Tips for Preparing A Budget To Buy A Property
- Imagine buying a house without preparing a budget?
- Understanding your own financial position is critical when planning such a large capital outlay.
- Your financial position is unique, so you need to take time in preparing a budget.
- This will give you a true picture of your finance situation.
- Don’t rely on estimates from Bankers or Brokers, make sure you have all your figures at hand when required
Where to Start
Firstly, your Budget needs to show income and expenditure for each month separately. This will allow you to plan for surpluses and deficits along the way.
Secondly, the budget you use needs to be either downloaded to your hard drive or placed on a USB. This will allow for easy updates at any time. ( Note: Most budget planners available from Financial Institution web sites cannot be downloaded, so every time you start to use them you need to re enter all your data. )
Thirdly, from your hard drive your budget is available at any time and can be used in the future for other planning needs.
Tips on Budgeting
Listed below are some guidelines to assist with shrewd budgeting:-
- Compiling of Data – This needs to be a complete list of all income and expenditure for the last 12 months. Most of this information can be taken from credit cards, store cards and bank statements.
- List all Expenses – Most expenses will be listed on the above statements, but you will have to consider all cash related expenses also. On the surface this may not appear to be much but consider 10 coffees a week is $30 or $1,500 a year. All such items can add up. Don’t forget birthdays, Christmas and holidays.
- Credit Cards – When credit cards are used for purchases, list the items purchased in your expenditure. Do not include the payment of your credit card as an expense as the items will be included twice.
The only time credit card payments should be included is when you are paying down more than the purchase amount for that month. Then only include the extra.
- Credit Card Limits – When an application for finance is assessed, the value of your credit and store card limits are taken into account even if the limits are not used. The presumption is that unused limits could be used after the home is purchased and in turn adding to your repayments. Also unused limits can reduce your borrowing capacity. Every $10,000 of credit limit you have will lower your borrowing power by about $35,000. This will vary from Institution to Institution.
Check all credit card limits and reduce unnecessary debt. This is especially so if your
borrowing limit is equal to or less than required.
- Future Financial Changes – Future changes to your circumstances could affect your cash flow. Try and build any of these known changes into your budget so you know that future changes could be met. Some examples would be:-
- Education costs increase as children get older
- Proposed alterations or additions to your new home.
- Increase in family members
- Build in a Rate Cushion – To ensure that you can absorb interest rate increases in the future, when doing your budgeting use an interest rate of 2% above the current variable rate.
If possible use the higher rate as your repayment figure so that a financial buffer can
be built up in the loan a/c.
- What if you have surplus funds – Surplus funds placed in a Bank a/c will earn little interest, and the interest is taxable. Look at setting up a redraw facility on your home loan. This will achieve the following:-
- Surplus funds are offset against your loan a/c. This reduces the loan a/c value and thus reduces the interest charged.
- At the same time the Limit on the a/c is not reduced, so in fact a credit is being built up inside the loan a/c.
- This credit (The difference between the a/c limit and the a/c balance ) can be withdrawn at anytime. Note: Depending on the type of a/c, some banks will charge a fee for withdrawals. Check this out first.
- These credit funds can be used at your discretion, but here are some tips:-
- Use for emergency situations
- A good way to save for a long term goal like a holiday. Place the savings in the loan a/c and withdraw when required. This will reduce interest charged on the loan a/c.
- If surplus funds are not required long term and left in the loan a/c, the loan will be repaid earlier than required. This will save on interest paid.
- Dedicated Bank A/c – After completing your budget you should be able to calculate what the average monthly expenditure is. Place this amount in a separate bank account and only use these funds for the items included in your budget. This should ensure you don’t get off track.
I admit it. This process requires some self discipline, but having control of your finances is the first step to a successful outcome.
- Will our quality of life change?
Now is the time to consider the following points in relation to your proposed financial situation:-
- Will your new repayments affect your current quality of life?
- Could you increase your quality of life by reducing the capital cost of the property? ( This does not mean taking short cuts but spending less on the property )
- How would you be affected if some of your planned income ceased? Reduce the income stream in your Budget and see the affects
Budgeting is an integral part of the preparation process for buying a home. As stated earlier, your financial situation is unique so the better you understand it, the better the results when buying a property..
About Geoffrey Boyd
Having spent 23 years in the Financial Planning Industry, Geoffrey was
looking forward to retirement. It was then that some friends asked him
how they should go about buying a house.
This started 3 years of research into all aspects of planning and preparation when buying real estate from an outsiders point of view.
All the research, hints & tips, ebooks and software programs developed from this research are now available at www.hobig.com.au
Contact Geoffrey direct on 0448 843 214
or E: email@example.com
Home Buyers Information Guide