When we go to the bank (or mortgage broker or lender etc) we sit down, we give them information about how much we earn, they do some calculating… and then they tell us: “Ok, so the maximum we can lend you is $400,000” (or whatever amount they tell you).

And we think, great, the bank can lend us $400,000 and we have a $100,000 deposit. This means we can buy something for $500,000. Let’s start looking for properties at that price.

But, this is the biggest First Home Buyer mistake that can be made.

People let how much they can borrow determine how much they spend and how much they repay. For example, now that I can borrow $400,000, how much did the bank say are my repayments?

But, this is a trap.

Actually, I should say, “But wait, there are two big traps!”

Big trap number 1: Overspending

Just because there is a maximum you can borrow, you don’t have to borrow it. When we let how much we can borrow determine the price of house we want to buy, we let our lender decide how much we should borrow.

But don’t let the lender determine how much you spend on a property. You don’t have to borrow that much money. You don’t have to borrow as much as they are willing to give you; and you don’t have to buy the most expensive house you could possibly afford.

If you are not careful, letting your lender decide how much you borrow—or your maximum home loan amount—could lead you to take out a bigger loan than you would have liked. Particularly for a first home.

The more you borrow:

• the more you spend;
• the higher your repayments;
• the longer it takes to pay off your home loan;
• the more interest you pay over the life of your loan; and
• the longer it takes you to buy the house of your dreams later.

Don’t spend all your money in one go on a slightly better property now when you could have a much better property later by saving more in the short-term with a smaller loan.

Keep the debt small and manageable. That way you can pay it off faster and potentially save yourself hundreds of thousands of dollars in interest repayments.

If you let the lender determine your home loan amount and how much you ultimately spend on a property, you could be paying hundreds of thousands of dollars more in interest than you want to. You could end up becoming a home loan zombie, and you don’t want that!

And then repaying your home loan will feel like it drags on.

You need to decide for yourself how much you will borrow based on knowing how much that means you can repay over the life of your home loan (more on this in Step 2: Calculate).

How much you spend on a property should never be determined by how much you can borrow. You need to decide how much you want to borrow.

Big trap number 2: Making minimum repayments

When a lender tells you how much you can borrow, they will also tell you how much to repay (the amount you have to repay every week, fortnight or month to pay your home loan off).

However, when they tell you the repayments, don’t think of this as the repayment amount; instead, think of this as the minimum repayment amount you have to make no matter what; the amount you have to pay back in order not to fall behind or go into arrears with your lender. You don’t ever want this to happen.

And then set your own repayment amount (don’t worry, Step 2 takes you through this).

The only way to get ahead is by setting a repayment amount that is more than the minimum repayment amount set by your lender.

Always pay more (whenever possible).

The higher your repayments:

• the more you save;
• the faster you pay your home loan off;
• the less interest you pay over the life of your loan; and
• the faster you could either be debt free or buying your next property.

Always make higher repayments than the repayments set by your lender.

Always!

There is a way for you to do this that will allow you more flexibility when using that money later.

When I say ‘always’ make higher repayments, there is something you should know. You can split up the repayment and put them into two different accounts.

You can put your normal minimum repayment into your home loan account and then put the rest, the additional amount you want to repay, into an offset account. If you’re not sure why or what this is, don’t worry, I’ll come back to this point again later.

Next, it’s time for starting with the end in mind.