Borrowing against a property is likely to be the biggest debt you will have looming over your head. Literally. Through the excitement of finding your first home and independence it will bring, there will be bills, repairs, and an ongoing payment which may mean you have to reevaluate your lifestyle for a while. Fortunately, there are actions you can take in the year leading up to your big purchase to get your finances in the best possible shape.
Hopefully you would have been doing this for a while now. If you have your finances in check with a healthy deposit behind you, you are in a much stronger position to secure and negotiate the terms of your home loan. Even if you have access to a substantial amount in your KiwiSaver, we still recommend saving for a few years prior. It goes without saying, that the more you pay into your house at the beginning, the less you will have to pay back over its lifetime.
Get your finances in check
How much you can borrow will depend on many factors, including your credit score. Now is the time to check all your credit reports for indiscrepencies and prove to the banks that you do not present any major risk in borrowing a huge sum of money. The banks will follow a paper trail so your accounts need to be looking healthy for at least three months. Avoid changing jobs on the lead up to your application as the banks will be assessing the stability of your income. It’s almost impossible to gain bank funding if you are within a 90 day trial period in a new job.
One great piece of advice we give our clients is start acting like you already have a mortgage six month before your application. Curb any excessive spending and limit your outgoings to what you will be able to afford once you have paid your mortgage, utilities and home insurance. This will help you decide how much is a comfortable amount to borrow.
Pay off other debt
Even if paying off your debt reduces your deposit, applying for a mortgage with a clean slate will make you far more attractive to the lenders. Banks will be paying close attention to the percentage of your income that is being lost to credit card bills, car loans and other monthly outgoings. If you have existing debts, pay them off with your savings to reduce interest and lower your committed expenditures which are considered when calculating your mortgage availability. Now is not the time to take out a car on lease and do not go over your overdraft! A poorly managed cashflow and bank account will raise red flags.
Work out how much you can afford
Before you go house hunting, you need to know what you can afford. You may dream of the Ponsonby villa with the picket white fence, but the reality is, for most first-time buyers, there will be big sacrifices. You may have to sacrifice your first area choice for a third bedroom, or you may have to learn to love 80’s décor for a few years to be near a transport link. To avoid disappointment when house hunting, pay close attention to the current market to see what is going at what price in your chosen areas. Use a mortgage calculator to roughly estimate what you may be able to borrow.
Get a pre-approval
A mortgage calculator can give you a rough estimate of your borrowing capacity, but a pre-approval is the estimate once the lender has checked and verified your documentation. A pre-approval will not only help you understand how much you may be able to borrow, but will also speed up the buying process and make you look like a serious buyer.
Find the right mortgage
This is where we come in. Your bank will offer you an attractive rate, they may even throw in a free TV. What they can’t offer you is a tailored service and solution based on your lifestyle and needs. A bank will only have one product – their product, and a mortgage is not a one size fits all scenario. A mortgage adviser knows the ins and outs of the market and has access to all the major lending institutions to bring you more choice. Mortgages also have different structures and being on the wrong one could see you pay tens of thousands more over its plan. It is essential that you shop around and fully understand the commitment you are making.
If you are thinking of purchasing your first home, get in touch with The Mortgage Supply. We can talk you through the process to leave you feeling relaxed and reassured in your decision. Once we understand your requirements, we’ll do the shopping around for your mortgage leaving you to shop around for your home. Did we mention our advice is free? Contact us today.