Typically a new home means a new mortgage and it’s important to consider these steps in the correct order.
Before rushing out and falling in love with your next dream home ensure that you are in the correct financial position to turn that dream into a reality. Accordingly, it is important to understand your current financial position and your borrowing capacity with a loan application. A short employment history, maternity leave, even your age can limit your lender options or worse yet, get you knocked back. As an example, if it’s a mature borrower, lenders will look at an applicant’s retirement age. This is how the lender ensures that everything stacks up and the loan makes sense. Luckily, purchasing a property is considered lower risk by lenders compared to construction loans, debt consolidation, renovations etc.
To help set you up for mortgage application success, here are 8 tips you need to consider:
1. Deposit / Equity
Capital refers to your deposit and your overall financial situation. This is the first thing that lenders look at. Even if the rest of your application is star-spangling great, if you do not have a sufficient deposit or equity in your existing property, then most lenders will knock back your application. As a general rule, you’d need at least 5%-10% (20% preferably to avoid LMI cost) of the property value as a deposit for purchasing a property depending on the lender/bank. When diving a bit deeper, how much of a deposit you need as a first-time buyer depends on three factors:
Whether you looking to buy a new or an established property
Whether or not you qualify for the first home owners grant (FHOG)/first home buyer concessions and
How much are you paying in Lenders Mortgage Insurance (LMI) fees
Lender’s genuine savings requirement is something that often catches out first home buyers when they apply for a home loan. ‘Genuine savings’ is basically funds that you’ve saved over time. Most lenders require that at least 5% of your deposit come from genuine savings when you’re applying for a loan greater than 90% of the property value. That means if you’re planning to borrow $500,000, then you’d require at least $25,000 (5%) in genuine savings. Now if you only had $24,000, then you’d be declined.
Fortunately, there are some ways to circumvent this policy such as:
Using paid rental history as a substitute for genuine savings or
Applying with a lender that does not require genuine savings
First home buyer tip: Did you know that you can turn any deposit into genuine savings by simply waiting 3 months? (except a borrowed deposit). Turning your deposit into genuine savings is as simple as putting the funds in a savings account, adding it to it each month for three months and then voila, it is considered genuine savings.
2. Credit Report
Your credit report will include a credit score or rating which is based on personal and financial information about you including:
the number of credit applications you have made (the less the better!)
the amount of money you have borrower
unpaid, overdue or late payments on loans or credit facility
conduct on existing accounts for the last 24 months (overdrawn accounts, late payments etc.)
A low score could affect your ability to get a loan.
Don’t have a good credit rating? Don’t worry, it is possible to improve. Ask us how!
You can access your credit file for free. A comprehensive credit file can help us understand the possibility of a successful application.
This is an obvious but especially important one. Assessing an applicant’s borrowing power will depend a lot on their income. A borrower’s capacity to afford the mortgage repayments and sustain day to day expenses is crucial. Be sure to have at least 2 payslips ready for the application.
4. Cost of Living
Post Banking Royal Commission, the determination of your cost of living is now determined having regard to your actual costs rather than a standardisation. Lenders are therefore scrutinising the cost of living and expenses in much more detail than ever before. Applicants must be far more aware of their necessary and discretionary spending. Almost always, lenders will use the higher of your actual living expenses and their own minimum benchmark called the HEM (Household Expenditure Method).
5. Debt to Income Ratio
A debt to income ratio is the percentage of a borrower’s gross income that goes towards repaying outstanding loans. It also assists lenders to determine what mortgage payments you could afford to repay. Lenders will look at your income, living expenses and current debts to work out if you can afford to make repayments without hardship. It is known as a serviceability assessment.
6. Type of Employment
Are you PAYG or self-employed? Full time, part time or casual? How long have you been employed in your current role? The type and length of your current employment will determine if you are eligible for a loan depending on the bank/lender. For many of us, obtaining employment records is easy with payslips. However, for the self-employed, providing business financial statements is a little more detailed, but not impossible.
No one wants to be discriminated against, but the reality is the older you are, the more likely you may need to have a mortgage ‘exit strategy’. Since home loans often have 25 to 30 year loan terms and the average age of retirement in Australia is 63 years¹, lenders are generally more cautious with borrowers over the age of 40. Why? Because they may need a plan that shows how they intend to pay off their mortgage before or after retirement.
8. Property Type, Size and Location
Before you go house hunting, contact us first. The type, size and location of a property can at times have an impact on your ability to obtain finance. Some lenders have restrictions on the properties that they are willing to finance and these characteristics can include the property type (eg unit), size and location. It is best to check with us before taking any action. For example, some inner-city studio apartments might seem affordable, but finding finance could be difficult unless you have a large deposit. High-density apartments (inner-city apartments) and serviced apartments all affect how much you can borrow.
We look forward to walking you through the home loan application process to find the most appropriate loan having regard to your individual circumstances when it comes time to apply.
Disclaimer: This article provides general information only and may not reflect the publisher’s opinion. None of the authors, the publisher or their employees are liable for any inaccuracies, errors or omissions in the publication or any change to information in the publication. This publication or any part of it may be reproduced only with the publisher’s prior permission. It was prepared without taking into account your objectives, financial situation or needs. Please consult your financial adviser, broker or accountant before acting on information in this publication.
Source 1 www.bt.com.au/personal/your-finances/retirement/retirement-age.html