Explainer: How Redraw And Offset Accounts Can Save You Money

from http://www.mortgageandfinancehelp.com.au/


January 28, 2016

Offset accounts and redraw facilities work in similar ways; they both allow you to reduce the balance of your home loan, and therefore the interest charged, by applying extra money to your debt.

Redraw facilities allow you to deposit spare income into your home loan account, allowing you to redraw a sum equal to the extra repayment amounts in future.

In the meantime, the extra money paid will lower the amount of interest charged while still giving you access to your money.


For example:



However, there may be restrictions on how much money can be withdrawn and when.

“For redraw, it depends on whether the facility applies to a fixed-rate or variable loan,” Moses says. “Most institutions only allow redraw from a variable-rate loan, or fixed-rate loan but with limited access.”

It is important to find out how a loan’s redraw facility works before taking it on, as the fees and restriction attached might outweigh the benefits of interest savings.

Deciding between an offset account and a redraw facility on your home loan largely depends on how accessible you need your extra money to be.

Offset accounts are like savings accounts that function alongside your home loan. You earn interest on the money in the offset account and you often have a debit card attached for simple withdrawals.

“Let’s say that you are paying five per cent interest on your home loan and earning two per cent interest on your offset account,” explains Heritage Bank NSW State Manager Paul Moses.

“In a offset setup, the difference would be 3%, but would mean that the 2% interest that you earn is coming off the interest you are paying on your home loan.”

With 100 per cent offset accounts, you earn interest equal to the interest you are paying on your loan. Rather than earning savings account rates, you are earning home loan account interest rates on the money held within the offset account.

“Let’s say you have $10,000 in your 100 per cent offset account. Instead of paying interest on your $100,000 loan, you are only paying interest on $90,000,” Moses says. “That’s probably the best type to have, if you are looking at offset accounts.”

Offset accounts, like many savings accounts, often come with account fees, but the fee may be worth the interest savings and the added flexibility compared to redraw facilities.

“There are less restrictions attached to 100 per cent offset accounts, they’re very flexible. But really, it does just depends on each lender,” Moses says.

Finding a loan that matches your needs is a lot easier with an expert on your side. Email jonni.chin@wealthplus.com.au to find a loan that matches your current needs and future plans.


What is ‘Negative Gearing’?

Jack Needham

(article shared from http://www.smartpropertyinvestment.com.au/markets-a-research/14935-what-is-negative-gearing)

Negative gearing – the media, politicians and investors love talking about it, but what does it actually mean and why is it an important consideration when devising your property investment strategy?

It seems that negative gearing policy is always hitting the headlines. Negative gearing can be an essential part of a property investor’s strategy – but it is important to understand the policy, how it should be used and how it can affect your buying behaviour.

What is negative gearing?
‘Gearing’ simply refers to borrowing to invest in an asset, be it property or otherwise. In terms of property, it refers to taking out a loan to purchase a property.

When an investment is negatively geared, it means that the interest paid on this loan is exceeding the rental income provided by the property – resulting in a loss.
This is opposed to when a property is neutrally geared, or positively geared. Neutral gearing refers to the scenario when the interest on the loan is equal to the income generated by the rental property in question.

When an investment is positively geared, it means that the income generated by the property exceeds the loan repayments on the property – resulting in a profit.

To give an idea of when a property would be considered to be negatively geared, let’s consider the example below.

Imagine you bought a $540,000 property and took out a $500,000 loan at an interest rate of seven per cent. The annual interest payable on the loan is $35,000.

Let’s also imagine that you are earning $530 per week in rent, which adds up to an annual rental income of $27,560.

Based on the above example, you are paying $35,000 in interest but only earning $27,560 in rent – resulting in a shortfall of $7,440 per year. In this case, the property is negatively geared.

Negative gearing policy explained
Many investors get into property investment to benefit from longer-term capital growth, but having an investment property in some of Australia’s more competitive real estate markets can often mean sacrificing a strong rental yield, and therefore making a short-term loss on an investment property.

