Stop UberEats, Netflix and Amazon online shopping
Spend less in the 3 to 6 months before you apply for a loan. If you are one of those first home buyers who enjoy eating out, going to movies and online shopping and are looking at applying for a loan in 3 to 6 months’ time, its time for you to gradually reduce these activities or stop them altogether.
Banks currently look at grocery bills, medical expenses and utility bills to assess a borrower’s household expenses and their ability to meet their repayments. Expenses such as eating out, clothing, recreation, insurances and HECS or HELP FEE debts are now factored in and lenders will see these when they go through your bank statements. Finance brokers will have to itemise these expenses and present them to the banks. A high discretionary spending can reduce your borrowing capacity. Having the discipline to reduce these expenses will also help you once you have the loan and start paying the mortgage.
Avoid interest free payment providers
These fintech companies offer a way to purchase an item and pay it off in instalments. Using these facilities can affect your credit score and this impacts your ability to take out a home loan. Best to pay for things you like in cash.
Avoid short-term lenders or payday loan lenders. Aside from being slugged with a high interest rate, your ability to borrow will also get affected.
Genuine savings and saving more than the 5% deposit
Banks want to see is that you are able to save. This means saving at least 5% of the purchase price of the property. That 5% savings has to be sitting in your account for at least 3 months. Before putting down that 5% deposit for a block of land and another 5% to the builder, keep the 3 months statements in your file showing that you have had that 5% deposit prior to entering into the contract. Banks will surely ask for this.
Saving just 5% and borrowing 95% of the purchase price of the property will limit you with the number of lenders you can go to. There are a few but expect high interest rates above 4% and more scrutiny into your living expense, ongoing debts (credit cards and personal loans), your employment and residential history. Lending at 95% of the property’s purchase price is already a risk for lenders so they want to make sure all other risk factors such as income, employment and credit history are kept to a minimum. If you are able to save more than the 5% e.g. 10% deposit, then you will have more lenders to choose from and more competitive interest rates.
Show your ability to repay
Lets say you are living with your parents and your mum and dad provide you with a 10% deposit as a gift. Banks want to see that you have the capacity to pay the monthly repayment for the loan you will be applying for. As an example, a first home buyer couple would like to purchase an established home for $500,000. They have the 10% deposit of $50,000 gifted by mum and dad. They still have to show that they are capable to pay the monthly repayment for the mortgage of $450,000. The repayment for a $450,000 loan at 4% is around $2,184 monthly. The first home buyer couple will need to show that they are able to save $2,184 monthly in their savings account for at least 3 months prior to applying for a loan. Banks want to see that you are able to afford the loan.
Don’t take out new credit facilities
If possible, reduce the credit card limits. For credit cards that you don’t use at all, best to close them down. Do not take out personal loans, car loans or credit card debts if you have plans of purchasing a home. These credit facilities will greatly reduce your borrowing capacity. At the way lenders are changing their policies and calculators, your borrowing capacity today may not be the same 6 months down the track when you apply for the home loan. To avoid unnecessary risks in your loan application especially if you already have made a deposit for the block of land a year ago, don’t take out new credit facilities.
Keep your bank statements for transaction accounts and ongoing liabilities in order
It is important that your credit card statements, personal loans and and all statements relating to ongoing liabilities are in order. By this I mean there are no late payment fees dishonour fees or defaults. Keep at least 6 months bank statements clean.
Employment and income stability
Don’t switch employers when you are applying for a loan. Banks require that you have been with your employer for at least 2 years. This shows employment stability. If less than that, you have to prove that your new job is similar to the previous role you had or is in a similar industry. If you are one of those who consistently receives bonuses and commissions, keep the letters from employers relating to your bonus incomes. For sales people receiving commissions, have your group certificates for 2 years ready as proof that you are consistently receiving the same or more commissions yearly. The same rule applies for those who consistently work overtime.
Check your credit rating
The Turnbull government on the 1st of July 2018 introduced the mandatory comprehensive credit reporting (CCR). The regime will give lenders greater transparency on a borrower’s true credit position and their ability to pay a loan, thus reducing a lender’s exposure to defaults. For borrowers, CCR will lead to a better deal on mortgages, personal and business loan. According to Scott Morrison, “if you have a good credit history – you’re paying down your mortgage, you haven’t missed a payment on your car loan and your credit cards are under control – you will be able to demand a better deal on your interest rates or shop around, armed with your data.”