Recently I got a call from a friend in Sydney named Eric. Eric was looking to buy his first investment and put the following questions to me: How do I get started financially and what are young people doing to save their deposit?
This is a great question and got me thinking about why some young people are so good at getting that initial deposit and property over the line and others never get there?
After thinking about my own situation and observing my 20 – 35 year old friends it became clear. Most of us don’t have a clear savings goal and have never developed the savings habit. It’s as simple as that. If you don’t know how much money you need, and you don’t know what you want the money for, it’s going to be extremely difficult to keep yourself on track.
Five years ago I was introduced to a speaker named Jim Rohn by a good friend of mine. Jim’s money management tips have stayed with me and are extremely simple:
- Profits are better than wages
- Invest first and spend second
- Save a fixed percentage of your wage each week, Jim recommends starting with 30%
As far as I can see the only way most of us can save this initial deposit is to work for it. The great news is that once your in the market you can continue to save, renovate, make capital gains or sell to get access to additional money for your next property so the process becomes a lot easier.
During our conversation Eric asked another great question. What are the banks expectations around home loans and pre-approvals?
While each bank has different ways to assess risk and serviceability at the end of they day all they are really asking is:
- Can you comfortably make your repayments, and
- If you cant can we recover the debt by selling the property
The bank will look at a number of things when assessing your risk and serviceability including:
- How much you earn
- How much you earned over the last 2 financial years
- How secure is the money you earn
- How much money do you owe
- Other property loans
- Car loans
- Credit cards
- Personal debt
- How much money do you spend
- Do you have a good credit history
- Do you have a proven track record of savings
- Can you split the risk by buying the property with another party
- Do you have any dependents
- A number of other factors
These factors paint a picture of you to the bank. The great news is not every bank looks at you in the same way and there are a number of things you can do to look better on paper.
A mortgage brokers job is to sell you to the bank and to set you up with a lender. They will do a lot of the hard work and help make the process as simple as possible. Make sure you don’t get put in the too hard basket and tossed aside by building a personal relationship.
It’s also worth talking directly to the big banks. They will tell you what they need from you to get your loan across the line. Bank managers are paid to support you and can become champions for your cause and good friends over time.
What can you do to look better on paper?
- Earn more money
- Repay all bad debt immediately
- Car loans
- Credit cards
- Personal debt
- Reduce your credit card limit
- Get a letter of support from you employer guaranteeing your employment for 12 months
- Build a relationship with your bank manager and get them to fight for you
- Split the risk by buying the property with another party
- Save a larger deposit
- Have someone guarantee your loan
Pre-approval is a great ideas if you are seriously considering purchasing a property. I recommend gaining a pre-approval letter from your lender (approval from the bank for a set amount of money before you begin looking at property) for the following reasons:
- You will know exactly how much you can borrow
- You will be able to put an offer in as soon as you see the right property
- Real-estate agents will put your offer above others that are subject to finance
- You will eliminate the stress of finding a property and loosing it because you couldn’t get finance
At the end of the day getting your first loan can be challenging, but then anything worthwhile is.
Please don’t get caught in the trap of thinking you need a large deposit or to save for years to buy your first property.
Many of the banks only require a 5% deposit (on a $400,000 property you are only expected to come up with $20,000)
A number of states in Australia also provide a first homeowners grant, which can help you get there even faster.
If you have a questions, or would like me to write on a specific topic let me know in the comments below…
The information provided in this article is of a general nature only and in no way constitutes legal or professional advice, or specific advice in relation to any finance. In all cases we recommend you receive professional financial advice for your own personal circumstances.