The idea here is that as property prices increase rapidly (ie capital growth), rental prices fail to keep pace with this growth. In this case, investors are banking on making their money through the change in their properties’ values, rather than solely relying on the income generated from the rental payments they receive.

In Australia, negative gearing attracts a tax concession or benefit on both property and shares investments. When a property investor is ‘losing’ money on their investment due to the loan repayments, they can write-off the loss each year as a tax deduction – effectively reducing their taxable income and making up for some of the loss experienced.

In the case outlined above, the $7,440 shortfall would be removed from the investor’s taxable income. If, for example, their taxable income was $90,000, negative gearing would enable them to reduce this to $82,560.

Negative gearing can be used with other tax policies such as depreciation claims and related expense write-offs (such as property management fees) to bridge the gap between profit and loss each financial year. Depending on how significant the negative gearing scenario is, this may be enough to render the rental income deficiency inconsequential.
For information on how negative gearing should be calculated into your tax return, refer to the ATO website.

Why would an investor choose to be negatively geared?
In an ideal world, investment properties would provide solid long-term capital growth as well as a profit from rental income. Unfortunately, securing such investment properties can be a difficult process.

It could be that, in order to secure a property that promises impressive long-term capital growth, investors need to sacrifice short-term rental income and engage a negative gearing strategy.

This is particularly the case in capital city markets – where long-term growth drivers such as population increases, infrastructure projects and employment opportunities exist, but the sheer volume of rental stock and competition between investors means that buy-in prices are high and the ability to charge a rental rate that would provide an immediate profit is limited.

It may be that an investor decides that achieving this long-term increase is worth the short-term sacrifice, and so a negatively geared investment will work within their investment plan.

It is important to note that negative gearing is generally not designed to be a long-term investment practice. The idea is that investors will use the tax concession to limit the pain whilst they progress on the loan repayments outstanding on their property – until they reach a point where the property becomes neutrally or positively geared.

What are the disadvantages of negative gearing?
The disadvantages of negative gearing revolve largely around the income of an investor – indeed, your income will likely determine whether you can afford to buy a negatively geared property (and your tax bracket may influence how much of a benefit any deductions yield).

If you are on a low to mid-range income and are seeking to expand your property portfolio within a short period of time, holding a negatively geared property has the potential to limit your ability to save for your next deposit.

Remember that holding an investment property involves far more than simply meeting the loan repayments – and maintaining a cash reserve to dedicate towards property upkeep, or periods where the property is unoccupied, becomes a more difficult task when a property is negatively geared.

Holding several negatively geared properties has the potential to create financial stress associated with meeting repayments, and it places increased importance on the investor staying in their current employment or gaining a higher-paying job.

There is a degree of risk involved with negative gearing, and an increased onus on the investor selecting an area that will experience significant capital growth. The future returns on the property need to exceed the cumulative difference between loan repayments and rental income throughout the time of ownership.

If property values don’t move up, and rents don’t go up either, the investor will have sacrificed years of cash flow for little in return. For the sacrifice of holding a negatively geared property to pay off, the property needs to provide good long-term returns.

Is negative gearing here to stay?
The other big risk with choosing to invest in a negatively geared property for a long period of time is the amount of political uncertainty surrounding the policy. Australia is one of the only countries in the world to feature negative gearing as a taxation policy, and a degree of doubt exists over its longevity.
There are many arguments concerning whether the policy of allowing deductions on negatively geared property investments is good or bad for the real estate market at large.

Many proponents of the policy argue that it encourages investment in housing stock, increasing rental availability and driving construction employment.

Arguments have also been made that negative gearing adds an artificial level of increased competition to the real estate market – driving up prices for owner-occupier buyers, forcing them to remain renters and thus playing into the hands of ‘already rich’ investors.

The policy has previously been abolished by the federal government – in the 1980s – before being reinstated a short time after and it continues to feature prominently in debate surrounding taxation.

Your EDUCATION may be ‘FAILING’ you because…

Life Doesn't happen in exam rooms (2)

[Flashback] High school/ University Exam Period, late night study sessions preparing for your future, where you have that Tim Tams opened, messy hair and severe eyes bags.

