Entering the property market is harder than ever thanks to high interest rates and a competitive market. Searches in Australia for ‘how much deposit do I need to buy a house’ have increased 77% in 12 months, while searches for ‘how to get a home loan’ have increased 41% over that same period.
Lead broker at Tiimely Home, a low-interest home loan provider, Barbara Giamalis, who has over 25 years of experience, says there are many common misconceptions when it comes to applying for a home loan. Below, Barbara lists five things you should immediately stop doing if you’re planning to apply for a home loan, as they might impact your chances of getting approved in a tough market.
1) Cancel your credit card. You don’t need it for a credit rating
One of the greatest myths is that you need a credit card to build your credit score to get a home loan.
Barbara said: “If you’ve got credit cards, try and pay them off and cancel them before applying for a loan because it gives you greater borrowing power. It’s a myth that you need a good credit score through a credit card to get approved for a home loan as your credit rating is what it is. If you’re a first-time borrower and never had a loan, your rating won’t be great, it might be around 700, but it’s better than having 800 with two credit cards.
“If you’ve got a $10,000 limit then we base it on the $10,000 limit, whether it’s on a $0 balance or not, so getting rid of credit cards makes a huge difference on servicing. I don’t dislike credit cards, I’ve got one myself, but there’s good and bad credit and it’s bad when you want to borrow the maximum.”
2) Use ‘Buy Now, Pay Later’ schemes such as AfterPay wisely
If an applicant opts to pay off purchases in increments, even interest-free payments, this could signal to some lenders that the applicant may not be financially stable.
Barbara explains: “Most lenders, including us at Tiimely Home, will look at the living expenses of an applicant. If an applicant is using buy now pay later services more than what they have in their savings this could be a red flag and lenders could question whether they can afford a loan.
“Services like Afterpay also reserve the right to report negative activity (missed payments) on your credit history. Meaning if you miss payments this could impact your credit score negatively.”
3) Start saving your mortgage repayment
As well as saving for your deposit, you should start saving the amount you need for your monthly mortgage repayment. This shows lenders that you’re disciplined when it comes to finances.
Barbara said: “One of the best tips for young people, and one they can start doing now, is to start saving for their monthly mortgage payment before applying for a home loan as it shows dedication.
“For example, if they’re borrowing $600,000, their payment will be $3,000 a month. It’s favourable to see that they’re saving $3,000 a month whether that be in rent and/or savings. It shows a dedication and willingness to be able to pay your mortgage instead of ‘I’ll go out for the night and spend $500’ because you can’t do that once you’ve got a mortgage. A three-month saving history is a great way to prove this.”
There are many calculators online, under loan repayments, that can help you figure out what your mortgage payments would be.
4) Gambling and cash withdrawals are red flags
Gambling, even X Lotto, is a big red flag as they are non-discretionary items and will be taken into account by lenders. Barbara adds: “If a person is spending $200 a week on gambling, that comes into their living expenses, so on top of their basic living expenses, you’ve got an extra $800 a month that they’re gambling.
“Cash withdrawals are another red flag because you don’t know where that money’s gone. If you’re going to an ATM regularly and taking out $1,000 a month, or $1,000 a week, which we often see, you can’t track where that money has gone. It’s better to have purchases that are traceable.
“Large one-off purchases such as a couch, a new hot water service or a motor vehicle, won’t be taken into an applicant’s living expenses as it’s a one-off meaning the banks will look at that as a discretionary cost.”
5) Your HECS debt can impact your borrowing power
It may seem obvious to pay off as much of your debt as possible before applying for a home loan but people often don’t factor in higher education debt.
Barbara adds: “Higher Education Loan Program (HELP) impacts your borrowing power. HELP debt is a liability that you need to declare in the home loan application process. The impact of HECS on your ability to get a home loan may vary depending on your income level and the amount of your HECS debt. Seeking financial advice before deciding to pay off your debt is crucial.”
With the current rates increases, borrowing isn’t an option for many. Barbara adds: “The number one question I’m asked is ‘How much can I borrow?’.
“Mortgage brokers have a program where we can look at the borrowing power based on a person’s current financial situation across various banks. We can advise them what it would be but this can vary between lenders. However, it’s important not to only go with a lender based on how much they can lend. You must ensure you’re comfortable paying back the loan based on your personal financial circumstances.”
She adds: “With the current rate increases, we find that borrowing just isn’t there at the moment for a lot of clients. How the banks look at it is, say the rate is 6.14%, they factor in a 3% buffer on that in case the rates go up, so you’re looking at being able to service a 9.14% compared to a 6.14% rate.
“There’s a huge difference between what people can borrow now and salaries haven’t changed in comparison to rates. By enacting some of these small tips above, it might just be the difference between getting approved or denied for a home loan.”
Tiimely Home offers a better way to get the right home loan, for you. One simple application, in one central place. They use our own tech to make the process faster, and their human experts to make your experience better. Plus, they provide simple, clear information to put you in control of your home loan journey.
You should always get your own independent financial advice.
