Exit The Rental Market With A Real Plan
For many first home buyers the challenge is in mindset-listening to the media thinking that just because housing affordability is at an ‘all-time-low’ that they have missed the boat and will spend the rest of their life renting. It’s a media conception to keep you back from even trying.
It’s hearing their friends talk to their broker who get declined and think the same will happen to them.
We are here to tell you that yes, you can become a home owner-even in the toughest of markets.
How?
By doing the work and having a plan, a structure on where your money is going and why that’s important to you..
Most people live, work, spend, repeat, and then go and talk to their chosen lender or broker and either get finance approval or don’t. It’s a huge gamble because what is behind the application of the borrower?
- Any savings goals?
- Emergency back up buffers?
- Consideration of your current financial position?
- Consideration of your future financial position?
Most first home buyers don’t think these questions are relevant, they just submit their payslips to their lender or broker, hope for the best and either get approval or don’t. Those that don’t can often feel dejected, let down, and feel like the road to home ownership will never eventuate.
But it will with the right plan.
For first home buyers living at home with, paying board or a little portion of rent to mum and dad, you have an AMAZING opportunity to grow your savings, setup your accounts, curb your spending (like it really matters) and thrive into home ownership. But first you must decide that your wants for tomorrow (the want of being in your new home) are greater than your needs of today (that little spending addiction—you know the one, coffee, fluff stuff etc).
For first home buyers in the rental market who are currently paying rent and putting extra savings aside. You also have an amazing opportunity to enter the property market as you are already demonstrating capacity to service your loan through rental payments and saving money.
In our experience what holds all first home buyers back is lack of clarity of cashflow, lack of control over spending, silly debt (unsecured personal loans, credit cards), buy now-pay later products, subscriptions, and behaviour-like taking money out at the casino, or going to the TAB or gambling expenses. Lenders don’t like risk, and if you present yourself to any lender with zero savings, high spending and high debt there is a high chance your loan application will be declined.
So, what can you do about it?
You can take-action and budget.
Look at your cashflow holistically. Look at your nett income and set your spending caps, determine your savings accounts and targets, seek ways to snowball your debt and streamline all other obligations. You may quickly realise that one bank account doesn’t cut it, but that you need a few (but not too many). Once you have a clear picture of where you are at you will have a clarity of your current financial position. It’s important that you have the clarity to see exactly where you are at.
For example: say your nett household income is $120,000.
Using our model of 25% for living expenses, 25% for rent/mortgage, $25% for savings, and 25% for spending (4 equal quadrants), you could split the above $120,000 into 4 x $30,000 chunks. $30,000 is $575 per week, and $2,500 per month.
In this scenario you would seek to have a savings goal of $30,000 annual.
You would develop a spending cap of $30,000 annual ($575 per week for the important things like groceries/petrol etc).
$30,000 for your rent/mortgage (meaning your ideal rent/mortgage payment would be $575 per week or less).
And $30,000 for your living expenses and emergency buffer back up funds.
When you can see clearly where you are, you can recognise your affordability from a cashflow and budget perspective—not from a lending perspective, and this is important. Why? Because when you sit with your lender or broker the onus is on you, the borrower, to understand where your money is going. When your lender or broker talks about borrowing capacity (in lending terms) you might find that you can ‘borrow’ a higher amount than what you thought, and can compare this against your affordability from your budget plan.
Remember, just because the lender says you can borrow up to an amount, it doesn’t mean that you have to… especially if this overextends you on your financial position!
If the lender says you can borrow X, and that your proposed mortgage repayments would be around $3,500 per month, you would recognise immediately that the amount is too high (when using previous example of $2,500 per month), and that if you applied for this loan amount at your current income level that other aspects of your budget plan would need to be changed.
This could result in a reduction of weekly spending (meaning less fun and an impact on your social and overall lifestyle), a reduction of savings (meaning less goals being achieved or holidays being had), and a loss of living expenses due to more costs arising when becoming a home owner (meaning more struggles with bills such as council rates, building insurances etc).
A higher mortgage amount than what feel you could afford via your budget plan will affect other areas of your life detrimentally.
Put simply: Your budget (if established correctly) should support all your financial goals, not just your loan. Your budget will save your ass preventing you from over committing to monthly repayments above and beyond what you are prepared to pay and are comfortable with. Your budget provides you with the ability to make an informed decision when it comes to your loan application, your first home ownership opportunities, and the lifestyle you get to live as a first home buyer with a mortgage.
The key take away is that neither lenders or brokers provide a budget plan for you that outlines where you are today vs where you want to be tomorrow—but we do. It’s with this knowledge on your current position that provides you with clarity, giving you the confidence and ability to have targeted conversations with your lender or broker to ensure that you fully understand the obligations that befall you prior to becoming a first home buyer.
Buying your first home need not be a big and fearful juggernaut ahead of you. Yes, it takes effort. Yes, it takes education. But you don’t have to do it alone. At Your Budget Mates, we have helped hundreds of first home buyers create solid financial systems and smart habits that last long after settlement day.
If you are serious about getting into your first home please reach out. We would love to help you too!
We’ll help you get on top of your finances — with a few smart tweaks, a couple of strategic adjustments, and a good dose of clarity and education. You’ll be ready to step into home ownership in no time!