[Now picture this] Full Time work. Bills, Groceries and Rent and those special window-faced envelopes that haven’t been touched for precarious reasons. You look at the date and you realized that Christmas is round the corner, not only do you need to think about presents for your loved ones but for those long lost relatives that we have to see at Christmas parties as well as wear those festive Christmas jumpers.


Check Bank Account to pre purchase flights for your best friend’s wedding. A thought popped into your head, ‘Did I even get paid? Where did all that money go?’


Richard Branson writes

Are young people being educated not to think?


RB future of education

In my editorial from the first Student magazine, I highlighted the need for real debate about outdated education models. “The fierce debates on education, surely involving the student more than anyone, are almost never thrown open to him. We plan to be a vehicle for intelligent comment and protest.”

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Student magazine fulfilled this aim, with lots of articles and discussion around education issues throughout its lifespan. We ran a humorous account of Alias Lamego’s experiences of education called ‘College Loaf’. More seriously, we ran an article called ‘Education Axed’ by Gavin Maxwell, the acclaimed author of Ring of Bright Water, who was a big influence on my own development.

“Man is a rational animal, whose opinions and ideas can be arrived at by rational processes of thought…” it began. “I contend that this claim could not be upheld, and that all civilised races of making are so thoroughly indoctrinated by their education as to render their intellects functionless. Each individual has to a greater or lesser degree, been brain-washed, although we prefer to use the word ‘educated’, and so have all nations at all times.”


RB future of education3


Gavin went on to question how teachers are often tasked with showing pupils how to learn facts, rather than truly use their brains and come up with new ideas. “The strictly scholastic side of a child’s education…consist in the main, of the ingesting of a vast mass of largely useless and uninteresting facts for dyspeptic regurgitation in subsequent exams.”


RB future of education4



He also ponders, back in 1967, how technology could already be holding back real education. “So, here is our educated man, living in an essentially technological world which actually contributes to the submissive, non-thinking condition upon which his whole education has been based. The higher the technology, the further the regression into the nursery world of toys and dreams of power.”

RB future of education5


While I think that technology has a huge role to play in improving education and engaging young people in learning, Gavin’s points about the education system’s obsession with stats and exams ring true. There should be far more focus on practical education and the development of skills to use used in everyday activities and business. Life doesn’t happen in exam rooms.



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Gavin Maxwell concludes: “The older generation is guilty – then and now – of educating its children not to think.”


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Advice on selling to close friends and family, Jack Ma (Richest man in China) shares his thoughts


Jack Ma, founder and executive chairman of Alibaba Group (one of the world’s biggest internet-based business) is China’s richest man and according to Forbes 18th richest person in the world with a net worth estimated at $24.1 billion (Wikipedia). Prior to his success, he failed his university entrance exam 3 times and only first encountered a computer 1997, aged 33. Jack Ma shares his thoughts as he once said:

‘When Selling to close friends and family, no matter how much you’re selling to them, they will always feel you’re earning their money, no matter how cheap you sell to them, they still wouldn’t appreciate it.’
There will always be people who do not care about your Costs, Time, Effort, they rather let other people cheat them, allowing others to earn, then supporting someone they know. Cause in their heart, they will always be thinking, ‘How much did he earn from me?’ instead of “How much did he SAVE/MAKE for me?”

This is a classic example of a poor person’s mentality!

How did the rich people become rich? One of the main reason is because they are willing to SUPPORT their associates business, taking care of one another’s interests thus naturally they get back more.

Your Friends will in turn support you, thus the circle of wealth continues to grow and grow!

Simple Logic, you will start to get rich once you understand it.

Jack Ma on Sales: ‘When doing Sales, the first people who will trust you will be Strangers, Friends will be shielding against you, fair-weather friends will distance from you. Family will look down upon you.’

The day you finally succeed, paying the bill for every get-together dinner, entertainment, you will realised: Everyone else is present except the Strangers.

Do you get the meaning of this?

We need to treat our dear Strangers better! And even more so to Friends who know what you are doing and yet still SUPPORT you!

