People often ask Nick and I about how to prepare themselves and/or their kids for taking out a home loan. Obviously, everyone’s financial circumstances are different but, this week, I thought I would compile a short list of the lessons our clients have learned and provide some tips:
- Don’t over extend. In other words don’t borrow too much. As a rule of thumb, if you’re paying more than half of your after-tax income as a mortgage, then you’ve probably borrowed too much.
- LVR under 80%. If possible, try and keep your loan less than 80% of the value of the house. This will ensure that you don’t pay Lenders’ Mortgage Insurance (“LMI”). LMI insures the bank still gets its money. It doesn’t insure you. LMI often costs many tens of thousands of dollars so it’s best avoided.
- Ensure that you have liquidity. In case of unforeseen circumstances (like unemployment) make sure you have access to funds that ensures that you are able to pay the bills to survive.
- If at all possible, diversify your income base. This is much harder for employees then for the self employed. A second income is always a welcome differentiator.
- Don’t make an emotional decision. Like whilst standing in the house you want to buy in your second viewing whilst talking with the estate agent.
- Seek pre-approval for a loan before you start looking for a house. That way you know how much you have to spend. This will help narrow down your search.
- Don’t walk into a bank branch for your home loan. Go to a source that can instantly search for the best rates in the market for you – like Thyme Financial Group.
- Make sure that you select the right home loan product. Again, a good broker – like Thyme Financial Group – can help you here.
- Do some financial house keeping before applying for a loan. This may involve:
- Paying out a car lease or consolidating it into an application – not our preferred way but you may have limited options.
- Reducing credit card limits to $5,000 or less (depending on your circumstances).c. Consolidate personal loans and credit card balances (if possible).
- Show that your income for the past six months can more than adequately cover your loan repayments.
- 10. If you’re looking to upgrade or downsize, always sell before you buy.
- 11. When you’re a PAYG employee and want to leave to start your own business, it’s easier to get a loan as a PAYG employee. The self employed need to show a minimum of 2 years tax returns to qualify for most mortgages.
- Get professional financial and legal advice if you are unsure.
