Today we wrap up our two-part series on What type of buyer are you? If you believe that 2019 is your year to secure a property then this is essential reading. This article will focus on how you present financially, how much you need and how the property your buying affects your borrowing. If you need
So let’s jump into Part two:
- How do you present financially?
- How much do you need?
- What sort of property are you buying?
- What driving reason is behind the purchase?
How do I look financially?
In today’s finance market, lenders want a detailed view of your financial history, habits and overall position. They get this by looking at a few different factors.
Where does your income come from?
Lenders like it when you have a regular source of income. For PAYG employees this is as simple as providing your last three payslips so the lender can determine your average pay amount.
Lenders assess your income to determine serviceability, or your ability to repay your home loan. Your income helps a lender calculate the size of a home loan payment you’re likely to be able to manage.
Outside of employment, many people have other forms of income which need to be declared. Some of these will be accepted by lenders, and some won’t. Some of the sources of income lenders will accept include:
- Rental income. A lender will generally accept up to 80% of the income you receive from an investment property.
- Overtime pay. You’ll generally need to provide two years of payslips to demonstrate how much overtime you’re likely to work.
- Centrelink benefits. Certain Centrelink benefits, such as child support payments, are accepted as income.
- Fringe benefits. Lenders may accept up to 80% of any fringe benefits you receive such as a stipend, a living allowance or car allowance.
- Share dividends. Some lenders, though not all, will accept a portion of share dividends as income.
Some lenders may accept other alternative forms of income on a case-by-case basis. Likewise, if you’re self-employed you’ll use different documents to demonstrate your income, as mentioned above.
Do you know your Credit Score?
Lenders will also want to look at your debt repayment history. They do this by looking at your credit history and credit score.
There are a few different credit providers that can give you a credit score. You can get a govt approved credit score from the providers listed on the ASIC moneysmart site. Credit score providers
If you have had some rough patches in your credit history, there are still lenders who may be able to help. Some lenders specialise in helping borrowers with bad credit and offer home loans to borrowers who’ve had defaults, writs, judgements and even discharged bankrupts. We cant guarantee it will be easy, but it is possible and the team at Launch Money are here to assist.
Do you track your expenses?
Lenders will assess your monthly expenses to determine your disposable income, or the income that’s not currently devoted to bills, household necessities, groceries and discretionary spending. To calculate this, lenders tend to use one of two methods, either the Household Expenditure Method or the Henderson Poverty Index. The Household Expenditure Method calculates the median spend for basics necessities and discretionary items, while the Henderson Poverty Index is based on a survey of Australian families and assumes a family of two adults and two children. CXC myVAULT is an excellent way to automatically track your expenses and categorise them. It is a great tool to provide the lender when the calculations above don’t go your way.
A lender will also take into account any assets you have. This includes vehicles you own, any shares you have, your superannuation and any other properties you might own.
Your liabilities include any debts you might have. This could be credit cards, personal loans, car loans or HECS or HELP debts.
When assessing your credit card debt, it’s important to note that lenders will look at the combined credit limit of all your cards rather than what you owe on them. So if you have a card you don’t use, it pays to cancel it or reduce the limit.
Lenders want to see that you’ve saved a deposit because it demonstrates your financial discipline. You will require at least a 5% deposit, except in some special circumstances.
If you have less than a 20% deposit, you’ll have to pay for lenders mortgage insurance (LMI), an insurance policy that covers your lender in the event you default. This expense can add tens of thousands of dollars to the cost of your home loan.
Parts of your deposit can come from sources like gifts, financial windfalls or inheritances, but most lenders will want to see at least 5% coming from genuine savings.
However, there are ways to get a home loan without a deposit. One way is to use a guarantor.
A guarantor is a close family member, usually a parent, who offers their home as security for your home loan. This security serves as a deposit, eliminating the need for you to save one yourself. However, this means your parents’ home is at risk should you default on your home loan.
How much are you borrowing?
The type of home loan and the size of the loan amount also affect how the lender assesses you. This includes:
- The amount you wish to borrow must not exceed the loan’s maximum loan-to-value ratio (LVR). In other words, you’ll need to have a minimum deposit saved, with a common amount being 20% of the property’s purchase price
- Your proposed borrowing amount must fit between the minimum and maximum loan limits imposed by the lender
- You must use the financing from the loan for the purpose it is designed for, such as using an investment home loan to purchase an investment property
What sort of property are you buying?
Knowing that the property to be purchased will be used as security for the home loan, if you default on the home loan, your lender will sell the property to recoup the money. Because of this, banks look closely at the type of property you’re considering.
- Its location. Some lenders have restrictions on which postcodes they will lend in. Some rural areas, undesirable areas or areas of oversupply may face restrictions.
- Its nature. Your lender will want to know if you’re buying a house or a unit. Lenders often have more stringent criteria when it comes to lending for units.
- Its size. The property size is usually relevant only to units. Most lenders will not lend for units under 50 square metres.
- Its title. The property will need to have a freehold or strata title without encumbrances. This ensures the lender can sell the property in the event you default on your home loan.
- Its use. If you’re buying a rural property, it must be not be used for commercial farming.
Why are you buying it?
Lastly, a lender will want to know why you’re purchasing the property. The reason you’re buying your property will dictate the type of loan you’re eligible for, and often the amount you can borrow.
- To live in. If you’re buying as an owner-occupier, you’re likely to face fewer restrictions and get offered a home loan with a lower interest rate.
- As an investment. While investors face tighter lending criteria and are often saddled with higher interest rates, they are sometimes able to borrow larger amounts because lenders assume rental income will help them service their home loan.
As you can see, securing a home loan requires an expert to ensure you are not disadvantaged by a lodgement error, incorrect information and poor product choice. A conversation with a broker is free and without obligation.
At Launch Money we believe we offer an indispensable service and hold strongly to the belief that a mortgage broker is the only party to the process who is best positioned to act as an advocate for the borrower.
Whether you are buying a new home, personal investment property, Commercial property, SMSF investment property, motor vehicle or thinking about refinancing, Launch Money can help secure a better loan and deliver a hassle-free mortgage experience for you.