Trying to crack the housing market? Here are six factors you must consider

Getting a foot on the property ladder as a first-time buyer can feel like an uphill battle – particularly in capital cities, such as Sydney and Melbourne. However, many young Australians are still finding ways to crack the housing market – and secure a competitive mortgage as well.

Let’s explore six key factors to consider before you try and nab a property that may help you get a competitive home loan in the process.

Tips when trying to crack the housing market

• Save up a decent deposit

If possible, saving a deposit of at least 20% is ideal. The greater your deposit, the less at-risk a lender may perceive you as being in terms of defaulting on your mortgage. A large deposit may increase your chances of application approval.

Additonally, it will allow you to avoid paying Lender's Mortgage Insurance (LMI), which can cost you tens of thousands of dollars, depending on the property value. Most Australian lenders also offer their lowest interest rates for borrowers with larger deposits. So, not only will you be borrowing a smaller amount but you could pay less interest by saving up a bit longer and applying for a home loan with a 20% deposit.

• Look for something that’s within your means

Not everyone has the time or income to save such a large deposit. So, if this option doesn’t suit you when you are just starting out in the property market, start slowly. They call it a property ladder for a reason: you’re supposed to climb it.

Consider starting your property buying journey by looking in up-and-coming areas, or ‘bridesmaid suburbs’ – aka homes near to your dream suburb but in a more affordable area. Over time, if property values grow, you may be able to sell this first home and use the profit as a larger deposit for your next home.

• Pay off your debts now

Large amounts of debt, such as outstanding credit cards and even your HECS/HELP debt, can affect your borrowing capacity. Worse, unpaid debts can also hurt your credit rating, which lenders look at as part of their assessment of your eligibility for a mortgage.

Before you apply for a home loan, consider working to pay off your existing debts. Not only will you boost your borrowing power, but you’ll take the weight of debt off your shoulders.  

• Boost your credit score

Lenders will perform a hard credit check on you when you apply for a home loan. Having a credit score that falls into the ‘good’ to ‘excellent’ categories of risk is likely to improve your chances of approval.  Nowadays, credit bureaus can report both negative and positive payment behaviour, which means you can actively work towards building a positive credit history.  

To build up your credit rating, consider:

• Checking your credit history for any mistakes, such as family members’ credit history attached to your account.
• Limiting the number of loan or credit card applications you make, and paying off your existing debts.
• Saving a healthy nest egg of funds, as this is considered positive information that could boost your score.
• Avoid late payments as best you can.

• Calculate what you can realistically afford

Interest rates will fluctuate over a 20-30-year home loan, so it’s important you understand the actual limits of your household budget for mortgage repayments, and that you do not just accept what a lender is willing to offer you.

Look at how much of a deposit you can reasonably save, and then calculate how much you may be approved to borrow. Then, look at a few home loan options (comparison tables may come in handy here), and create a short list of options to calculate repayments against.

Use RateCity’s Mortgage Repayment Calculator to determine how much your repayments could be on the loan amount you may be approved to borrow, with today’s interest rates. Then, add a buffer of at least 2-3% on top of these repayments.

For example, if today’s interest rates are sitting around 4%, add a buffer of 3% to your hypothetical mortgage repayments, and determine if you could realistically afford this same loan amount if your interest rate was 7%. Realistically, your home loan repayments could fluctuate this much over the life of the loan.  

• Consider using a guarantor

If you don’t have a big enough deposit for a home loan, you might want to consider asking a family member, such as your parents, to come on the home loan as a guarantor. Generally speaking, this will involve them offering up their property as security against your mortgage. This option may help you secure a home loan, while also avoiding Lender's Mortgage Insurance. 

Keep in mind that going guarantor isn’t as simple as signing a couple of forms. If you find you can’t meet your mortgage repayments, the bank will then turn to your guarantor to come up with the money. In the unfortunate event that you default on the home loan, the lender is legally able to seize your parent’s home as collateral to reclaim its lost funds.

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