How do I maximise my chances of getting a home loan?
In the current climate it can be tough finding the right bank to make a mortgage application with. Amongst other challenges, the financial sector can be a confusing minefield due to banks’ constantly changing credit policies regarding lending money to applicants. Many people have a hard luck story from their experiences in dealing with banks and can be jaded by the experience.
We live in a busy world and it comes as no surprise to find that when it comes to applying for bank finance, many people are ill-prepared to do so – they have often had little or no time to research an appropriate lender for their circumstances and what can tend to happen is they simply make a finance request to their usual bank or even a random lender – and then hope for the best.
I am passionate about helping people achieve their dream of home ownership, which relies heavily upon obtaining bank finance, and it prompted me to prepare this paper, which I hope uncovers for you what banks really look for when assessing a home/investment loan application, the types of finance available, the fact that it is imperative to prepare yourself prior to applying for finance and what to do if you don’t currently meet the standard criteria.
How do I prepare to apply for bank finance?
As a minimum, having access to a good Finance/Mortgage Broker is imperative to giving you the best chance of putting yourself in the right shape to apply for finance.
The Mortgage & Finance Broking industry has seen some big changes for the better in the recent years. ASIC has legislated that Brokers need to hold an Australian Credit License and the MFAA (Mortgage & Finance Association of Australia) now require Mortgage & Finance Brokers to hold a Diploma in Finance Broking. These changes have seen 25% of Brokers leave the industry in the past 18 months which we hope has resulted in the industry retaining more of those brokers who operate with a professional approach.
Most people typically relate to Mortgage Brokers as an aid to shop around for the best rate on their home loan. In addition to getting you a good deal, 2 key areas where a Broker can be of assistance is firstly making an assessment of your situation prior to the lender formally assessing your application and secondly, connecting you to the right lender for your situation, on competitive terms.
Talk to your friends, family and your Accountant to find a good Finance/Mortgage Broker…who should belong to a professional body such as MFAA or FBAA.
What do banks look for when assessing a personal finance request?
The credit assessment the bank undertakes when assessing a home/investment loan application is reasonably complex. All of the major banks ‘credit score’ your application using various parameters regarding your personal situation. Some of the non bank lenders do not utilise a credit scoring process. The assessment process is broadly based around the following parameters:
- Your credit history – your personal credit file, as well as conduct on any current lending facilities, including credit cards. It is a common misconception that it is better to have zero other liabilities when applying for a mortgage. Of course having the maximum possible amount of expendable income to meet mortgage repayments is a positive aspect, however it may go in your favour to have a credit card or car loan as long as you can display an unblemished repayment history. You can access your credit file via the following link in order to view upfront what information is held on you which the bank will get to see when you apply for credit: www.mycreditfile.com.au
- Bank valuation – the bank will send an independent valuer to the property for their own assessment of its worth. There are also various risk profiles the property needs to pass such as location and neighbourhood, environmental issues and market volatility.
- Employment stability – how long you have been in your current employment for. Stability is key here so changing job every few months is not going to be looked upon favourably. If you have held a role with the same company for many years it will go in your favour. Don’t be overly concerned if you are thinking of applying for a home loan and have recently changed jobs – as long as you can display industry experience then it may be possible to find a lender to suit your needs. For self employed applicants you usually need to have been self employed for at least 2 years, however as with most policies there are exceptions to this.
- Whether you are a new client to the lender or an existing client. If you hold a credit card or car loan with a lender and have perfect repayment history you may find this can go in your favour when applying for a mortgage with that lender. However, for me, the goal is always to find a lender who has a lending policy that best suits both your personal situation and the type of property you are buying.
- Self employed applicants – your business usually needs to be able to show a net profit as well as consistency of income over at least 2 years. Also ATO obligations – banks will ask to see your latest Tax Portal statement to evidence that your obligations such as GST are up to date
- Ability to service (repay) the debt. All lenders will make a calculation based upon your family situation, (married or unmarried, number of dependant children etc) using your income and expenditure, to ensure that the loan will not over extend you. A good Finance/Mortgage Broker would usually do this calculation at the very outset to determine your borrowing capacity. It is imperative to disclose all existing liabilities such as personal loans, car loans, HECS, child maintenance payments, credit cards and store cards on a mortgage application. If you neglect to do so that in itself can cause your application to be declined.
- Type of property securing the loan – different lenders have differing views on various types of property – for example whether that’s an acreage, a small unit less than 50m2 in size, a rural property, a serviced apartment, a ‘high density’ unit in an inner city area or Company title property, a good Broker will usually know which lenders can best suit your needs
- Personal Statement of Position – this details your assets and liabilities. A bank will gain comfort from a sound net asset position, that is, the value of your assets minus the amount of your liabilities (such as home loans, car loans, credit cards etc etc)
What types of loans are available?
- Home/Investment loan – home/investment loans are available in your personal name, a company name or that of a trust.
