The reality is that most people in Australia are going to need to get a home loan in order to purchase their first home. As time has gone on, more and more requirements have been put into place on mortgage brokers to ensure that you get the lending product that suits your needs.
This article is going to go over 7 items that you may not have thought about prior to seeking out a mortgage broker or applying for a home loan yourself. Make sure you take notes on items that directly affect your current situation. Think about how you could use what is written here to better your situation.
1. Reduce Credit Cards
Having that plastic credit card in your wallet is great when used right, however the limit of each card is likely removed from the amount you’d otherwise be able to borrow. This means if you have credit cards with a limit of $50,000, that is $50,000 less you could borrow.
Not only that, the interest rate you’re paying on the balance. These are normally used as a convenience to gain points or rewards while making small to moderate purchases. Not for large purchases with a high interest rate.
So what can you do? Get rid of those cards that you aren’t using. Those you do keep, change the limit to something that you are comfortable with. Remember that lenders use the limit of the credit cards, not the balance you’ve currently used.
2. Clear Unsecured Loans
Unsecured loans are normally around 5-7 years long with a high interest rate. Not only do you owe what the balance is for that loan but also the interest over time. This increases your debt-to-income ratio, as well as your ability to repay a home loan.
Also if you have any principal only loans, it may be worth considering changing them to principal and interest to start paying off the balance of the loan.
3. Living Expenses Budget
Spending too much is also one way that affects how much you can borrow when buying a home. Taking control of your spending 3-6 months from when you apply for a loan can really make a difference.
You can manage this by setting up a budget, if you’ve never done that before don’t be afraid as it can be very simple. One simple way is to categorise each of the debits on your bank statements to see where your money goes and what transactions you can save money on.
Lenders typically use something called the Household Expenditure measure which is commonly referred to as HEM. This is a minimum rate the lender uses as a person’s living expense and is different between lenders. So if you’re living on beans and rice but not getting the income required to service the loan, it won’t matter how much you save.
4. Refinance your debt
If you are getting a home loan or refinancing an existing one, you may have the option to refinance your existing debt into a home loan. This provides you with the option of making a single payment instead of multiple, as well as having an interest rate that is determined by what your home loan’s interest rate is.
5. Credit History
Although your credit score is not often used in Australia, your credit history is. Any blemish on your credit history could be the reason a lender chooses not to provide you with a loan.
By making repayments on time is one of the best ways to ensure your credit history is not negatively impacted.
6. Searching for Properties
Lenders take into consideration the property you are buying when you go for a home loan. These differ from one lender to another which could limit which lender you could get a loan from or the amount they’ll let you borrow.
Commonly you will see restrictions on these:
- Studio apartments
- Student accommodation
- Inner city apartments
- Properties under 50sqm
- Rural and Remote properties
- Stratum Titled apartments
- Commercial zoned residential properties
7. Self-Employed and Tax
The last thing on this list you need to watch out for is if you are self-employed. Working with a great accountant can do wonders for the tax your business owes as well as putting in place various tax efficient strategies. It is worth knowing that a business with low profit restricts the amount you could be eligible to borrow.
Make sure if this is the case for you that you reach out to your tax accountant and discuss the options available for you. I would always recommend using one for anything to do with tax.
Conclusion
It doesn’t matters if you’re buying your first home to live in or as a wealth creation tool for your future. These 7 items are things you need to consider taking action on before getting a home loan.
Contact us at Read Finance if you are planning on buying a home, it is never too early and we can help guide you through the process as well as help find the home loan lender that best suits your needs.
