Property prices in Sydney and Melbourne are still down although showing some signs of recovering. This may be the best opportunity for first home buyers to get into the market before house prices start picking up again. However, changes brought about by last year’s Banking Royal Commission enquiry has decreased borrowing capacity and more scrutiny into applicants’ living expenses and ongoing debts.
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 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 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’ statements in your file showing that you have had that 5% deposit prior to entering into the contract.
2. Save more than 5% for the deposit
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), employment and residential history.
If you are able to save more than the 5%, then 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 loan you will be applying for. They want to see that you are able to 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’ time, 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 reduce 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, 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 greatly 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 consistently work overtime.
The Australian Lending Market
Since 1 July 2018, the Comprehensive Credit Reporting is in effect. This means that banks are now required to share 50% of your credit data with credit bureaus. As long as you demonstrate good credit behaviour, this will have a positive effect on your credit score. A good credit behaviour means paying your liabilities such as home loans, car loans and credit cards on time.
The CBA and Bank of Queensland have previously announced that it will remove low documentation loans in its offerings.