Practise makes perfect before committing to a loan

Practise makes perfect before committing to a loan

Buyers are being warned not to succumb to temptation and borrow beyond their means.

As record-low interest rates in Australia attract first-time buyers to the property market at their highest level in years, the Federal Government is relaxing the responsible lending laws in place since the global financial crisis of 2008.

The free flow of credit may seem an ideal scenario for those prospective buyers with a fear of missing out on stepping onto the property ladder.

But in reality, it’s important they are wary of overextending themselves financially because the responsibility is effectively shifting from lenders to borrowers.

Learn from history

Founder of independent financial comparison site Roland Bleyer said the GFC occurred when US lenders provided credit to borrowers even when they couldn’t pay it back.

But in a bid to avoid history repeating, Mr Bleyer wants would-be buyers to establish good habits before committing to a loan – in the interests of self-protection.

Remember that buying property is probably the single biggest purchase you will make, so it pays to be properly informed.

Plan ahead

The first piece of homework is to examine your finances in fine detail over an extended period, say at least a month or two, to provide insights about your incomings and outgoings.

After establishing your earning capacity, spending and debt levels, lenders usually then determine your ability to take on more debt and how much you can safely afford for repayments, including any potential rate rises.

The good news is that loan calculators can play a similar role.

Compare the loan repayments

Next, go online and examine each loan’s advertised rate and, using personal loan calculators for an estimate, compare loan costs over varying terms — such as 20, 25 and 30 years — to suit your personal circumstances.

Once you have determined a figure that will not be restrictive, try to mimic repaying a mortgage by direct debiting funds into an account you cannot touch. This will determine the limits of what is possible when a loan is finally approved.

If in practise mode, you cannot comfortably live on the remaining funds without compromising on lifestyle, it tellingly pre-empts the struggles ahead should you sign upon the dotted line.  

Knowing what works for you is just as important as any loan arrangement or interest rate. So, it’s vital to be informed before you’re locked into unrealistic self-expectations and potentially crippling overheads.