There is no doubt that home loan lenders across Australia have tightened their lending requirements over recent years and borrowers now need to provide more detailed information to obtain a home loan.
For many borrowers this is leading to frustrating delays in applications and approvals. In many cases it is impacting the ability of potential home purchasers to obtain a home loan in the house price bracket they are seeking.
Below are some tips on how to approach your home loan application to give you the best chance of a positive result the first time!
Know what your living expenses are!
Seems like a basic tip, right? Unfortunately many borrowers have no real understanding of what their living costs are and how much is split between fixed and discretionary expenses. All lenders want to understand what your ability to repay a loan is and this is achieved by deducting your ongoing living expenses and loan commitments (current and future) from your ongoing income.
You can download a budget planner from the ‘ Download” page on this blog site .
This budgeting tool that enables you to review all your expenses and calculate how much you need to allow each month, or fortnight, for your ongoing living expenses
It evens breaks down your spending into different categories so that you can assess if changes should be made.
Seek expert lending advice early in the process
When you are starting to consider a potential new loan it is recommended that you seek the advice of an expert, such as a Mortgage Broker or a Bank Lending Manager, as early in the process as you can.
Most Banks and other lenders have reviewed their lending policies and processes over recent years so even experienced borrowers and investors are likely to benefit from this advice early in the process.
Utilising a Mortgage Broker gives you a comparison across a wide range of lenders and their differing policies to assess what lender may suit you best.
Gaining this input can provide a high level review of your financial position to provide guidance of what loans you may be eligible for, and what you need to demonstrate to gain a loan as simply as possible.
This will give you a guide into areas such as:
- Your borrowing capacity
- The fees and costs you could incur
- The level of funds you need to contribute
- The types of loans and indicative interest rates you may be eligible for
- The different loan features and associated products that may suit your requirements,
Review your position
Having discussed your situation with a lending expert will often give you the reality check of where you are in your home buying journey, and gives you the chance to review and adjust your position.
- Do you need to save more?
- Are there discretionary expenses you can cut to improve your borrowing capacity?
- Is it time to review your budget?
- Do you need to adjust your expectations of the type of home you can afford?
Reduce unneeded credit limits
As a Mortgage Broker we often see clients with Credit Card and Store Account limits that are at very high levels and well beyond the day to day requirements of the client.
Why? Because Banks have continually offered higher limits and clients have found the easy acceptance irresistible.
However Credit Card limits can be a real negative on your borrowing capacity as lending policies assume that you will draw down the full limit, and therefore calculate ongoing repayments on that level of debt.
Therefore if you have credit limits beyond your requirements, call your Bank and get the limits reduced before you apply for a loan.
Demonstrate your ability to repay
The best way to show a potential lender that you can afford the ongoing loan repayment is by demonstrating that behaviour in your saving and spending patterns.
If you are saving for a new home, find out what your monthly repayments will be on that debt level and make sure your demonstrated savings are at least that amount each month (less any rent payments). Better still, save a little extra to show that you can manage the extra expenses of owning a home and can weather any interest rate increases. The best way to show this regular savings is to open a separate savings account and each time you are paid, transfer the required amount to your savings account. Most importantly don’t withdraw from this account at all, no matter what!
The same theory applies to borrowers wanting to scale up to a bigger or more expensive home. Find out the loan repayments on the increased debt level and start making that level of repayments each month on your existing home loan.
If you can demonstrate a 3 -6 month history (or even longer) of saving at this level you are well on your way to a loan approval.
Provide up to date information
When it comes time to apply for a loan each lender will require up to date information on your financial position.
This means providing things like Bank Statements, payslips, credit card statements etc that are as close to the application date as possible.
Be prepared that banks will not only want to see statements on your savings account but also on your main transaction account. This is to verify that your ongoing income and expenses are in line with what you have provided in your loan application.
In summary, when you apply for a loan you need to show the lender you can repay the loan. By demonstrating that financial behaviour and providing documentation to support your application, you are assisting the lender in showing them that they are making a responsible lending decision in approving your loan.
If you need any help or advice don’t hesitate to let me know.
Good luck in your home buying journey!