Applying for your first home loan is a big step. Even considering the idea of buying your first home can be daunting, let alone putting those ideas into action. Amongst the general nerves and apprehension lies the difficult question – which loan? Choosing the best home loan for you and your partner is a decision that requires research and careful consideration, and is not to be taken lightly. But with so many options saturating the market, it can seem as if every bank has a not-to-be-missed opportunity on offer.
Complicating that decision is the matter of mortgage rates – often just labelled “interest rates”. Whilst low interest rates are commonly used as a selling point to market home loans, they can fluctuate just like the housing market – and the two aren’t always in sync. Keeping on top of your home loan and its interest rate is the real difficulty at stake, and can often clash with your other financial needs and wants.
Constructing a fool-proof and realistic budget is an important way of managing both your money and your home loan. Budgets can help you predict the major monetary drains in your life, and can assist you in re-evaluating what you really need. Netflix is awesome, but if you rarely use your account, is it really necessary?
An issue raised recently in financial circles is the apparent disconnect between budgeting tips and growing mortgage rates. Popular financial rules – such as the 50/30/20 rule (more on that later) no longer seem feasible. Yet others argue that homeowners don’t always re-evaluate their financial situation before and after buying a home. As Elizabeth Renter stresses in her article, adaptability is key. Predicting and planning for unexpected and extra expenses will not only help you avoid being blindsided, but will also assist you in being realistic in regards to what you can afford.
But this 50/30/20 rule? What is it, and just how out of touch is it?
Bankruptcy expert Elizabeth Warren swears by her general rule of thumb in regards to homeownership – the 50/30/20 rule. The rule is a simple budgeting formula that helps you allocate your paycheck into 3 broad financial areas.
- 50%: Essential Needs
50% of your paycheck goes should be assigned to essential needs. That is, the necessary things you need to live your life. i.e. groceries, utilities, rent, petrol, etc. Needs should be strictly confined to items or payments that MUST be paid or your quality of life will suffer.
- 30%: Wants
After allotting 50% of your paycheck to your needs, you can allocate 30% to your wants. These are items that will improve your quality of life, but are not essential for you to live. This could include holidays, clothes, electronics, or any similar purchases that will make you happier, but that you are not vitally reliant on.
When allocating money to this section, be sure to prioritise. You may be tempted to spend more than 30% on this category, but know that doing so can negatively impact your financial future in the short and long term.
- 20%: Savings and Debt
The remaining 20% is assigned to savings and debt repayments. Credit card payments, student loans and superannuation funds are all included in this category. This 20% also applies to money put aside for savings accounts or future investments.
Many financial experts can agree that the issue is not the 50/30/20 rule itself, but the other economic choices we make. In her article on “Budgeting for New Homeowners” Elizabeth Renter concurs, advising that an important first step is nailing your budget and saving foundations.
Home loans, budgeting, and mortgage rates don’t have to be terrifying. The key thing to remember is that planning and research is paramount; and rushing into something you’re not sure you can afford, or that you don’t know much about is never a smart move.