The uncertainty and nervousness that surrounds buying a home is instantly washed away with these four words "Your loan is approved." The sound of these four words can border on “euphoric” if you are a first home buyer.
In years gone by, getting your loan approved was quite easy. A lender would look at what you earned and then calculate what you could borrow based on an average cost of living amount. Incidentally, this cost of living amount often differs between lenders. It is also known as the Household Expenditure Measure or HEM for short. If you could meet the bank's repayment according to the income/HEM calculation, then serviceability, from the lender's perspective, was often met.
Those days however are long gone.
In today’s world, (even though a bank will use their HEM as a guide), you need to know what you can afford to spend on repayments and you need to show the lenders proof that you can do that.
This means you need to answer two questions:
- What can I realistically afford to borrow?
- How do I prove to a lender that I can repay that amount?
The key to answering these questions is knowing what your income is and what your expenses are. In other words, what do you earn and what do you spend? While a quick look at your bank accounts will tell a story about the past, you need a tool that will help you create a different story for the future. A good budget, combined with a savings plan, will do this.
A well thought out budget is all about your future. It outlines where you will spend money and where you will save money.
Developing a budget and committing to the savings plan that accompanies it is essential to your success. Sounds easy, but in reality, building your budget and sticking to it is not easy. If it was, everybody would do it. My best advice when it comes to budgets is “Don’t do this alone.” Partner with someone who can help you with it.
Here are my tips for developing your budget:
Step 1. See a Finance/Mortgage specialist who builds budgets for their clients;
Step 2. Establish your deposit goal and break it down into monthly milestones;
Step 3. Commit to a savings plan and get your Finance/Mortgage specialist to hold you accountable to it;
Step 4. Review your budget every 3 months with your Finance specialist.
If you follow these steps, answering the two questions that the banks and lenders will ask you about proving affordability should be easy.
That feeling of “Euphoria” is out there waiting for you!