Last Updated: 1st April, 2024

Buying a house is one of the most expensive investments you will make in your life. But there are some habits you can establish prior to buying a home that can improve your chances of getting approved for a home loan. Let’s go through them.

How To Be Financially Ready To Buy A House

1. Establish A Budget

Budgeting is an essential habit to have before buying a house. Creating a budget will help to determine how much you can afford to spend on a house, including the mortgage repayments, property taxes and other associated expenses. It will also identify areas where you can cut back on your expenses to save for a deposit or to afford a more expensive property.
The 50-30-20 Rule
The 50-30-20 budgeting rule can be a good strategy to follow. This rule involves allocating 50% of your budget towards necessities, such as housing, food and utilities, 30% towards discretionary expenses, such as dining out, and 20% towards savings and debt repayments. By saving 20%, you can gradually reduce and build up your deposit and pay off any outstanding debts.

2. Build An Emergency Fund

An emergency fund is a separate savings account that you can use to cover unexpected expenses, such as medical bills, car repairs or home repairs. Having an emergency fund can provide a safety net in case of a financial setback. You can start by saving at least enough money to cover your living expenses for one month as your emergency funds. It is generally recommended that you set aside three months’ worth of expenses in your emergency fund as a practical guideline.

3. Manage Your Debt

Debt-to-income ratio (DTI) is a metric financial institutions use to assess whether you can comfortably afford to repay a mortgage without experiencing financial difficulties. It is your total loan amount divided by your annual income. Most lenders want borrowers to have a DTI of 6 or lower. Knowing what loan amount would give you a DTI of no more than 6 will give you a good idea of your maximum borrowing power.

4. Automate Your Savings

Set up an automatic transfer from your transaction account to your savings account each month to ensure you save consistently. Lenders view genuine savings as a way to show financial stability and the ability to make repayments. It also indicates that the borrower has financial discipline and is capable of budgeting and managing money effectively. Accumulating savings while saving up for a home can be challenging but every bit counts. To simplify this process, consider establishing automatic transfers to your savings account on a regular basis. With this, you won’t have to worry about manually depositing money, and your savings will grow rapidly over time.

5. Save For A Larger Deposit

While there are lenders who offer loans at a Loan-to-Value Ratio of 95%, you would end up paying Lenders Mortgage Insurance (LMI). Paying at least a 20% deposit means you won’t have to pay LMI. Saving for a deposit is also important for the following reasons:
  • You demonstrate to lenders that you are financially responsible and have the ability to save money. This will increase your chances of being approved for a home loan.
  • A larger deposit can lead to a lower interest rate, which means you pay less interest over the life of your loan.
  • A larger deposit can also reduce your monthly repayments, making them more manageable and giving you more financial flexibility.
Consider developing a habit of saving a portion of every paycheck.

6. Cultivate Frugal Habits

Prioritise your needs over wants. Lenders will look at your spending habits. They will often look at your bank and credit statements for up to six months to assess your spending patterns and ensure that you are not exceeding your limits or making late payments. By being mindful of your spending, you can demonstrate that you are a responsible borrower and increase your chances of being approved with favourable terms. Some frugal habits you can start with are:
  • Prepare your meals in advance and eat in.
  • Close all subscriptions and memberships that are not used or unnecessary.
  • Close your credit cards or reduce your limit.
  • Do not rely too much on ‘buy now, pay later’ services.
  • Repair and maintain items instead of replacing them.
  • Shop with a list to avoid impulse purchases.

7. Maintain Your Credit Score

Your credit score is a numerical representation of your creditworthiness, based on your credit history and other financial factors. Lenders use this to assess the risk of lending you money. A low credit score could lead to higher interest rates or even rejection of your loan application. On the other hand, a high credit score could result in a lower interest rate, which could save you thousands of dollars in interest charges over the life of your home loan. Maintaining a good credit score is crucial if you want to secure a mortgage loan with favourable terms. Look at these factors that affect your credit score and take steps to improve it if necessary.

8. Plan For Ongoing Costs Of Owning A Home

Owning a home comes with many additional expenses beyond your monthly mortgage payments. Plan for additional homeownership costs like property taxes, council rates and maintenance costs. Create a separate budget for these expenses so you are prepared for the additional financial responsibilities that come with homeownership.  

Non-financial Habits To Have

In addition to managing your finances effectively, cultivating healthy non-financial habits can also greatly boost your homeownership journey. Let’s go through what they are.

1. Research The Housing Market

By doing market research, you can gather information about the current real-estate market, including property prices, mortgage rates and housing trends. Market research also allows you to explore different neighbourhoods and understand the local amenities, such as schools, recreational areas and shopping centres. You can also identify potential risks, such as environmental hazards or crime rates, that may affect your investment or quality of life. Here are some questions to ask when you go house hunting.  

2. Look Into the Professionals Who Can Assist You

Buying a home can be a long process, and you may require the assistance of a few professionals along the way. They are
    • Financial Adviser: To assist you in determining your budget and discussing your financial goals.
    • Buyer’s Agent Or Real-Estate Agent: To help you look for properties according to your needs.
    • Mortgage broker: To help you process your documents and find the best loan products for you.
    • House Inspector: To help you thoroughly examine the property you are interested in buying and identify any potential problems or issues that may not immediately be visible.
    • Conveyancer: To help with the legal aspects of buying and selling of a property and ensure that all legal requirements are met.
Visit our page on the home-buying team to know more about how to build a successful team to guide you through the home-buying journey.   These financial and non-financial habits can help you prepare for homeownership, and each of them is essential for increasing your chances of securing a mortgage with favourable terms. By cultivating good financial habits:
  • You show lenders that you are financially responsible and capable of managing your finances effectively.
  • You are better prepared for the costs associated with owning a home, which will ensure that you can enjoy the benefits of homeownership while avoiding financial problems and reducing the chances of experiencing mortgage stress.

Our Experts Are Ready To Assist You!

Ready to take the first step towards your dream home? Start by cultivating these smart financial habits recommended by our mortgage experts. Contact us today at 1300 889 743 to learn more or fill out our free online assessment form to get started on your path to homeownership.