Changes to the Credit Contracts and Consumer Finance Act (CCCFA) in late-2021 have seen banks tighten up their lending criteria. In our Buying of the Plans webinar, dashing financial adviser Scott Lewis outlined seven ways you can improve your mortgage-worthiness.
It’s a simple enough equation. The banks will look at what you earn, what you spend... what debts you have, what assets you have salted away. But there are other factors, Scott says, that buyers often overlook. “They also look at whether or not you have kids,” he says. “If so, how many. They have a little calculator where they add in these variables, and it influences how much they’re prepared to lend.” Here are seven things the banks look at when they’re assessing your loan application:
1. Your deposit. Banks typically require a 20% deposit and this determines what LVR (loan to value ratio) the bank will lend against.
2. Your income. Is your income enough to service the mortgage you’re taking on. Note, banks do their sums on a higher rate than in market. At the moment, this an interest rate of around 6-7% — a good 2-3% higher than their current lending rates. They’re not just being mean here: they want to be sure you can meet your repayments if things get tough.
3. Your level of personal debt. From the bank’s perspective, this is all about risk. If you have less than a 20% deposit, then you should aim to have less than $10,000 in short-term debt. Consider reducing your credit card limits to what you really need.
4. Account conduct. Banks will ask to see your bank statements when you apply for a loan. It’s important you can demonstrate that you can live within your means and have what’s called ‘good account conduct’. Too many takeaways; too much obvious pubbing and partying isn’t a great look. Neither is living pay cheque to pay cheque. You want three to six months of relative virtuousness.
5. Loan affordability. Related to #4. You want to demonstrate to a lender that you can afford the new lending. That is, you want to show them that your income is enough to cover your new monthly commitments on top of your regular, everyday expenses. Top Tip: A good way to do this is to work out your future mortgage repayments and put this money aside into a separate savings account (that you don’t touch). You can share this exercise with the bank before you take out the new loan — it gives them some reassurance, you too.
6. Body Corporate fees. If the property you’re buying incurs Body Corporate (BC ) fees (as all apartments do), then you will need to set money aside for your first BC contribution which you pay at settlement. Note: the banks also factor BC fees into loan servicing as a monthly outgoing cost.
7. Avoid “interest-free”. If you’ve bought stuff on interest-free deals, pay them down. Banks take a dim view on people with too much consumer debt — and these will also become harder to repay once you’ve got a mortgage to contend with.
The Sorted website is a fantastic resource that will help you get on top of your finances, no matter where you sit on the tycoonish spectrum. We all know the grim stats on housing affordability: the mountain can seem unclimbable, especially for first-home buyers. But this website — and the many tools and guides it contains — will give you some sense of empowerment.
And then there's Ockham's excellent, indispensible, world-famous-in-Western-Springs free guide to Buying Off the Plans. Download now!