Money Tests to Pass Before you get a Mortgage

What money tests do I need to pass before buying first home?

Purchasing your first home is one of the biggest and most exciting financial commitments you will ever make in your lifetime. So, it’s essential to pass some basic money tests beforehand so you can reduce potential financial strain down the track and determine whether you’re prepared to take on a mortgage.

Debt and expenditure minimisation

Do you use Afterpay? Have a few credit cards, or perhaps a personal loan or a car loan, as well as numerous digital subscriptions like Netflix or Spotify? If you answered yes, it’s time to think about reducing your outgoings.

1. Determine your current debts. It may be worth seeking financial advice and determining if debt consolidation is a worthwhile path.
2. If possible, consider closing your buy now, pay later accounts like Afterpay. We don’t want to sound like a buzzkill, but services like Afterpay train you to rely on the bank’s money instead of your own. Between 2018-2019, the rate of shopping with buy now, pay later services has nearly doubled from 14% to 27% of all purchases. It also encourages you to make purchases that aren’t always well-thought-out. On the plus side, banks are becoming increasingly wary of these kinds of services so closing down your account may even help you get a mortgage.
3. Review all of your subscription services. Consider if you need multiple streaming services? Are you using your gym membership? Have you assessed your car insurance or are you automatically renewing each year? Reduce where you can, don’t waste money on things or services that you aren’t using and review your expenses annually.

Reducing your outgoings and minimising debt will not only help you to be in a more comfortable situation when you have a mortgage, but it may also help you when it comes to applying for finance.

Understanding associated costs

When you’re saving for a deposit, typically, your priority is reaching that magical number that will help you get into your first home. However, mortgage aside, there are several additional costs you should keep in the back of your mind, including:

• Stamp duty
• Insurance
• Furniture
• Landscaping and fencing
• Rates

To learn more about these additional expenses, you can read our piece on Why First Home Buyers Must Budget for More Than a Mortgage here.

Budget

The word budget might sound like a dirty word, but it doesn’t have to be! Think of it as a roadmap for knowing where you want your money to go. It can be as simple or detailed as you like and essentially, it’s about ensuring your money is going where it needs to go each pay cycle.

It doesn’t mean you can’t have fun or purchase treats, but it is about guiding your spending to help you create better financial security.

Rainy day fund

We can’t stress the importance of a ‘rainy-day’ fund. This is typically a bank account separate from your savings. It’s for unexpected emergencies – think your car breaking down, or something unexpected happening in your new home, or even an event causing you to take time off work.

While some of these occurrences may be covered by insurance, you can’t always rely on a timely payout. Insurance can often be a long, drawn-out process and you may need to access the money before you receive a payout which is why it’s good to have a reserve stashed away.

How much you have in your rainy-day account is really up to you. Discussions often suggest three months of living expenses, but it’s important to self-reflect and review your expenses and situation to determine how much you need.

Rate rises

If you’ve obtained a variable loan have you considered the extra expense you would face if the rates rose. How much extra would it be a month? How would you need to restructure your budget to afford the increase in payments? Speak with a professional mortgage broker who can help your understand your repayments if interest rates rise.

To determine how much extra your repayments would be if rates were to rise, try our loan calculator here.