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Saving, budgeting and being financially ready for settlement on your off plan property

August 23, 2019

Saving doesn’t have to be hard. In fact, with a solid budget and savings plan, getting a loan deposit ready in time for settlement is easier than you might expect. So strap yourself in and get ready to take some notes as we prep you for the long game that is saving.

More money, less problems

As you’re probably aware, one of the advantages of buying off plan is that you don’t always need much money to get the ball rolling. But don’t forget, you still need to save a deposit in order to meet settlement.

Settlement is where your legal and financial representatives meet with the developer’s representatives to pass ownership of the property to you and you pay the balance of the sale price. Your lender will register a mortgage against the title of your new property and provide the funds while your solicitor ensures all clauses on the sales contract are fulfilled and the transfer of ownership is registered with the title office.

According to Mark Edlund, Managing Director of Clarity Home Loans, having a big deposit gives you more options when it comes to applying for that all-important loan.

“You want your deposit to be as healthy as possible,” he says. “The bigger the deposit, the greater option of lenders you have, so there is a better chance of getting a great deal.”

A larger deposit also means you have a better Loan to Value ratio. This is calculated by dividing the amount you borrow by the value of the property, meaning the less money you need to borrow (i.e the bigger your deposit is) the better your ratio is.

What are banks looking for?

There are lots of reasons why banks look favorably of deposits of more than 5%. It demonstrates that you have good money management and the ability to consistently save.

As Mark says,“The emphasis in lending today is on spending discipline. It used to be that people would be eating out five times a week because they didn’t have a mortgage, and then they’d cut down when they got one. But now, the banks want to see a history of budgeting, not just a promise for the future.”

Since banks are interested in your ability to consistently and reliably re-pay your mortgage, it makes sense that they are interested in your track record. This also extends to checking that you consistently pay any existing debts and bills.

“Credit reporting in Australia used to be very bland. Now, we have CCR – comprehensive credit reporting. That means that for the last 24 months banks can see your repayment history on all of your outstanding loans. I can see your conduct. They can see where you’ve failed to make repayments.”

This means any repayments you fail to make will be counted against you when applying for your loan. Setting up direct deposits and keeping an eye on your accounts so all your bills get paid on time is an easy way to prevent this from happening.

Jump start your saving

So now you know what banks are looking for in your saving habits, here are some top tips from Mark to get you saving like a pro:

Know what you spend money on

“This is really ‘Savings 101’, but a good budget starts with looking over what you have spent money on during the last six months. It’s time consuming and tedious but it really is the best way to understand where your money is going. Once you know that, you have the capacity to begin controlling your cash flow.”

Control what you spend money on

“A lot of people think budgeting is about making cuts, and that’s part of it, but it is really about having control over finances and making informed choices. For example, when looking over your expenditure you might not have realized that you spend $5,000 a year on meals out—all you would have to do is half the amount you eat out and you could save an extra $2500 a year. That’s a significant saving for minimal effort. Again, I can’t stress enough what a powerful tool budgeting is.”

Debt comes in more forms that you might expect

“Only spend money you have. Car leases, sometimes called novated leases, Afterpay, Zip Pay and ‘nothing to pay for X-month’ deals are all forms of debt. A significantly large portion of people who take an interest-free deal, like the sort of deals some big box retailers offer, don’t have the money to pay it off in the time allocated and end up paying interest. As a rule, you should only take on debt for an appreciating asset, namely property and shares."

Ditch the credit card

“There’s a myth that you need a credit card to establish a credit history so you can apply for a home loan, but this is utterly false. Lenders would prefer to see that you don’t have a credit card. If you must have one, be sure to keep your credit limit low. Lenders will be able to see if you have high credit limits and will hold it against you when applying for a mortgage.”

Use budgeting apps to keep you accountable

"There are a wealth of budgeting tools and apps out there that can do everything from tracking your spending to alerting you when you are about to exceed your allocated budget. Not only are these useful, they also help keep you focused and motivated. A lot of people benefit from the outside influence of apps that can help keep them accountable.”

We recommend:

  • RAIZ: this app also creates forced savings each time you spend, so is worthwhile for property buyers/deposit accumulators
  • GOODBUDGET: helps split income into unique savings accounts. Works well if you’re following Barefoot Investor advice

Mortgage brokers: here to help

By now it has probably become clear that saving up for settlement is a big task and may involve some significant lifestyle changes. But fear not, you don’t have to do this alone. Mortgage brokers are here to help.

That’s right, mortgage brokers are more than just someone who helps you find the right loan, they are also here to help you on your savings journey. Mark says that one of the wisest things you can do is to get a mortgage broker involved as soon as possible so they can help you avoid any big mistakes.

“I would say, at the time you exchange contracts, you should be considering talking to someone like us as soon as possible so you can adequately plan for your financial situation. A lot of what we do in those pre-exchange conversations is talk to you about what you shouldn’t do. So, if we haven’t had that conversation earlier, we can have it as soon as possible afterwards.”

As well as warning you about what you should avoid, a mortgage broker is also uniquely positioned to provide you with one-on-one savings advice that is tailored to your situation.

As Mark puts it,“We can help you decide how best to navigate the extremely complicated credit environment. Do you try to accelerate the payments on a personal loan to get it paid off, or are you better served putting that money into savings? A chat with us can help you figure these things out.”

So, there you have it. With a solid budget, some well thought out cuts and a bit of expert advice you will be well on your way to being ready for settlement.