make repayments easier early on, but you’ll pay more interest overall. A principal and interest loan costs more upfront but reduces interest long term and helps you pay off your mortgage faster."
Research the help available
Mortgage brokers can explain the government schemes and first-home buyer grants you may qualify for, which vary by state.
"Many clients assume they’re not eligible for support, then discover they actually are," Ms Hassett says.
The government's First Home Guarantee, which allows eligible buyers to purchase with just a 5% deposit, has been massively popular since opening six months ago.
However, Dr Oliver advises saving a larger deposit if possible to reduce the amount of interest you will pay over time.
The First Home Super Saver (FHSS) scheme is another option, one which lets first-home buyers withdraw up to $50,000 (maximum $15,000 a year) of voluntary super contributions, plus earnings, to use as a deposit.
The only catch? You need to live in the home soon after purchase and before any consideration of using it as a rental.
If you’re not eligible for government support, considering a parental guarantor or paying out Lenders' Mortgage Insurance (LMI) could be your way over the line.
LMI can help you buy sooner, but has pros and cons. High expensive is a key barrier – on a $1 million home with a 5% deposit, it could add about $40,000 upfront.
With property prices rising so fast however, some quick maths will help you quickly work out whether its a hit worth taking at the start.
Your career could also improve your chances of buying this year. Some lenders waive LMI for high-income or low-risk professionals. This includes doctors, nurses, pharmacists, lawyers, engineers, accountants, miners, and emergency service workers, allowing them to borrow up to 90–95% of a property’s value without the extra cost.
Stamp duty costs can be very pricey and vary by state and circumstance. Picture: Getty
Factor in the additional costs
Property ownership comes with both upfront and ongoing expenses that those who've been renting may not be aware of, Dr Oliver warns.
"Stamp duty alone can cost around $30,000, plus there's legal and inspection fees, surveys and loan establishment costs.
"You may also want to spend a few thousand fixing up the property. You probably need an extra $50,000 to allow for all these things," he says.
"Once you then move from tenant to owner, you incur ongoing costs such as rates, land tax, maintenance costs and higher insurance premiums."
The costs of managing a home can add up quickly. Picture: Getty
Stress-test your budget
Even if your mortgage repayments seem lower than your current rent, interest and other costs can push your monthly outgoings higher when everything is combined.
Dr Oliver recommends practising for a few months as if you’re already paying your mortgage.
"If your loan will cost $2,000 a month, start setting that aside in savings now," he says.
In today’s inflationary environment, he also suggests allowing for potential rate rises.
"Banks test whether you can handle an extra 2% on your repayments before approving a loan," he says. "It’s a worst-case scenario, but if you budget that way, you’ll likely have some money left over."
3. Cut expenses and boost savings
Before applying for a loan, make sure your finances are in good shape — no overdrawn accounts, debts cleared, and a solid credit score, says Ms Hassett.
Lenders generally prefer credit scores of 650–700+, which can help you secure lower interest rates and faster approval. Lower scores may be acceptable but may mean a higher deposit, extra fees or a specialist loan.
She also recommends trimming unnecessary spending.
"So many people have unused gym memberships or forgotten direct debits — $10 here, $10 there — that really add up.
Prospective buyers need to carefully track where they might be overspending. Picture: Getty
"There are now services that can track your subscriptions and show exactly where your money’s going, which can be really useful."
4. Don't be scared by rate hikes
With one or two more cash rate rises expected this year, it’s natural to feel cautious about buying, but if you’ve prepared well, there’s no need to panic.
"When rates are rising, it can actually be a good time to buy," says Dr Oliver.
"There’s less competition, so you can think calmly, and banks looking for borrowers may offer better deals.
This article first appeared on Mortgage Choice and has been republished with permission.
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