The first question you ask yourself when looking to purchase a property is “can I afford to buy a property?” It is an important question as it requires to look at a few things.
Purchase Budget
Firstly, you need to work out how much you feel comfortable with spending on a property and if you qualify for any of the government grants and subsidies on offer. This includes estimated repayments on the loan as well as any other expenses such as council rates, water rates, insurance, gas &electricity (for owner-occupiers only) and property management fees (for investors only).
Savings
Secondly unless you are using another property’s equity you will require a deposit to purchase a property. Most lenders will require at least 5% of the property value plus LMI (lenders Mortgage Insurance). There are a couple of lending institutions that could require less of a deposit; however, their criteria are selective and interest rates are substantially higher.
When using a 5% deposit to purchase a property most banks require savings to be there at least for 90 days. This is what is called genuine savings. This assists you in proving to the banks that you are not frivolously spending your income.
If you wanted to avoid LMI (lender’s mortgage insurance) you would simply require a 20% deposit or in some cases. Although, some lenders only require a 15% deposit to avoid LMI. Something that more lenders are requiring now is showing evidence of your ability to make repayments. This means that you should be saving or if you are a renting, paying rent plus saving money a month to total at least the same or similar amount you would be making in repayments once the loan has settled.
Income
Thirdly you need to consider your income. This includes your wages, any current or potential future rental income, child support as well as any government subsidies such as FTB (family tax benefit) or pension.
Something that needs to be taken into consideration is if you have any knowledge of a form of income that will not be around post settlement or income that will diminish over time as this can impact your ability to make repayments. If you are self-employed unless you are applying for a no-doc loan you will need to have lodged both your company and personal tax returns for the 2 most recent financial years before applying with a bank.
Living Expenses
Lastly, monthly living expenses are a main factor taken into account by lenders. Every lender will have a standard minimum living expenses benchmark. If your total declared monthly living expenses are lower than this benchmark, the bank will require bank statements for the last 90 days from all your bank accounts and credit cards to prove that this is accurate and true.
Other items to consider are reducing limits or paying out and closing debts to maximise your borrowing capacity are items such as tax debts, car loans, credit cards, personal loans and buy now, pay-later facilities such as after pay and zip pay. Such facilities can also affect your credit score if used frequently over a short amount of time (12-18 months). It also gives the lender when assessing your application to ask more questions regarding your ability to repay the potential loan if you use these facilities regularly on the smaller day to day items.
This is the first article of the property purchase series. If you are interested, and would like to learn more. Please click here for the part 2 of this 10 part series on the property purchase process.
*The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs or financial situation.
