Mozo guides

5 money tests to pass before getting your first mortgage

You may be emotionally ready to settle down but how do you know you are financially ready to buy your first home? Taking on a mortgage is one of the biggest financial decisions you’ll ever make, so before you take the plunge it’s a good idea to take a moment to learn what are things to know when getting a mortgage.

To help you out, here are 5 tests first home buyers should pass before taking out a mortgage. And if you don’t, it could be a sign you’re not quite (financially) ready to buy.

# 1. Have a budget and know how to use it

Good money management skills are a must-have for first time home buyers as there are a host of new expenses you’ll need to prepare yourself for like council rates, water bills and home insurance. And for the first time, you’ll be responsible for the upkeep of all appliances, the water heater, yard and building maintenance so you need to make sure that you can cover the costs (in addition to your mortgage) if things need to be repaired.

If you aren’t already sticking to a household budget, now is the time to start one, see the template to get started.

#2. Know how much you can borrow

Everyone wants to live in the house of their dreams but when you are considering home ownership it’s important to not only think about what you can afford now, but also put some thought into the future of the property.

Will you be buying as a couple or as a single? If you are borrowing as a couple you might be able to make high repayments while both of you are working but what happens if one of you stops working to go back to uni or you start a family?

If your current job isn't paying enough for the type of property you, consider looking for a new position. However, keep in mind that lenders look at the length of your employment. A full-time job that pays well is favoured by lenders than part-time or casual work. If you are a part-time or casual worker it doesn't mean you'll never get approved for a home loan, it will just be more difficult.

To find out how much you can afford to borrow on your income try Mozo’s home loan borrowing calculator.

Once you know how much money the banks will lend you, you can start narrowing down the types of properties and suburbs that you will be able to afford.

#3 Have the requisite deposit

The advised deposit is generally 20% of the property price. That means for a $500,000 apartment you will need $100,000 upfront.

Saving up for a home deposit can be one of the biggest hurdles for first time buyers but there are ways around this with things like lenders mortgage insurance (LMI).

Some lenders will let first time buyers borrow up to 95% of the property value but anything over 80% means that you’ll need to pay LMI, which can be as much as 3% of the loan amount. The cost of this insurance gets added to your home loan and protects the lender if you forfeit or default on your home loan. LMI also isn’t transferable so until you have an LVR (Loan-to-value-ratio) of less than 80% you will have to pay this insurance again if you buy a new property or switch loans.

The benefit of having a bigger deposit is that you’ll have more equity in your home from the start. Generally in the early years of a home loan, the bulk of your repayments are going towards interest and a smaller amount towards the principal. So the more equity you have upfront, generally the better.

#4. Be able to handle repayments

Now that you’ve got an understanding of the amount of money you can borrow, it’s time to road test those repayments. While you’re probably already forking out money for rent, remember that home loan repayments are likely to be higher (especially when you factor in other expenses like insurance and maintenance).

To prepare yourself for the reality of home ownership run a full mock budget for 6 months based on your estimated repayment amount. Set up an automatic transfer of the estimated monthly mortgage repayment amount (minus your rent) from your bank account and put it into a high interest savings account.

Ex. Your monthly rent is $1,600 and your hypothetical mortgage repayment is $2,400 plus $600 in insurance and maintenance expenses. 

3,000 (mortgage + extra bits) - 1,600 (current rent) = 1,400

You should be able to put aside $1,400 into a savings account without it affecting your lifestyle. If putting that extra $1,400 aside during the six month mock budget is too difficult you might have to reconsider how much you can actually afford to borrow.

Buying a home is a long term commitment so it is better to find out if your budget has any breaking points prior to buying, rather than ending up with a mortgage you can’t afford or living a lifestyle you’re not happy with.

#5. Be prepared to withstand rate hikes

While interest rates are at record lows, economists predict a rate rise in the near future, so it’s a wise idea to always have room in your budget for a market movement.

Would you still be able to afford the repayments if rates rose by 1%? What would you need to cut back on?

To find out how much extra your monthly repayments could be if rates were to rise, see Mozo’s Rate Change Calculator.

Try upping your repayments to the new amount for a set period to see if it's something you can do easily or will struggle with.

The good news is that you’ll save yourself a nice emergency fund if rates don’t rise and be fully prepared if they do.

If you want to learn more tips on getting a mortgage, check out our home loan guides page. 

Maria Gil
Maria Gil
Money writer

Maria Gil writes across all of our personal finance areas here at Mozo. Her goal is to help you think smarter about money and have more in your pocket. Maria earned a journalism degree in Florida in the United States, where she has contributed to major news outlets such as The Miami Herald. She also completed a masters of digital communications at the University of Sydney. When Maria isn’t busy with all things finance, you can find her tucked away reading fantasy books. She is also ASIC RG146 (Tier 2) certified for general advice.

* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

** Initial monthly repayment figures are estimates only, based on the advertised rate. You can change the loan amount and term in the input boxes at the top of this table. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

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