Let us treat STRANGERS who buys from us better from today. They are your BEST customers!

Source: Charles J. Phua, a translator and insight writer. Linkedinhttps://sg.linkedin.com/in/cjphua

I was earning $500,000 a year at 30: Here are the 10 best pieces of advice I can give you about money

 by Cary Carbonaro, Business Insider Contributor Nov. 17, 2015

businesspeople london bankersFlickr / Herry Lawford

After graduating from college, my career moved quickly up the corporate ladder, including eight years on Wall Street.

I worked at JPMorgan Chase, I was a vice president at Citibank, and then a director at Lord Abbett Investments on the e-marketing and e-commerce side.

Every day a new company was going public, and I lived across the street from the New York Stock Exchange.

Every night before a business day, I would hear them setting up some crazy paraphernalia in the Street. There were giveaways on the Street because there was so much “silly” money. Anything with a dot-com got funded or went public.

For example, Pets.com was launched in 1998. In case you don’t know the story, the Pets.compeople spent half of the value of their company on a Super Bowl ad and by 2000 the company was defunct.

I was earning $500,000 a year at age 30, but I felt like I wasn’t making much money because I was in an established industry without big stock options. It was conservative and I was conservative. It didn’t fulfill me. I felt like I wasn’t making a good difference in anyone’s life.

Cary Carbonaro headshot

Courtesy of Cary Carbonaro

So I quit that job, moved to Central Florida and started my own financial advisory business. Everyone thought I was crazy. Who walks away from an amazing job like the one I had?

I had to reinvent myself as an entrepreneur. It took me a long time to build my firm, one client at a time, from scratch. I went from $500,000 income a year to almost zero the next. It challenged me personally, professionally and emotionally.

The beautiful side of the hard work is that I have a much better sense of my purpose in the world. I love being a practicing certified financial planner because it equips me to make a difference in my clients’ lives. I get to help them make all the right moves with money. It is rewarding to watch them achieve the goals we set out together, and I even wrote a book so I could reach a wider range of the population, from the young to the seniors who might not be able to afford a certified financial planner.

Now here are some of the best pieces of advice I can give you about money.

View As: One Page Slides

1. Beware of FREE money

Credit cards are NOT free money. Use them as you would cash, or don’t use them at all. If you use them to stopgap your life, you will never have financial freedom.

Flickr / Alan Levine

2. Simplify budgeting

It’s simple. Know what you have coming in and going out each month. Do you know this? It doesn’t matter if you do it on a napkin or Mint or an app on your phone. This is so simple, yet so important. It is the building block of all financial planning.

3. Know your worth

Assets (what you own) minus liabilities (what you owe) equal net worth. And your net worth does NOT equal your self-worth.

Always remember that.

Thomas Lohnes / Stringer / Getty Images

4. Don’t be afraid

Personal finance is not just about math, and you don’t have to be good at math to learn it. Simplify, learn the basics, and just get started. It is never too late to learn.

The first step is knowledge. You can’t fix what you don’t know. Learning financial literacy is one piece of education that will be well worth your time.

5. Know your credit score

This is important for your entire adult life, and having a good or excellent score can save you hundreds of thousands of dollars.

Flickr / Mads Bødker

6. Teach your family about money

Financial literacy is a life lesson that should be passed down to your children. Learn it, share it, and your entire family will be better off.

7. Inflation hurts

You have to invest to outpace inflation and get growth on your money — otherwise you’re effectively losing money as time goes by. This means don’t hoard cash, and invest for the long term, which is greater than 10 years.

8. Never lie

Don’t lie about money or spending with your partner. Full financial disclosure is a key to a healthy relationship.

9. Plan for your future

Planning for your financial future is way more important than planning for vacations, parties, etc. Are you spending enough time on your financial future? This is a strategic conversation and you might need to hire a professional financial planner.

10. Just start

There are multitudes of free resources to learn the basics, and you can hire a certified financial planner when your situation gets more complex. Find a planner who suits your needs atLetsMakeAPlan.org.

