Fletcher Rowe | August 21 2017
The past 12 months of mortgage lending policy have really shook up the industry. Taking out a new home loan presents unique and ever-changing challenges compared to what once was almost a “revolving door” lending policy.
These policy changes were well-intentioned, posited to be steadying erratic and unsustainable housing markets by disincentivising purchasers who were taking advantage of record low interest rates and record high housing growth.
It has, however, opened the door for first home buyers, as well as highlighted the need for a strong, well constructed loan application.
We are often asked by prospective borrowers how to make their applications look better than the Tom, Dick or Harry who are next in line for assessment, and what it is that these assessors are looking for to justify a new loan.
While some occupations are looked at more favourably than others, there are rules that everyone can follow to make themselves stand out.
There are many factors banks will look at, but generally, these few tips will go a long way to securing that new loan.
Borrow within your means.
Your mortgage shouldn’t feel burdensome, especially in the current climate of low and competitive home loan rates. What banks are paying particular attention to are accurate representations of living expenses to get a fairer gauge on where applicants are spending their money. Putting a budget in place for groceries, entertainment etc. (and sticking to it!) can go a long way to showing the bank you are responsible with your money and can adapt if rates do move up. Your bank wants to know that potential changes to your living expenses (increased school fees, staying home with young children) that are part and parcel with life are not going to stir up your position and impact your ability to make repayments. Not overstretching yourself will ensure you’re not stressing about keeping a roof over your head as well.
Pay down the balance of your loan when you can.
A lot of what has happened in home loan world has revolved around repayment methods and their sustainability. Traditionally, investors will pay the interest portion on their loan, a strategy that has worked well for quite some time as property growth rates (often 10% plus) have comfortably exceeded home loan interest rates (4-5%). Borrowers would hold on to these investments, and then sell them as they neared retirement to repay the loan and net a pretty profit. Banks are growing wary that a slowing market may mean the investment benefit is decreasing. If rates go up while growth slows or goes backwards, the borrower may not be sufficiently protected by the sale of the property.
We are seeing borrowers who pay down the principle component on their loan rewarded with not only lower interest rates, but favourable credit assessment. Your lender wants you to increase equity through reducing your debts over time, not just relying on property growth. If you can afford to pay principle and interest on your home, you should. Putting spare cash against your mortgage reduces the interest you pay, and it can be drawn on when it’s required, according to Joel Robbie from Nod.
Make your repayments on time.
A pet peeve of ours are clients who consistently pay bills, loans and credit cards a few days late, despite having more than enough funds available on their due dates. A couple of late payments won’t significantly impact your credit score, however habitual mismanagement will. All of your expenses have a due date, and dealing with your expenses prior to these dates will hold your application in good stead. Know when your repayments are due, and set up direct debits for these bills, especially if you’re someone who forgets to manually pay their bills on time. If you know you’re going to miss a deadline, call your bank or telco and let them know you’ll need a bit more time to pay or set up a repayment schedule. This is perfectly OK, and will not be recorded against your credit score.
Seek out expert advise.
A mortgage broker will understand the ins and outs of banks’ lending policies, and know what to highlight in your application to make yours look stronger. They can also give far more accurate assessments of how much you can borrow and the overall costs to own a property. A good broker will ensure your best interests are maintained over the life of your loan, not just through the application stage. This could save you a substantial amount over the life of your loan.
IFA Mortgages & Finance are a free mortgage broker service. Discover what it means to talk to an experienced lending expert who will develop a buying strategy that is tailored to you.