If you were a little generous at Christmas and overspent, it might be time to make a budget and get on top of your finances.
Why keep a budget?
A budget essentially means you can hold yourself accountable for your spending. The transparency of doing a budget can be a bit of a shock if you’ve been spending more than you thought. But, it will mean you can see what you’re spending your money on, which helps you work out where to limit your spending and save.
If you’re considering taking out a home loan, a budget is essential. You’ll want to ensure you have as big a deposit as possible, and your lender will want details of your living expenses in any case.
How to make a budget
Firstly determine your income and current spending patterns. Go through your bank and credit card statements, and, if you have them, supermarket receipts and bills.
Next, it’s time to prioritise and set a new budget. Take a look at what costs you can reduce or get rid of altogether. Can you reduce your power usage for example? Can you bring coffee and/or lunch from home? Can you curb your leisure activities? Have a think about reviewing your phone, internet, utility and insurance plans to see if you can find a better deal.
If a property purchase is on the cards, you will need to incorporate these expenses (and any rental income) into your budget too.
Upfront costs will most likely include:
- Stamp duty
- Legal and conveyancing fees including government fees
- Mortgage and lender fees including mortgage registration fee and lenders mortgage insurance (if you borrow more than 80 percent)
- Building and pest inspection fees (optional but highly recommended)
- Valuation fees (optional but highly recommended)
- Moving fees
Then there are ongoing costs to consider including:
- Interest and loan repayments
- Council rates and/or strata rates
- Utilities – electricity, gas, water, phone and internet installation
- Potential increases to interest rates
Smarline’s budget planner will help you start planning your budget for the new year.
Be disciplined but realistic
If you know you won’t be able to change certain (possibly expensive) habits, then there’s no point in budgeting for it. Only you know what you can achieve and you need to be able to enjoy life too. But if you’re in the market for a home loan, some short term sacrifices might be worth it.
More cash on hand means a bigger deposit, which has many benefits, including:
- You have a better chance of getting your loan approved
- You may have access to better rates and special loan deals
- You may not to need Lenders Mortgage Insurance
- You will need to borrow less and will therefore pay less interest over the life of the loan
- You will have increased borrowing power so may be able to borrow more, and purchase a ‘better’ property
And, when your mortgage broker asks for your living expenses for the loan application, you’re already there!
Example: The difference your deposit makes
Consider you are buying a property for $700,000.
In scenario 1, you have to borrow $600,000 (86% LVR), can only get a rate of 4.2%.
In scenario 2, you have a bigger deposit and only have to borrow $550,000 (78% LVR), and you can get a rate of 4.1%.
The risks of not keeping a budget
It’s easy to overlook your everyday expenses, as well as the costs of buying and owning a property. Writing down your income and expenses in the form of a budget will give you much greater clarity of your financial situation. Financially overstretching yourself is both risky and stressful, and things can go badly very easily if unforeseen expenses crop up and you don’t have financial back up. Ideally, you will have some additional savings to act as a buffer in case interest rates or other regular expenses increase (such as council rates, electricity or phone bills, insurance), or in case of a substantial unexpected cost (such as a leaking roof, electrical or gas problems, burst water pipes or major health problem).
You can contact a Smartline Mortgage Adviser on 13 14 97 for mortgage advice. Alternatively, complete our call request form and we’ll call you!