Should you save your deposit or pay off your debts first - First Home Buyers

How first home buyers are getting into the market I Two Red Shoes mortgage brokers

A question that’s coming up a lot lately – if you are a potential first home buyer and you have a personal loan (or another debt) should you pay that off first or save for a deposit first? The answer is different for everyone, let’s look at this from the top level:

Conventional wisdom says avoid paying interest and get rid of that loan first – and this is very valid, but in a rising market you may find the interest you save is less than the properties are going up in value. In this case you want to buy as soon as you can to set your price.

If you can afford the repayments on the personal debt as well as your new home loan and deposit is more of an issue – then concentrate on getting together your deposit. Now, that’s both if you feel you can afford the repayments and if you fit into a lender’s mould with the repayments in place. (Or look at having a guarantor help you get around the deposit issue).

On the other hand, if being able to afford all of the repayments is the issue then definitely you have to pay off the loan as soon as you can – look for tips on budgeting and see what you can do for a short term towards reaching your longer term goals. I often preach you can go without a lot for a short period of time in order to meet a really important goal. This means set yourself a short time frame (10 weeks, 12?) and really focus, no eating out, no entertaining - all of that will come.

Then apply this wisdom to accumulating your deposit rapidly.

Don’t forget there could be other options for you to avoid having to save for a deposit, for example if you have a lump sum payment coming to you & a great rental history, or you have fantastic parents to help out you could already be ready to go.

Bottom line is absolutely you look better to a lender without any other liabilities (or with fewer) but my advice is to get your broker to look at your personal overall position, especially when the property market is rising. It’s very difficult to save towards a moving target like Sydney house prices in current years.

Article for Western Weekender