Ready, set, mortgage: Get your finances in order

Buying a home could be the largest transaction of your life. Applying for a home loan can feel overwhelming – particularly if you’re new to the property market.

Understanding how lenders assess your credit history, how much you can afford to spend on loan repayments, and the size of the deposit you need is essential before you start the home loan application process.

Here are four essential questions to ask yourself before you start house hunting.

1. What’s your credit rating?

When you apply for a home loan, your home loan provider will assess your credit history. You could lose points for late bill payments and bad debts. It pays to see where you stand with a free credit report. This will detail your current position and give you the opportunity to correct any errors.

You’ll likely lose points for late bill payments and bad debts.

2. How much can you afford?

To get a good idea of how much you can realistically afford to repay, make a budget. Track your day-to-day living expenses and subtract them from your income. Don’t forget to allow for a rainy-day fund and other little extras, such as holidays or nights out.

You can put your budget figures into a mortgage calculator for a general idea of how much you could borrow and what the repayments would be.

Also, bear in mind that while interest rates are low right now, it’s possible they’ll go up in the future. Keep some room in your repayment budget to cover potential interest rate increases.

3. How much deposit do you need?

Home loan providers recommend that you save at least 20% of the purchase price for your deposit, although some lenders will accept as little as 5% deposit.

If you can’t manage a 20% deposit, you may be required to pay Lender’s Mortgage Insurance (LMI). And the smaller your deposit, the more you’ll need to borrow and the more interest you’ll pay in the long run.

The smaller your deposit, the more interest you’ll pay in the long run.

4. What associated fees will you need to pay?

When you buy a property you may have to pay stamp duty. Rates differ from state to state, but are usually in the vicinity of 3% to 5% of the purchase price*.

You’ll probably need to pay a conveyancer to prepare your legal documents for the settlement process, and possibly a builder and pest inspector to check over the property before you sign the contract.

Meeting with a home loan specialist before you begin your search might be helpful, as they may be able to give you a rough estimate of these costs. You can then factor them into your budget and, if necessary, revise your budget or savings goal.

Applying for a home loan doesn’t have to be stressful.

Build a strong credit history, save for a deposit, consider the associated fees and don’t overextend yourself. These are the first steps in the home loan application process.

*This is an estimate of the rates – you should make your own enquiries.

This article was originally published on 3 Jun 2016 at 10:00am but has been regularly updated to keep the information current.