Our home is often the biggest purchase of our lives, and a mortgage (or home loan) is typically our biggest financial commitment. Today it is a necessary debt to get onto the home-ownership ladder. But choosing the right home loan and repaying it quickly using our Smart Money methodology can save thousands of dollars – and frees you up to achieve other goals faster!
But there are steps one must do before getting approved for the home loan on the house you want to call home. It all starts with the house-hunting game!
Typically, when we decide to buy a home, we start going out and looking at lots of different properties, in various suburbs, of various sizes, before finding the right home – often with an estate agent or realtor. But it’s vital you determine the upper limit of the purchase price of the homes you are looking at before starting to look.
Most banks and home-loan providers have calculators on their websites to help you calculate the maximum price level homes to look at. You enter the amount of deposit you’ve saved, and the calculator will help you determine how much mortgage you can service (afford), and these two sums will give you the upper purchase price point at which to look at homes.
If possible, however, ask yourselves, “do we REALLY need to borrow all that we can afford or to the limits?”. It’s wise to consider a modest increase to what you have already or be prepared to buy a first home that is tidy but appropriate starter home in an up-and-coming suburb with likeminded folks.
The mistake I see most often, especially amongst the younger first-home buyer, is to stretch what they can afford to buy, perhaps a new home, or a better suburb, or a large home, rather than considering the longer-term strategy of what would be prudent today and moving up steadily, not borrowing more than you can safely afford.
Remember the Smart Money Method recommends mortgage terms of no longer than 15-years. This will help keep your feet on the ground, making sensible financial decisions based on affordability, and assist you to free of the banks and this debt sooner.
In addition, if the mortgage affordability relies on BOTH partners income, what happens when a family comes along? In my experience, this often causes a lot of unnecessary financial stress.
So, when house-hunting (which can be fun!) always have an upper purchase price target, a sum you will not compromise by going beyond it, even if you fall in “love” with the house or the realtor tries to convince you otherwise!
Be firm with the estate agent too, there is little point looking at homes above your price range as this unsettles you – you may feel the home within your budget ‘lacks’ and this emotion is not healthy. Remember, the higher the purchase price of the home they sell you, the higher their commission – a direct conflict of interest in my view!
Many homes today are sold under auction. This can be difficult especially for a first home buyer as emotions can lead you to bid much higher than you know is prudent based on your price target.
Consider taking a person with you to auctions who is not emotionally invested into the home – they have an arm’s length perspective and can leave a lot of emotion out of the decision. If you do choose someone to help – a family member, friend or professional – trust them to be acting in your best interests at the auction.
It is also very important to have your loan pre-approved by your Bank or Mortgage provider BEFORE going to the auction as this not gives a natural upper ceiling to how far you can bid, but also ensures you can pay for the home if you win the auction.
A winning bid is contractual so you must have the finance in place beforehand. Most home loan providers offer pre-approved terms today so that is helpful.
Happy hunting!
