What is it?
How it works?
Why do it?
Do you want to buy your first home? Can you see the red sold sign in sight but you’re still a few months away? Not sure if your finances are looking that healthy…?
Read on, we might have something that can help you.
It’s called the Rent + Savings Method.
It’s a trick you can use to improve your likelihood of getting your application approved AND get yourself ahead financially.
What is the rent + savings method?
The rent + savings method works by showing the bank that your rent + your savings = your future home loan repayments. The banks look upon this favourably because they can see that you have committed to saving some money and you can also service your home loan once you have drawn it down.
Here’s how it works:
Hold on to your hat, this is about to get deep into high school math territory.
Take the amount you think you’d like to borrow (eg; $500,000) at the banks’ test rate (approx 7%) with principal and interest repayments.
Then take this figure, deduct your weekly rent and the difference is what you’ll put aside in savings. If you can do this for 3+ months. Then the banks may look upon you with more favour when considering to give you a home loan or not
Confused yet? .
Let’s do an example:
First, you’ll want to work out what your weekly repayments would be at the higher test rate used by the bank (around 7%). To do this, shoot over to our mortgage calculator! Pop in the amount you want to borrow plus the test rate (7%)
Then, take this figure, and subtract your weekly rent.
The remainder is how much you’ll target trying to save each week.
Example:
$500,000 at 7% = $767.15 per week.
If your rent is $500 per week, you’ll want to try and save $267.15 per week.
If you can do this for 6 months, not only will you be showing the bank you’re a good bet, you’ll also have an extra $6945.90 in the bank! The benefit is 2 fold.
Why go to all this trouble?
1. You’re proving to the bank that you’re a safe bet and you can afford your future home loan
2. You are increasing your deposit by saving a chunk of money each week!
3. You could potentially get into that home you dream of faster!
Want us to run the numbers with you? Get in touch.
While we’re home loan experts, our blog posts are for general information purposes only and are not intended as financial advice. If at any stage you need personalised advice, get in touch on 06 8788 4444 or Ben or Mark.
