For most people, buying a home or investment property is only possible by taking out a home or investment loan. If this is you, you need to know how the game has changed and what it takes to be approved.
I compiled a list of 8 must do’s BEFORE you apply for a mortgage. Take the time to understand these as it will help you be a stronger applicant.
1. Ditch the plastic (or significantly reduce your credit limit/s):
Credit cards work against you more than ever before. Refer to a blog I wrote on this very topic which explains it all.
2. Pay off all your unsecured loans first (e.g. personal loans, car loans):
These loan types are usually short term (5 to 7 years) and therefore the amortised repayments are high, which reduces (or squashes) your borrowing power.
3. Go for P&I repayments:
P&I home loans work in your favour as the amortised repayments are spread over the full term of the loan (usually 30 years). IO loans are usually amortised over a 25 year loan term, which is the remaining term once you come off the IO period (which is usually 5 years). A longer amortised repayment term increases your borrowing power. Further, P&I rates are lower than IO rates nowadays, which also works in favour of your borrowing capacity.
4. Take control of your living expenses:
This has been a hot topic for the past 12 months and your loan application is being scrutinised like never before. Lenders no longer use a generic amount as your living expenses, instead they ask you to document YOUR own living expenses. These are verified against your bank statements. The higher your living expenses (in other words your lifestyle), the lower your borrowing power. You should make a concentrated effort at least 3 to 4 months prior to applying for a home loan to trim your living expenses in order to improve your borrowing power.
5. Refinance any existing home or investment loans first:
In most cases refinancing re-sets the loan term back to 30 years, which improves your borrowing power as the amortised repayment term is extended to a longer term. Refinancing is also an opportune time to consider switching to P&I repayments and achieve a sharper home loan rate, both benefit you by increasing your borrowing capacity.
6. Keep your credit history clean as a whistle:
A blemish on your credit file will work against you… period..!! Make repayments on (or before) the due date for any existing credit you have. Pay your bills on time, every time. Also, try not to apply for a home or investment loan here, there and everywhere, as your credit file is triggered each time you apply for finance. This also applies for pre-approvals.
7. Choose a property type which your bank (or lender) likes:
Not all properties are acceptable to your bank or lender. Rather than fight the system, choose a property that is acceptable security to the majority of lenders. This is also a wise strategy for when it comes to selling your property in the future as you’ll have a wider pool of buyers improving your chances of achieving a higher price. Properties such as studio apartments, inner city apartments, student accommodation, apartments with living size <50 sqm, rural properties, stratum titled apartments, and commercially zoned (residential) properties are either unacceptable or have a heap of limitations when it comes to finance.
8. If you’re self-employed, pay the tax:
I have been in this game long enough to say with confidence that many self-employed mortgage customers have a hard time when applying for mortgage finance. There are many legal structures available to (legally) minimise your tax (e.g. trusts). The issue is that you can’t have it both ways. If your business profit is low, your borrowing capacity will also be low. If you want to increase your borrowing power, then you need to show a healthy set of numbers and just pay the tax.
Borrowing money is necessary for many (if not most) people. For some, a home loan is necessary in order to buy their desired home. For others it may be part of a wealth creation strategy.
Just be smart about it, and only take on debt which you know you have the financial capacity to service now and into the future.
In closing, the best advice I can give you is to use a reputable mortgage broker for your next home or investment loan. Hopefully a broker who is recommended to you by someone you trust. Almost 60% of Aussies are now using the services of a mortgage broker when applying for a home loan, which speaks volume (statistics published by the MFAA).
I am confident when I say that some (if not all) of the above strategies will increase your borrowing power when it comes to applying for your next home or investment loan. Good luck..!!
Disclaimer: The Information is general in nature and does not take into account your particular investment objectives or financial situation. It does not constitute, and should not be relied on as, financial, investment or tax advice or recommendations (expressed or implied) and is not an invitation to take up securities or other financial products or services. No decision should be made on the basis of the information without first seeking expert financial or taxation advice. Your full financial needs and requirements would need to be assessed prior to any offer or acceptance of a loan product. Subject to lenders terms and conditions, fees and charges and eligibility criteria apply.