- Line of credit – the lender can set up a facility which allows you to access available funds via internet or chequebook at any time you require them, with interest only becoming payable when you draw the funds and with interest capitalization allowed. This can appeal for investors or those wanting to use funds in the future without making a credit application each time.
- Loan terms – are usually from 5 to 30 years and usually loan term would end by age 75
- Type of repayment – you can make principal and interest repayments, ie, pay the loan down, or have an interest only repayment option for the first 5 or 10 years
- Variable or fixed interest – you can opt for a variable or fixed rate depending upon your preference for certainty of repayment, or a mix of fixed and variable.
- Redraw – most variable rate loans these days have a redraw facility meaning you can pay above the minimum repayment and draw it back in times of need. If you do get ahead it could enable you to take a ‘repayment holiday’ using available redraw to make repayments if you need to.
- Offset – also available with most lenders is an ‘offset’ facility – this works whereby the lender calculates interest on a daily basis with any capital amounts you have available in your offset account offsetting the balance of the mortgage, which may help reduce the amount of interest payable over the term of the loan.
Do I need a deposit?
- First home buyers typically need to have saved at least 5% of the purchase price of the property and have held these ‘genuine savings’ in a bank account for at least 3 months prior to loan application. There are exceptions to this, some lenders are happy to consider a ‘non genuine savings’ application if you have been gifted your deposit and others allow a ‘parental guarantee’ whereby a family member can offer their home, investment property or term deposit as security for a limited guarantee, enabling the borrower to borrow 100% plus costs. It is a requirement that legal advice is sought by the guarantor in order they fully understand the implications of offering a guarantee.
What other costs in addition to my deposit should I be aware of?
- Stamp duty & mortgage registration – these are Government fees and in particular the stamp duty on the property can be significant. Stamp duty in NSW for a property purchased for $500,000 is currently $17,990 (as at Oct 2013)
- Lenders Mortgage Insurance (LMI) – this is a fee typically applicable when you borrow more than 80% of the value of the property. LMI should NOT be confused with mortgage protection insurance which covers the borrower against sickness or accident. LMI is an insurance that covers lenders against their borrowers defaulting on the loan. Indicative LMI cost on a property purchased for $500,000 when placing a 10% deposit is $7,920 (as at Oct 2013) Some lenders allow you to also borrow the LMI premium
- Conveyancing and pest inspection – typically $1,500-2,500 depending upon the amount of work involved
Self-Managed Super (SMSF) Loans:
SMSF loans are a growing in volume each year as an increasing number of SMSF’s are established in Australia. You can purchase residential or commercial property within an SMSF structure and borrow within the structure to assist with the purchase. Many small business owners find this particularly appealing to purchase the premises they operate from with their Superfund.
This is a specialized type of lending which requires a banker or finance broker who is experienced at this style of lending to ensure a streamlined process, not to mention advice from your Financial Planner in the first instance to make sure this is the right investment choice for you.
What documents will I need to provide to support a home loan application?
- Completed home loan application
- Latest 2 computerized payslips for PAYG applicants (no more than 6 weeks old) OR letter from employer detailing your role, gross annual salary and start date along with last 3 months bank statements showing salary credit
- Last 2 years personal & company tax returns – up to date and lodged to ATO – for self employed
- 100 points ID – copy of passport and licence
- Evidence of all assets and liabilities stated on the application, such as copy of car rego paper, last super statement, home and contents insurance certificate, last savings statement, last credit card statement etc.
For refinances, additionally:
- Last 6 months statements for any home loans being refinanced (no more than 6 weeks old)
- Latest rates notice for the property/s
For financing a property purchase in personal or company name, additionally:
- Copy of front page of the contract for sale signed by vendor
- Copy of transfer
For financing a property purchase with a Self managed Superfund, (SMSF) additionally:
- Statement of advice from a licensed financial planner
- Copy of executed SMSF and Bare Trust Deed
What if I don’t meet the criteria presently?
It is not uncommon for people to find they dont fit with their banks’ lending guidelines however knowledge of which lenders’ have a policy that is most suited to their situation is extremely valuable. If you don’t meet your banks’ criteria presently, you may consider one or more of the following:
- Talk to your Finance Broker prior to applying directly with a bank. Any areas that need improvement can be discussed and addressed prior to a full assessment by the bank. A full assessment by the bank will be noted on your credit file and if the request is not successful, if you subsequently apply with other lenders they will most likely ask what the outcome of the previous loan application was
- Banks are on a constant merry go round of chasing market share. Your Broker will most likely be aware of which banks are chasing market share and of their appetite to lend to certain applicants or which bank has eased up on their credit parameters at any given time.
- It may be that you need to defer applying for finance for 6 – 12 months or any suitable period of time to enable a goal to be set up which will improve your situation from a lenders’ perspective
Any questions?
We always welcome enquiries and are happy to help answer questions in a no obligation manner.
Phil Riches
Senior Mortgage Consultant
M: 0418 204 304
F: (02) 8003 9851