Cary Carbonaro, MBA, CFP, is a managing director of United Capital of New York and New Jersey. See more about Cary and her bestselling book “The Money Queen’s Guide for Women Who Want to Build Wealth and Banish Fear” at MoneyQueenGuide.com.

Do You Need A Finance Broker Or A Financial Planner?

When taking the plunge into the world of home loans and property investment, the challenge often lies in knowing which expert to approach for help. Mortgage brokers and financial planners, although similar in their professional outlook, cater to different financial endeavours.

Mortgage brokers are qualified and must be either licensed or appointed to act as loan advisers. They have in-depth knowledge of loans and options suitable for a range of different financial situations. They negotiate with lenders to arrange loans and help manage the process through to settlement.

 “When it comes to talking about a client’s debt structure or interest rates, or the best way to set up a loan, it’s really something that needs to be done by a mortgage broker who is qualified to give credit advice,” says Luke Mellar, a lending specialist at Shadforth Financial Group.

Financial planners, meanwhile, assist with anticipating and managing longstanding financial outlook. They help sort through and select options for investment and insurance, with attention paid to retirement planning, estate planning and investment analysis.

“Planners take care of more of the long-term, wealth-creation strategy, as well as super and life insurance, and other sorts of wealth protection insurances,” Mellar says.

A financial planner’s work is wide-reaching and important to your long-term financial health and stability, options relating to loans and refinancing can only be recommended by a qualified broker authorised to do so.

There are some situations where it would be best to include both types of financial professional. For instance, if your broker is helping you refinance your loans in order to undertake a financial investment, a financial planner can step in to assess the best investment option for you.

“There is rarely a time when I am dealing with a client, just on the loan side of things, where I’m not thinking about how it fits with what the financial planner is talking about,” Mellar explains.

“In terms of whether the client’s choice is a viable investment strategy or whether it fits in with their long-term wealth goals, that’s something that we absolutely have to refer back to the planner to make sure that it fits in with their broader plan.”

The answer? It depends on your situation – for loans, see a broker, for investment advice, a financial planner. Of course, your broker can always refer you to a planner if you need one.

Contact an MFAA Accredited Finance Broker to find out how they can help you secure property or commercial finance, and ask them to recommend a financial planner they trust.

How To Pay Off Debt Fast Using The Stack Method MONEY


Just cause you can buy it doesnt mean you should.

Whether it’s consumer debt on credit cards, student loans or a mortgage, most people find themselves weighed down by debt at some point in their lives. This can keep us working jobs we hate just to pay the bills and keep our heads above water. By learning how to pay off debt fast you can release this burden and remove some of the stress from your life.

Today I’m going to show you how to pay off your debt as fast as possibleusing the Stack Method.

Step 1: Stop Creating New Debt

Most people do not receive training in handling money and how to live within their means. If you’re in debt then you’re probably one of these people and it’s time to bite the reality bullet. It’s going to be impossible to get out of debt unless you retrain your financial habits right now.

You must make a stand against all the marketers trying to take your hard earned money or offering easy finance. You don’t need more stuff to make you happy. What you need is financial peace of mind.

So cut up your credit cards or freeze them. I mean this literally. Put them in a container of water and stash them in your freezer. Then when there’s an opportunity to spend, you have time to thaw out (you and the credit cards) and really decide if you need that purchase.

Step 2: Rank Your Debt By Interest Rate

Make a list of all your debt with amounts and the interest rate. The highest interest rate should be at the top as this is what you’ll pay off first. Paying off your high interest debt is the key to the Stack Method and paying off debt as fast as possible.

Interest is a powerful weapon and right now the bank or other financial institutions are using it against you. Interest significantly increases the amount you need to pay back and often we’re completely unaware of how much that is.

For example, if you have a $10,000 credit card debt at 20% interest where you pay a minimum payment of $200 a month, you will end up taking 9 years and 8 months to pay off the actual amount of $21,680 including $11,680 in interest!

Step 3: Lower Your Interest Rates

You can often lower your credit card interest rates by doing a balance transfer. This means moving your credit card to another bank and they will lower the interest rate to get your business. Shop around and try to get the lowest interest rate for the longest duration (preferably until it’s paid off completely).

