Strengthening your financial fitness

Where you stand, what to fix first, and how much you can actually borrow.

This is the stage with the most leverage over everything that follows. A year spent getting your finances into shape changes what you can buy far more than a year spent watching listings.

Know where you stand

Start with the truth: what comes in, what goes out, what you owe, and what you've got. Lenders will work this out about you anyway, from your statements, so there's no advantage in a flattering version.

Income. Base pay, and how much of the rest a lender will count. Overtime, bonuses and casual income are often discounted or need two years of history.
Spending. Your real figure, not your intended one. Most people are out by several hundred dollars a month.
Debts. Balances and minimum repayments. A credit card counts against you at its limit, not its balance, so an unused card with a $15,000 limit is quietly costing you borrowing power.
Savings. Split into deposit, upfront costs and emergency fund. They are three different jobs.

Check your credit report

Your credit file affects whether you're approved and at what rate. You can see it free, and you should, well before you apply. Credit Savvy and Get Credit Score both do it without charge, and you can also request your file directly from Equifax, Experian or illion.

If the score is lower than you expected, the fixes are unglamorous: pay every bill on time, get limits reduced on cards you don't use, and dispute anything on the file that is wrong. Errors are common and take weeks to correct, which is the reason to look early.

Clear the expensive debt first

High-interest debt hurts twice: it costs you money, and it reduces what a lender will advance. Pay down the highest rate first. Buy-now-pay-later accounts count too, and lenders look at them.

Set three savings targets

Deposit

20% of the price avoids lenders mortgage insurance. On a $600,000 property that's $120,000. Less is workable with a guarantee, a guarantor or by paying LMI, covered in the next two chapters.

Upfront costs

Stamp duty if you're liable, conveyancing, building and pest inspection, loan fees, moving. Budget around 3% to 5% of the price, less where a first home buyer concession applies.

Emergency fund

Three to six months of living costs, kept separate. This is the thing that means a bad year doesn't become a forced sale.

Automate the transfer on payday so saving isn't a monthly decision, keep the deposit in a separate high-interest account away from day-to-day spending, and treat that account as untouchable.

Estimate what you can borrow

A rough rule of thumb is five times your income, less your debts. Earning $100,000 with $20,000 of debts puts you somewhere near $480,000. It is a starting point only: lenders assess you on your actual spending, your dependants, and your ability to repay at an interest rate about three percentage points above the one you're offered. That last part is the serviceability buffer, and it's why the number a calculator gives you and the number a lender gives you can differ.

Do this in HomePlannerBorrowing power calculator Get a borrowing figure from your real income and spending rather than a slider, and see how it moves when you clear a debt or reduce a card limit.Free account required

Before you move on

You know your real monthly spending
You've seen your credit report this year
Card limits reduced or closed where you don't need them
Deposit, upfront costs and emergency fund have separate targets
You've seen what the repayment looks like at a higher rate