Australia’s property market performed impressively during the pandemic. Most capital cities saw median home prices rise to record highs by the 4th quarter of 2020. Record low-interest rates and first home buyer incentives like the First Home Loan Deposit Scheme have driven strong demand. Prices keep going up, and it’s becoming increasingly difficult for first home buyers to get into the property market.
Now more than ever, it’s important for those wishing to purchase a home to speak to a broker to prepare them for the tumultuous journey ahead.
Here are some tips on getting your loan approved:
1. The importance of genuine savings
What banks want to see is that you can save. The rule of thumb is 5% genuine savings, meaning saving at least 5% of the property’s purchase price. That 5% savings have to be sitting in your account for at least three months.
Before putting down that 5% deposit for a block of land and another 5% to the builder, keep the three months’ savings statements in your file showing that you have had that 5% deposit prior to entering into the contract.
The 5% genuine savings deposit is especially important if you are a first home buyer and borrowing the 95% under the First Home Loan Deposit Scheme. Lenders participating in the scheme don’t want to see lump sum amounts deposited into the borrower’s accounts. Proceeds from the sale of a car, tax refunds, and instant gifts from parents are just examples of lump-sum deposits.
2. Save more than 5% for the deposit
Saving just 5% and borrowing 95% of the property’s purchase price 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 expenses, ongoing debts (credit cards and personal loans), employment, and residential history.
If you can save more than 5%, you will have more lenders to choose from and more competitive interest rates.
3. Show the 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 90% loan you will be applying for. They want to know that you can afford the loan.
4. Spend less in the three months before you apply for a loan
If you are one of those first home buyers who enjoy eating out, going to movies, and shopping and are looking at applying for a loan in 3 to 6 months, it’s time for you to gradually reduce these activities or stop them altogether.
High discretionary spending can reduce your borrowing capacity. Having the discipline to minimise these expenses will also help 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, it’s best to close them down. I can never emphasise 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 significantly reduce your borrowing capacity.
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 six 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 two years. 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 two years ready as proof that you are consistently receiving the same or more commissions yearly. The same rule applies to those who constantly work overtime.
If you are working casual, lenders want to see at least six months of employment with your current employer. If employed on contract, lenders want to see 12 months of employment history. If you are self-employed, you should have registered your ABN for a minimum of 2 years.
House prices are rising, but there’s still plenty of opportunities for Australians to buy their dream home rather than rent it. The simple reason for this is the record low rates on offer, with many mortgage rates still coming with a 2 in front of them.
This article was first published on 4 September 2019.
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