Buying a home today is difficult for first home buyers. With the soaring price of properties in the last 2 years and rising interest rates, getting a home loan is much harder.
Now more than ever is it important for those wishing to purchase their first home to speak to a broker a year ahead to prepare them for the tumultuous journey ahead in these uncertain times.
1. The importance of genuine savings
What banks want to see is that you are able to save. The rule of thumb is 5% genuine savings, meaning 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.
2. Save more than 5% for the deposit
Having just a 5% deposit means more scrutiny into your living expenses, ongoing debts (credit cards and personal loans), your employment, and your residential history. Lending at 95% of the property’s purchase price is already a risk for lenders so they want to make sure that 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%, then you will have more lenders to choose from and more competitive interest rates.
If you are a mature age borrower, a bigger deposit means a lower loan, lower loan repayments and better chance of getting a loan approval. If you’re buying land and building a house, you have more lender options. This is because most banks will lend up to 90% loan to value ratio for construction loans.
We have a few lenders who do not require proof of genuine savings if you have a 10% deposit. This means that if your deposit comes from the sale of a motor vehicle, your tax refund or a gift from a family member, these banks will allow you to apply for a loan even if the deposit is not genuinely saved.
3. Show capacity to repay
Let’s 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 of paying 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.
4. Spend less in the 3 months before you apply for a loan
Mature-age borrowers have a lot of disposable income. If you are one of those in their 50s who enjoy eating out, going to movies, and shopping and are looking at applying for a loan in 3 to 6 months’ time, it’s time for you to gradually reduce these activities or stop them altogether. There is further scrutiny into applicants’ living expenses. Expenses such as eating out, clothing, recreation, insurance, 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 itemize these expenses and present them to the banks. 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.
5. What to do with credit cards and personal loans?
If possible, reduce the credit card limits. For credit cards that you don’t use at all, best to close them down. I can never emphasize the importance of not taking 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. With 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 a 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.
6. Keep your bank statements for transaction accounts and ongoing liabilities in order
It is important that your credit card statements, personal loans, and all statements relating to ongoing liabilities are in order. By this I mean there are no late payment fees or defaults. Keep at least 6 months bank statements clean.
7. 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 receive bonuses and commissions, keep the letters from employers relating to your bonus incomes. For salespeople 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 to those who consistently work overtime.