Just make sure you’re reading the terms and conditions carefully so you don’t get stung by the new bank in other ways. Once you’ve done this you can order your list of debt again if things have changed.

Step 4: Create a Strategic Spending Plan

This is where we improve on your financial control from Step 1. Take a piece of paper and write down your income after tax and all the expenses that you have. This will include the minimum payments on all your debt.

Look at your expenses and then rank them in order of importance to you. Look at the items on the bottom of your list and decide whether you’d rather have them or be financially stable. The objective is to create a Strategic Spending Plan where your expenses are lower than your income.

You also decide how much you are willing to spend on each area of your life. You can allocate amounts for rent, groceries, eating out, buying clothes and other activities however realize that once you’ve spent your allocated money there’s no dipping into other areas. It also helps to have a Fun Account that you can spend on what you like and an Emergencies Account in case your car breaks down etc.

You also want to include in your Strategic Spending Plan as extra amount you’re going to use to pay off debt. Can you afford $20 a week? $50? $100? $200 or more? It’s important that you get a realistic number that you can commit to each week without fail and this is your Stack Repayment.

Step 5: Create a Repayment Schedule

The first part of the Stack Method is to cover the minimum payment on every single debt you have. Any time you miss a payment, you incur fees and these add up quickly. This also includes making the minimum payment on the debt with the highest interest rate.

Then for the debt with the highest interest rate (your Target Debt) you’re going to add the Stack Repayment from your Strategic Spending Plan. You apply this Stack Repayment and the minimum payment until that debt is paid off in full.

As your official minimum payment decreases you add that extra amount to your Stack Repayment. So as your minimum repayment drops your Stack Repayment increases equally. This will compound how fast you pay off the Target Debt by adding even more to the repayments you’re making.

Step 6: Reward Your Progress

You want to track your Target Debt so you can see your progress along the way. You can also decide on milestones that you’re going to celebrate and reward yourself on. A reward doesn’t have to cost money but if it does then it comes from your previously allocated Strategic Spending Plan.

This is an important step as it will keep your motivation going when you feel your willpower fading. Just like you’ve trained yourself to brush your teeth and shower, you can train yourself to manage your money. Feel great that you’re now entering the 10-,20% of people who are actually responsible with money.

Step 7: Compound Your Results

Once you pay off your Target Debt you have a huge celebration and congratulate yourself. Then you move the Stack Repayment (which includes the previous minimum payment as well now) to the next debt with the highest interest rate. This becomes the new Target Debt and you are using your Stack Repayment amount plus the minimum payment for the new debt.

This is why the Stack Method is so powerful. As you decrease a debt you actually increase your Stack Repayment amount. This means the second debt will get paid off even faster, the third even faster than that, and so on and so on until you are completely debt free.

Step 8: Be Kind To Yourself

During this process your resolve is going to be tested multiple times. Maybe you’ll have an emergency like your car breaking down or the need to travel for a sick relative. The important thing is to not throw up your hands in despair while going back to your old habits.

Life will test your commitment to your new responsible money attitude and it’s up to you how you respond. When things go wrong (and I guarantee they will) you need to shrug it off and get back on track. Show compassion when you accidentally go over your Strategic Spending Plan and decide to do better next week.

Now You Know How To Pay Off Debt Fast…

The Stack Method is a powerful tool but it’s up to you whether you use it. If you really want results then print out this article immediately and start working through the steps. It’s only by the decision you make right now that you will enjoy a debt free future and live a financially responsible life.

Did you know you could purchase your Commercial property through a Self-Managed-Superfund?

Investors look to direct property for reliable income

Investing in property is not new to Australian investors. Residential property is something we know and trust and has provided solid returns for many investors. Non-residential property, on the other hand, is less familiar to the average investor, largely because it has been out of reach for smaller investors. But this is changing and it’s well worth looking at the options.

The concept of investing in residential houses and apartments is well understood by most investors and is easily accessed and, in most cases, can be sold in a reasonable timeframe. In Australia, a long run of capital growth in the residential sector has strengthened its appeal, particularly for self managed super funds and individual investors.

