For aspiring home owners in 2023, the Real Estate Institute of Western Australia (REIWA) recommended getting financially fit before embarking on a house-hunting journey.
The new year usually marks the start of taking on new goals, and for a significant portion of Aussies, turning the Great Australian Dream of owning a home into a reality is usually in the cards.
But before hitting the market, REIWA advised home buyers to get their finances as lean as possible in order to be in top shape before applying for a mortgage.
“Start prepping now, even if you aren’t thinking of buying until mid-year, that way you’ll be in top shape by the time you want to apply for a loan,” according to the institute.
REIWA outlined six ways aspiring property owners can get financially fit before house hunting.
1. Manage your expectations
The institute acknowledged that the Reserve Bank of Australia’s (RBA) monetary policy tightening — which was kicked off in May 2022 to fight surging inflation — has changed the finance game in the market for property buyers.
“Eight consecutive interest rate rises have changed the lending climate and reduced buyers’ borrowing capacity,” REIWA stated.
As of December, the country’s cash rate stood at 3.10 per cent — its highest level in a decade.
According to the institute, the rate hikes have significant financial implications for borrowers.
“For example, last year’s rate rises added about $800 per month to an average $500,000 mortgage. You may not be able to borrow as much as you could when interest rates were lower,” the institute said.
If you’re a borrower approved for a loan a couple of months ago, REIWA pointed out that the terms of your loan will need to be re-evaluated following any subsequent rate increases.
Additionally, lenders are legally required to appraise your loan with an interest rate buffer of 3 per cent when assessing a borrower’s ability to repay their mortgage.
“This means if you’re applying for a loan with a variable rate of 5 per cent, they will assess your ability to repay with an interest rate of 8 per cent. This reduces your borrowing capacity,” the institute said.
To help alleviate this hip-pocket pain, REIWA recommended looking at homes in lower price brackets, in different suburbs or different types of dwellings.
2. Reduce debt and consider the use of buy-now-pay-later services
REIWA noted reducing personal debt can help get your financial ducks in a row before buying a home.
“Any credit cards you have are considered potential debt, whether or not you use them wisely, and reduce your borrowing power further. Consider paying them off and closing the accounts or paying them down and reducing the limit,” the institute said.
REIWA also pointed out other lines of credit that aspiring home owners can take into consideration, such as the use of buy-now-pay-later services.
With two lenders — Macquarie and ING — announcing at the tail end of 2022 that they will now consider potential borrowers’ use of buy-now-pay-later service in loan applications, REIWA opined that other lenders might follow suit in the near term.
“This means you may need to declare your limit, current balance and monthly repayments when applying for a loan. Pay them off and cancel them if you can, and don’t use them in the lead-up to applying for a loan,” it said.
3. Give yourself time
Similar to preparing to run in a marathon, REIWA acknowledged getting your finances into shape takes time.
For example, lenders may require borrowers to have six months’ worth of genuine savings before greenlighting a mortgage application.
REIWA also warned home buyers not to be complacent even if they were given a lump sum for a deposit or receiving a windfall that significantly boosts their bank account, stating that this usually “isn’t enough” to convince banks to say yes to a loan.
“They will also want to review your bank statements for several months, so you’ll want to make sure they look their best,” the institute advised.
If you haven’t already, borrowers are advised to start saving for a deposit. While having 20 per cent is not a must, having a bigger financial war chest means having a lower debt.
4. Cut the extra financial ‘calories’
REIWA recommended borrowers to do a deep evaluation of their spending and see where they can cut back to help them be financially fit for a mortgage.
“Lenders will look at all of your expenditure, including Uber Eats and subscriptions to streaming services like Netflix and Binge. Expenditure on gambling apps will also be scrutinised,” the institute stated.
In the lead-up to buying a home, the real estate body advised ordering less takeaway and reducing the subscriptions. If your budget allows, you can resubscribe once you’ve settled on the property.
5. Give your credit score a health check
Credit scores play a major role when applying for a home loan.
With this, REIWA underlined the importance of having a healthy credit score, which can be achieved by paying bills on time and regularly paying down debt will help improve your credit score.
It also noted that bankruptcies, defaults, unpaid bills and multiple unsuccessful loan applications would lower it. Once you know your score, you can take steps to improve it if you need to.
6. Go see a broker
Finally, REIWA advised home buyers to speak with a real estate broker before looking at any properties, comparing them to “a personal trainer for your finances”.
Licensed brokers can help aspiring home owners review bank statements, spending and financial situation and provide an appropriate plan of action to improve your financial position before you apply for a loan.
They will also help you find the best lender for your circumstances, for example, if you need a low-doc loan or have a small deposit.
