By Marcus Roberts
Before you set off for a pre-approval from a lender for that all-exciting (and somewhat stressful) home loan, you need to get your bank accounts in order to give yourself the best chance of having your home loan approved.
Think of applying for a home loan the same way you would approach a job interview – you need to tidy yourself/bank accounts up and present the best version of yourself/bank accounts you can.
As a mortgage broker I have seen so many clients that I wish I had met six to 12 months prior, so I could have helped them clean up their accounts so they present their finances in the best version of themselves to the banks.
The following are my top tips to help you clean up your accounts in preparation for applying for a home loan.
Cancel your credit cards
Whilst paying your card balance off every month is sound money management, most lenders see a credit limit rather than a balance as the amount you have easy access to. If you’ve never used a card with a $10,000 limit, the lender will still use the $10,000 rather than $0 in their assumptions. If you’re looking to maximise your borrowing capacity, look to close or reduce these limits as much as you can and get letters or evidence from the card provider.
No more Afterpay
Whilst having a ‘buy now pay later’ liability such as Afterpay or ZipPay can be handy for purchases, they do need to be declared. If you’re not using them, decide whether you’re comfortable in cancelling the facilities.
Also, if you have a few buy now pay later transactions coming out of your bank account each month, these can be viewed by lenders as expenses, which will affect your borrowing ability. Whilst not explicitly stated by most lenders, the opinion can sometimes be that using this type of credit rather than cash for these types of purchases can suggest a borrower that might not be perfect at managing money.
This element of presenting your accounts in the best version they can be goes without saying. However, as we all know saving money is not easy and takes discipline and work.
One task I recommend you undertake is to list down all of your monthly subscriptions that automatically come out of your bank account each month and then cancel or cut back all the ones that aren’t aligned with applying for your home loan. Do you really need that Spotify Premium account and do you really need both Stan and Netflix for these few months? Reducing your monthly expenses as much as possible will help you immensely in obtaining that home loan.
Saving a deposit vs Lenders Mortgage Insurance
So how much deposit should you be aiming for? Obviously, the more money you save for your deposit, the less money you need to borrow from the bank and in an ideal situation you may be wishing to save at least 20% deposit so you don’t have to pay for Lenders Mortgage Insurance (LMI). This can be a difficult task, especially for first home buyers. For example, if you are looking at purchasing a $650,000 home, you’re looking at needing a minimum $130,000 deposit, plus upfront costs.
What is LMI? Lenders Mortgage Insurance (LMI) is a one-off, generally non-refundable, non-transferrable premium that is added to your home loan. It is calculated based on the size of your deposit and how much you borrow. The more you contribute to the purchase price of your property, the lower the cost will be. LMI is there to provide comfort to the lender, against any loss they may incur if you are unable to repay your loan. If you default on your obligations, the bank may sell the property, and if they can’t repay the outstanding loan, LMI may be utilised.
The cost of LMI varies as it scalable to the size of your home loan and also how much deposit you have. The higher the deposit and the lower the home loan, the less your LMI will be. If you would like to avoid LMI altogether, you will need to have a minimum 20% deposit.
If you are a first home buyer, check if you qualify for the Australian Government’s First Home Loan Deposit Scheme, which will save you paying LMI. The First Home Loan Deposit Scheme (FHLDS) is an Australian Government initiative to support eligible first home buyers to build or purchase a new home sooner.
Under the Scheme, eligible first home buyers can purchase or build a new home with a deposit of as little as 5% (lenders criteria apply). This is because the National Housing Finance and Investment Corporation (who administer the scheme) guarantees to a participating lender up to 15% of the value of the property purchased that is financed by an eligible first home buyer’s home loan.
LMI should not be viewed as a total negative though, paying LMI generally allows you to enter the property market sooner and the cost of LMI will be more than recouped when your property increases in value. Also, by having LMI, you won’t need to rely on a guarantor to supply additional security to secure your home loan.
Speak to a professional
My final piece of advice is to speak with a mortgage broker at the start of your journey – don’t wait six to 12 months down the track of your savings plan. A mortgage broker has the experience and expertise to guide you on your savings plan and assist you in developing good saving and spending habits to help you save that deposit!
–Marcus Roberts is a mortgage broker and property finance expert at Brighter Finance.