When it comes to securing your dream home, there’s one group you really need to impress with your home loan application – lenders. Whether it’s a bank or another financial institution, their “yay” or “nay” is pretty much the deciding factor in whether you’ll be turning the key in your new front door any time soon.
While you might have heard stories of lenders practically throwing cash at borrowers in an attempt to secure them as a customer for life, things have changed post-Royal Commission. Now, lenders scrutinise applications to a whole new level – think CSI detectives shining a blue light around a dodgy hotel room.
So when it’s time for them to direct their blue light at your home loan application, how do you make sure they’re not going to come across any suspicious stains and walk out in disgust? Here are our top tips for improving your chances of getting approved for a home loan.
Save as much as you can
When you’re starting out on Operation Buy a House, it can be hard to know exactly how much you need to have in your account before you start shopping around – but it may be more than you think, so it pays to start saving now. Like, right now.
In recent months, there’s been a lot of media attention on the government’s new First Home Loan Deposit Scheme, which enables first-home buyers to apply for a mortgage with a deposit of as little as 5%. While it might be tempting to head straight to your broker as soon as you hit this number, we’d recommend waiting until you’re closer to the 20% mark.
Why 20%? Because, while some lenders will approve a mortgage with a smaller deposit than this, these loans will also attract lender’s mortgage insurance (LMI). This is calculated based on the size of your loan and deposit amount, and can run into the tens of thousands of dollars. Let’s face it, no one wants even more expenses when you’re staring down the barrel of 30 years of mortgage repayments.
So what kind of numbers are we talking for a 20% deposit? Well, if you’re looking at a house in Western Sydney with a $750,000 price tag, that means you’ll need about $150,000 in the bank before you start talking to lenders.
Now you know what your goal is, it’s a good idea to open a high interest savings account to help your money grow faster. Although just a word to the wise: that growth may be at a snail’s pace in the immediate future given interest rates are at an all-time low.
Pay down your debts
OK, OK, we know we’ve just told you to start hoarding your money like Ken and Marg from down the road stockpiling toilet paper, but there is one scenario in which you should spend it first – if you have debts. When you’re about to take on the biggest debt of them all, a home loan, it’s important that you pay down any others as soon as possible, no matter how big or small.
Yep, now’s the time to cut up those credit cards. Ideally you won’t have one at all, but if you really can’t do without the security of an emergency card for ACTUAL emergencies (like an overseas family member falling ill) not PRETEND emergencies (like The Iconic having a 24-hour sale), then make sure it has no more than $5000 on it. And that you pay off the balance as soon as you can.
Get familiar with your credit history
Your credit history is a bit like your appendix – you often don’t give it a second thought until it really starts to cause dramas. But it’s important to keep it in mind now, as your behaviours today may come back to bite when it’s time to submit that home loan application.
What does that mean in practice? Basically, make sure you’re paying all your bills on time – your rent, mobile phone, health insurance… everything. This has become more important than ever since positive credit reporting became mandatory in Australia in 2018 and companies started reporting full credit histories, not just the odd stuff-up (like that time you paid your January phone bill… in April).
Also called comprehensive credit reporting (CCR), this means that your credit history is now more like a list of transactions from the last two years, showing every debt or liability in your name and whether they were paid on time. This enables lenders to form a more complete and transparent view of applicants’ credit histories. While it might sound scary, it can also work in your favour – by showing lenders that you have a pattern of good behaviour paying everything on time, they’d be CRAZY not to approve your home loan!
Tidy up your living expenses
At least three months before you plan to pay a visit to your mortgage broker, have a good, hard look at your living expenses and start whipping them into shape. Do I really need Netflix AND Stan? Do I need to be ordering UberEats every night or should I actually start cooking for myself? Should I be buying work lunches when I could just chuck a bit of ham between two pieces of bread? Can I cut down on visits to the pub? They might seem like minor costs in isolation, but it’s all the little things that can really add up.
Need more motivation to finally delete Uber from your phone once and for all? The biggest focus after the Royal Commission has been on people’s living expenses – and yes, lenders will comb through every single transaction listing. Which reminds us, now is probably a good time to stop paying your mate back using transaction descriptions like “Good vibez 69”. Unfortunately, potential lenders probably won’t find it as funny as you did at the time.
Ditch Afterpay and ZipPay
Still on the topic of spending, now is also the time to break up with the ‘buy now, pay later’ services like Afterpay and ZipPay. Sure, they might seem like a preferable option to a mountain of credit card debt, but these types of payment methods have their own pitfalls.
For instance, while they might not charge interest in a traditional sense, you’ll get hit with late fees if you miss a payment. According to Choice, one in six users can’t make payments on time – which, if you’re one of them, is not great news for your credit history.
Lenders will also look to your repayment history as an indication of whether you’ll be able to meet the (much bigger) repayments of your mortgage. If you’re relying on Afterpay to fund smaller purchases, it will ring alarm bells about your ability to take on the larger financial commitment of a home loan.
At the end of the day, these services can get you into a cycle of spending more than you earn – and remember we’re all about saving now!
Go “Barefoot”
When you’ve committed to something as big as saving for your very own home, it can be useful to have a helping hand to guide you through the process. Scott Pape’s book The Barefoot Investor is a sensible, easy-to-follow guide to building wealth, with a focus on setting up good habits to help you save a 20% deposit for your first home. Written for the average Joe, you don’t need an economics degree to follow its basic principles. The best part? Following Pape’s sound advice won’t just help get you into your dream home, it will also set you up for a financially secure future.
The material on this website is of the nature of general comment only, and does not represent professional advice. It is not intended to provide specific guidance for particular circumstances, and it should not be relied on as the basis for any decision to take action or not take action on any matter which it covers. Readers should obtain professional advice where appropriate, before making any such decision. To the maximum extent permitted by law, the author and publisher disclaim all responsibility and liability to any person, arising directly or indirectly from any person taking or not taking action based on the information in this publication.