6 things that could affect how much you can spend on your first home

Ready to take the exciting step towards buying your first home? Beyond the need for a deposit, there are a few other factors affecting what you can buy that you might not have considered. Here are six important ones.

Deposit

First up, the all-important deposit. Generally, you need between 5% to 20% of a home’s value for a deposit. But with sky high rents and the cost of living, it can feel daunting. Your deposit is important though, as it forms your initial stake in the property before you borrow to cover the rest.

The size of your deposit directly impacts your loan. A deposit of 20% or more of the property's value is the standard benchmark to avoid the cost of Lenders' Mortgage Insurance (LMI). While some lenders and government schemes allow for deposits as low as 5%, these loans will typically incur LMI, which is an additional cost. A larger deposit means a smaller loan, less risk to the lender, and a stronger application.

Income

Many first home buyers fixate on the deposit when looking to buy a home. But your income is equally important. That’s because your income determines what loan size you can comfortably repay. Even if you managed to save $200,000 as a 10% deposit on a $2million property, you still need the income to service the loan on the remaining $1.8million. Your lender or mortgage broker will assess the level of repayments your income can handle based on your other expenses and current interest rates.

Debts and/or credit limits

Having consumer debt, like a car loan or personal loan, can impact how much you can spend on your first home, too. This is because any repayments will eat into your surplus income each month. Even if the debts you are repaying are only short term, for example a four-year car loan, lenders factor it into your monthly outgoings. It can help to pay down these shorter-term debts before buying your first home.

Non-consumer debt, like HECS/HELP debt, can also reduce your borrowing power, but only if you earn enough to be paying it off each month. These repayments are automatically deducted by your employer, reducing the amount of take home pay available to service the loan.

On top of debts you owe, credit limits can also impact how much you can borrow and therefore how much you can buy. Lenders must account for all available credit as a potential liability. Generally, a fixed percentage of the total limit is factored in as a monthly outgoing expense in your serviceability calculation, regardless of the current balance. You might consider closing credit cards or reducing limits before you apply for a home loan to increase your borrowing power.

Spending patterns

In order to establish how much you spend on expenses each month, lenders will generally look at your last 3-6 months of bank statements. While they won’t begrudge you the odd meal out or holiday, repeated patterns of high spending, particularly in certain categories, can be a red flag.

Spending using Buy Now Pay Later platforms or depositing money into gambling accounts are common things a lender might look out for. It pays to clean up your spending habits and close Buy Now Pay Later accounts before applying for a home loan.

Employment conditions

Your work impacts your home loan in more ways than one. Not only does your income play a role, the conditions of your employment do as well. If you are new to a job or still on a probation period, this could be an issue when you apply for a loan. That’s because there’s a risk you may lose that employment and be unable to make your repayments. This is important if you plan to change jobs during your home buying search. While not impossible, a change of employment needs to be approached with caution.

Ongoing permanent employment is viewed most favourably. Lenders may require a longer history of employment when assessing income from casual or contract work, overtime, or bonuses. In some cases, a lender may only consider a percentage of this type of income in their calculations to account for potential fluctuations.

Location of the property

Lastly, the location of the property you want to buy can also play a role in how much you can spend. Some lenders restrict lending to certain postcodes. This is usually due to concerns around property density (for example new developments), local economic difficulties, mining towns, or areas prone to natural disasters.

This is why it’s important to inform your lender or broker of properties you are considering purchasing. Borrowing to buy in a restricted area can require a higher deposit, or in some cases, may result in refusal of a loan.

From knowing where to start to understanding the home loan process, settlement and costs, we're here to support you. For more information on buying your first home visit: www.bendigobank.com.au/personal/home-loans/first-home/

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