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First time homebuyers

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by Peter Switzer

A reader on Yahoo recently sent me an important question that must be front of mind for most first homebuyers when making the leap from renting, or living at home, to home ownership: how do I find out how much I can borrow?

The question

This was the question:

“I am thinking about borrowing to buy my first house and I do have some credit card debt and a car loan but I have a pretty good job. That said, I want to know how much I can borrow so I can work out what kind of house or apartment I can afford and importantly, where I can afford to live. Can you give me a rule of thumb? “

Enter the data

This is what I recommend. You go to your friendly search engine and type in “How much can I borrow?” and you will end up on a bank website where there will be a calculator which will ask some pretty basic questions and tell you what you can borrow. Giving it a shot, I gave myself an $80,000 salary, with $4000 a month living expenses and $500 a month for other commitments. I also said I had a $5,000 credit card limit. My borrowing power on these figures was $55,000!

Words of warning

ASIC’s Fido website warns that lenders or mortgage brokers may offer you a bigger loan than you would feel comfortable with. Your lender may increase your credit card limit without asking and without checking if you really can repay higher debt. Make sure you can meet your payments if interest rates go up by two to three per cent. This is a good worst-case scenario to prepare for.

Trial run

Another good idea from ASIC: “Do a trial run before you borrow. Try saving an amount equal to your loan repayments each month, or saving the difference between your rent and home loan repayments (include the one-off costs, such as stamp duty and moving house).”

Here are some old and trusted rules based on the safe way of borrowing. If your home loan repayments cost more than a third of your take home pay, you could feel the pinch.

The best advice I can give is to go to the FIDO website - www.fido.gov.au - and have a crack at their Budget Planner. This will make you put your money life on the lawn, so to speak, and this should help you decide what home loan you can afford.

Make a change

Sure, many sensible people have over-borrowed to buy great assets such as a home or a business, but they have often learnt to cut back on their excessive lifestyle.

If you don’t think you can drive an old car and hold back on buying new clothes all the time, then you better think about borrowing very conservatively or avoid it altogether!

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Friday, August 14, 2009