How to think like a home owner before you buy



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March 23, 2011

The next two years will likely see a spike in the number of first home buyers entering the market, if new research from lender Mortgage Choice is an indicator.

Fed up with increasing rental prices, more than half of the 1000 prospective home buyers surveyed in the annual Future First Homebuyer Survey were looking to the property market for refuge.

For those of you that are in a position to farewell your landlord and enter the property market, here are a few tips to help you save money before you dive into debt with your first mortgage:

  • Set a goal and save.
  • Devise a budget with room to survive a 2 percent rate rise.
  • Don’t get slack when rates are steady.
  • Consider an offset account.
  • Live like a first home owner before you are one.
  • Keep your options open.

Many future home owners are surprised to discover that borrowing the full purchase price of their dream home is not as easy as it once was. This is because most institutions no longer lend 100 percent of the purchase price, RateCity has found. The best way to realise how much you’ll need to save for your mortgage is by understanding loan-to-value ratio (LVR), which is the percentage set by lenders for each home loan that represents how much of the total purchase price you can actually borrow.

For example, if you’re in the market for a $400,000 property with an LVR of 80 percent then you will be able to apply for a $320,000 loan and you’ll need to save the remaining 20 percent, or $80,000. The higher the LVR the less deposit you will need, and therefore you’ll be able to borrow more, and vice versa.

You’d be wise to save at least 10 percent of the value of your future home allocating at least 5 percent to a deposit, setting aside the remainder for fees and charges. Budgeting is a great way to help you save for a deposit and by putting aside enough money for future repayments before you buy, you’ll be better equipped to afford your future lifestyle as a home owner.

In good times, such as when interest rates drop, accelerate your repayments where possible and you will own your own home sooner than anticipated.

Once you do take the plunge into bricks and mortar, consider a home loan with an offset facility, which can help reduce your loan size and save you thousands of dollars in interest. Offset accounts are linked to your mortgage so all of your income can be deposited into the account and it offsets the balance of the loan.

Finally, keep an eye on the market for the life of the loan and compare home loans online to ensure you have the best deal to suit your needs.

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