Non-residential property such as shopping centres, industrial warehouses and office towers was until recently the sole domain of large super funds and institutional investors.

But commercial property is now becoming more accessible to smaller investors through managed property funds and syndicates. This has broadened the property investment options for individuals and SMSFs and opens up some good opportunities, particularly in the current low interest rate environment.

Why invest in Australian property?

The major categories of commercial direct property include:

These property categories have varying characteristics but there are a number of advantages for investors common to them all, including:

The major attraction of Australian property for investors is the stability of income it provides. Australian commercial property also has a solid track record when compared to the rest of the world, as can be seen in the chart below, which shows the returns from Australian commercial property compared to those from global property over the 10 years to 30 June 2014. While the capital growth component of the income varied, income from rent was very consistent over the 10 years.

Ladies! Forget Waiting for Marriage: 6 Things to Know If You’re Buying a Home on Your Own

May 28, 2015

It used to be the norm that women and men would wait for marriage before buying a home. But now, more singles than ever are taking that big life step alone. And here’s the awesome part: Women have been outpacing men in the real estate market for several years now. Single women in their 20s and 30s represent 14 percent of first-time buyers, compared with 8 percent of single men in that age group, according to realtor.org.

I purchased my first apartment at the ripe age of 24. And then I did it again at 31. And once more at 33. Below, a few pointers that have helped me—and hopefully will help you—secure an affordable mortgage and great home on your own.


Aim for 25 Percent. While most financial calculators say it’s totally fine to spend 30 percent of your take-home pay on your monthly housing payment, I say be a little more conservative. Remember, being a homeowner requires a lot more spending than renting does. You’ll also have to account for real estate taxes, home insurance, and annual upkeep, which can easily be another 2 to 5 percent of your paycheck. Bulk up your emergency savings account and have at least a six-month cushion in the bank before applying for a mortgage. Mortgage lenders will be impressed to see that.

Clean Up Your Credit. One of the first items lenders will want to analyze is your credit health, especially your credit score. According to FICO, which is the biggest credit score issuer and the one used by over 90 percent of lenders, borrowers with scores of 760 or higher are earning the best rates. To view your score, first check with your bank or credit card issuer—some offer customers a free look. If you find that your number needs some R&R, make sure you’re paying all your bills on time and knock down any outstanding balances on those credit cards. Within a few months you should notice a difference. In the meantime, avoid opening any new credit cards.

Get Your Docs in a Row. This, for me, is the most dreaded part of applying for a mortgage: submitting paperwork. If you have any interest in applying for a mortgage in the near future, do yourself a favor and try collecting all the documents now. This includes the last two to three years’ worth of tax return statements, recent pay stubs, the last 12 months’ worth of bank statements, and a letter from your employer stating that you are gainfully employed. Once you apply for a mortgage, expect that the review process can take anywhere from six weeks to a few months. Hang in there!

A Freelancer? You’ll Need More. If you’re self-employed, prepare for more scrutiny. In addition to all of the above, you’ll probably also be asked for a letter from your accountant or financial adviser stating that buying a home will not hurt your financial stability or your business. Banks sometimes also ask for an additional year of tax returns. They want to see that you’re making money consistently year after year.

The More Your Put Down, the Better. The days of putting down just 5 percent and getting a standard 30-year mortgage are pretty much over. Lenders got burned in the mortgage crisis, so they want borrowers who are willing to have more skin in the game. Prepare to have at least a 15 percent down payment ready to go. Twenty or 25 percent of the purchase price is even better. The more you can pay up front in cash, the more likely you are to qualify for a better interest rate on your mortgage from lenders. It’s one of your best bargaining chips.

Avoid Real Estate Envy. Finally, as you’re house hunting, zero in on places that are financially within reach. A quick measure is to multiply your salary by two or two and a half—that’s about as much as you really want to spend on a home. Your realtor may try to convince you to look at homes a little bit outside your budget, but that can be a slippery slope toward spending far more than you realistically can afford.

Photos: Getty Images