The biggest purchase you'll ever make

There are no ‘secrets’ to buying a house or affording a mortgage, rather following simple principles for money management should see you through the biggest financial commitment of your life. Here are a few that should stand the test of time.

A general rule of thumb when buying real estate is ’20:25:30′ or a 20 percent down payment, a 25-year mortgage term, and allocate no more than 30 percent of your household monthly income towards repayments. If you can’t do that, then wait until you’ve saved more.

When you are calculating how much you can afford to borrow, bear in mind that if mortgage repayments take up over 30 percent of your income, you will be under mortgage stress. It is best to try and keep under the 30 percent mark when applying for a home loan, because if interest rates increase then your mortgage stress will also rise.

It’s fine to stretch a little beyond these figures, but remember that making poor financial decisions upfront could mean you struggle for the long term. Here are some of the things you need to do to make a sound decision:

• Check your credit score

If you’re thinking about taking on a mortgage, then you’ll need to have a clean credit record in order to maximise your borrowing capacity. So pay down any outstanding debts, reduce credit card limits to the bare minimum and establish a savings pattern; because this will show potential lenders that you’re able to meet monthly repayments.

• Save, save, save!

Just a few years ago, home buyers were able to put no deposit down to be eligible for a mortgage – but post-global financial crisis it’s clear that this may not be an ideal financial move. However, if you can’t save 20 percent of the purchase price of your future home, all is not lost. In order to borrow more than 80 percent of a property, most lenders will require you to pay lender’s mortgage insurance (LMI) because you’re seen as a higher risk borrower.

• What’s in it for you?

The government encourages first time buyers into the property market with a range of financial grants and savings incentives, so investigate the options in your state that might help you onto the property ladder. There are typically conditions that you’re required to meet to be eligible for first home buyer incentives so read the rules well in advance.

• Shop for finance online

By comparing home loans online at comparison websites such as RateCity, you could save tens of thousands of dollars on your mortgage by ensuring you choose wisely. Compare interest rates, fees and charges and research the various loan features so you only pay for what you need. Come back and compare your loan with what is on the market annually and refinance if you think you’re paying too much; it’s so much easier now thanks to a ban on early exit fees.

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