Improve your chances of getting a loan for your new home or investment property by understanding what your lender wants. Check out the do’s and don’ts here.
DO’S
Keep living expenses as low as possible
Lenders are going through 3-6 months worth of bank statements to work out what you’re spending your money on.
Save as much as you can
I encourage you to make small regular savings rather than larger ad hoc savings. Having 6 months of bank statements showing regular weekly/fortnightly/monthly savings is viewed more favourably. The larger your deposit, the:
- more likely you’ll be able to buy a higher-valued property
- lower the risk to the bank and the easier you’ll be approved for a loan
Be mindful of where you’re spending your money
You need to show the lender you’re of good character. Expenses that may be perceived as “wasteful spending” could be viewed negatively. For example:
- Lenders don’t like to see “Sportsbet” or gambling ventures on your bank statements
- Large ATM withdrawals at clubs can also be seen as gambling.
DON’TS
Don’t use ZipMoney, Afterpay or Interest free credit cards
Lenders prefer to see that you have the ability to save first, then spend. If you are using these currently, pay them off asap, stop using them and close the accounts.
Don’t apply for any car loans, personal loans or credit cards
The more debt you have, the lower your borrowing capacity.
When you apply for a new home loan, the banks calculate a payment of anywhere from 3%-4.5% based on the limit of your card, as a monthly payment. E.g.
$10,000 credit card limit = $450 per month that is deducted from your net income.
$450 per month is the equivalent of $66,000 of home loan lending. Therefore if you have credit card limits up to say $50,000, your borrowing capacity would be reduced by around $330,000.
Note: It doesn’t matter if you pay off the credit card every month and incur no interest, or even if you don’t use the card at all, your borrowing capacity would still be reduced. If your borrowing capacity is lower than you’d like, your best course of action would be to pay down the credit card and either reduce the limit/s or close the account altogether.
Don’t screw with your credit score*
Opening up credit cards over and over to get frequent flyer points is not good for your credit score.
I know that it’s great to feel like you’re getting one over on the banks by milking them for maximum frequent flyer points, but every 3 months when you open another $15,000 credit card, the story it paints on your credit report is that you’re opening the next credit card because you need it.
It’s important to remember that the banks offer these frequent flyer promotions because they know that the majority of people will end up using them and paying interest on the cards. When they look at it in reverse (when your home loan application is being assessed) the banks assume you’re in the majority.
Likewise, doing a balance transfer multiple times doesn’t look good either. It appears that you can’t afford to pay back the credit card debt, hence the balance transfer. It looks like you’re robbing Peter to pay Paul. The credit assessor may ask- “why should we lend you half a mil, if you can’t afford to repay a $10,000 credit card?”
Every time you apply for credit (phone plan, credit card, utilities, personal loan, Zip Money etc) there is an inquiry on your credit report. The more active your credit report, the worse off your credit score.
*Credit Score = an automated scoring system that happens with the majority of lenders the minute your application is submitted. Explained simply, you’ll score between 1 (perfect client) to 5 (automatic decline). For the best chance of a smooth loan approval, you want your home loan application to land as close to a 1 as possible There’s a whole bunch of other factors that go into your credit score, but having multiple credit inquiries on your Equifax Report (credit report) can severely affect your credit score.
I hope this information has been helpful. If you have any questions, you are more than welcome to contact us at anytime. As always we will do our very best to answer your questions and offer solutions where we can.
