When it comes to securing a competitive home loan, saving up for a deposit is just one piece of the puzzle. Lenders also need to be confident that you’re trustworthy, reliable and financially secure – in other words, you’re someone who’s capable of making mortgage repayments on time.
A big part of this boils down to getting your personal finances in order. Things like a good savings history, a low debt-to-income ratio and good budgeting skills are all great ways to show lenders that you’re serious about your finances and a worthy borrower.
In this blog post, we’ve put together a few handy tips to help you prepare your personal finances before applying for a mortgage.
1. Take stock of your financial situation
Before you can achieve your financial goals, you’ll first need to understand your current financial situation.
There are a few different ways to go about this, but the simplest option is to start keeping a record of your regular monthly income and expenses. This includes your essential expenses – things like rent, utilities and debt payments – as well as non-essential spending. Ask for a receipt with every transaction and tally them up each week to get a better idea of where you’re spending your money – you might be surprised to find out just how much is going towards non-essentials when the numbers are all laid out in front of you.
2. Set goals
Failing to plan is planning to fail. Whether your financial goals revolve around purchasing a home, starting a business or exploring new investment opportunities, it’s important to define what it is you want to achieve, as this will influence your financial decisions further down the track.
Short-term goals (like saving $100 per week) will help keep you motivated, while long-term goals (like buying a house) will give you a consistent direction to move in. To maximise your chances of success, try to always use S.M.A.R.T goals, which are:
Saying “I want to be in less debt” is a nice thought, but it’s too vague to be useful. We can turn this into a S.M.A.R.T goal by saying something like “I’m going to pay $50 off my car each week, which will allow me to be debt-free by March 2023.” It’s more practical, more measurable – and more likely to happen.
3. Establish an emergency fund
Life’s not always rainbows and butterflies. When the unexpected occurs, you need to be confident that you have enough savings up your sleeve to deal with the situation.
That’s where an emergency fund comes in. An emergency fund is essentially a stash of money set aside to cover any financial surprises that life throws at you, such as job loss, illness, vehicle maintenance, unexpected home repairs and so on.
An emergency fund should cover at least three months’ worth of expenses, but the exact size of the fund will depend on your circumstances – a single working person, for instance, will likely have fewer financial obligations than a family with a mortgage.
4. Pay off debt
For many people, debt is the key obstacle preventing them from achieving their financial goals. Stay on top of your finances by putting pen to paper and creating a list of all your debts, along with their interest rates.
Focus on making the minimum repayments on each loan, with any surplus money going towards the loan with the highest interest rate; when it’s paid off, start paying more off the debt with the next highest interest rate. Prioritising your loans with the highest interest rates will allow you to save the most in the long run. Depending on your circumstances, consolidating your debt into a single lower-interest loan may also be a good option.
Lenders tend to look very closely at your debt-to-income ratio and existing lines of credit, so getting on top of your debt sooner rather than later can help boost your chances of getting approved for a home loan.
5. Stick to a budget
The final step is to establish a budget. This is basically a financial plan that sets out how you allocate your money so that you can achieve the financial goals you created in the previous steps.
Setting a budget can be as simple as looking at your income and then allocating a certain amount of money for necessary expenses, savings, debt repayments and discretionary spending. Or you can get more granular and include individual expenses in your budget.
Whether you take a high-level or detailed approach is up to you – the most important thing is that you stick to it. Without a budget, it’s all too easy to start spending money on things that don’t add value to your future, which can hold you back from reaching bigger financial milestones later in life.
Contact the home loan experts
Regardless of what your financial situation looks like, iLender is here to help you secure a competitive home loan. Give us a call today on 0800 536 337 and have a chat with one of our expert Advisers.