Our recent Mortgages 101 Specialist Group Session was very popular and with so many fantastic questions asked by Residents on the night, we thought it would be a great opportunity to keep a record for everyone to refer to when thinking about how they will prepare for a home loan.
We thank Morgan Owen from Penny Finance and Nick Timson from ANZ for being generous with their time and making it such a valuable event.
Q&A – MORTGAGES 101
What different types of home loans are available?
There are a range of different home loans available. You can choose between a Variable interest rate and a Fixed interest rate, and you can also structure your home loan in different ways. As everyone’s financial circumstances are different it is best to discuss the type of loan that is best for you with your own broker, however things to consider are as follows:
- What are your financial circumstances at the time of taking out the loan?
- What are your long-term financial plans and goals?
- What does your financial past look like, and which Lender policy does it fit well with?
- Do you want a personal relationship with a mortgage broker who can assess a range of lender options?
- Or would you prefer a bank where you have a local branch you can visit?
- What is the plan for the property long term?
What are the types of things that Lenders will look at when assessing a loan application?
- Income is key – do you have enough income to service your life as well as the new repayment with a necessary surplus at the end of the month?
- Permanent Employment is favourable work i.e.) Full Time or Part Time.
- If you have a casual job – a minimum 6 months in the role with limited to no gap in employment history is needed.
- Probation can be considered – but previous role needs to be similar and in a similar industry with limited to no gap in employment history is needed.
- Your servicing for the new loan will be maximised if you have no consumer debt (personal loans, credit cards, unsecured debt) if possible, or if you do have some debt, it may not necessarily be viewed unfavourably if it is managed well, paid on time and other surplus funds show that you can manage those repayments in addition to the new loan repayments.
- Credit cards, even if they have a $0 balance are viewed as a debt up to the limit – i.e.) a $10,000 credit card with a $0 balance is still conserved a $10,000 debt with an ongoing commitment each month.
- Declare ANY and ALL debts to your mortgage broker – from there they can assess your capacity and let you know which debts would be useful to pay out and close and which are okay to leave open – undisclosed debts are viewed very unfavourably if picked up later.
- Spending benchmarks are used, however a broker and or lender might review your bank statements to consider whether you are spending over and above the amount you have declared as living expenses per month.
- Do not overdraw your accounts (any of them) or credit card accounts.
- Do not miss payments on any of the debts you do have.
- Excessive amounts spent on gambling will not be viewed favourably.
- Pay day lenders make banks anxious so best to close them if possible.
It is difficult to get a loan if you have a bad credit rating? How do I know what my credit rating is?
- You can check your credit report for free and it will not affect your loan application. Read our article here on how to check your credit rating.
- Check your report and start to take action where you have bad credit now as there is a good amount of time to clear it before you need to begin your loan application process.
- There are lenders who place more emphasis than others on the actual score – with most it’s about the conduct.
- Please note that any and all enquires such as online applications for personal loans will show up on your credit file.
How long does a bad credit rating last?
- Bankruptcy – 10 years
- Other bad debts like unpaid phone bill, utility bill or anything that has ended up being handled by a debt collector – 7 years
- If you have one of the above debts – your credit report will display it as well as display when it’s due to drop off your report.
- As long as there is an explanation for the above there are lenders who’ll consider minor defaults.
- There are also paid credit fix solutions if necessary.
What period of time do lenders want to see in your bank statements?
- Depends on the lender and depends on the type of account.
- Salary Credit Account – 1 month
- Genuine savings – 3 months
- Consumer debt statements (personal loan, car loan etc) – 6 months
- Credit Cards – 3 months
- To be safe – have ALL of your accounts consolidated and clean for 6 months in the lead up to your loan application.
- It’s wise to start spending and saving now in line with your behaviour when you have the mortgage.
When getting a loan there are two main aspects that a Lender will look at:
Saving the deposit
- A 20% plus costs deposit is recommended and viewed favourably by Lenders as it shows good saving ability and good money management skills. It also means that you will not be required to pay Lenders Mortgage Insurance and ensures you have a good equity stake in the property from day 1.
- Although a 20% deposit is recommended, it is possible to get a higher (LVR loan to value ratio) or loan amount which will require a smaller deposit. There are loan options with as little as a 5% plus costs deposit – however the higher your savings the more / lower cost options you will have available to you.
- It’s also important to remember the additional costs involved – like stamp duty, conveyancer fees etc. NB. The Savings Goal Tracker calculator takes these into account.
Can you afford to repay the loan?
- Lenders will look at what surplus cash you have after paying your expenses so it’s important to keep your expenses in check.
- A high income doesn’t necessarily mean that you are more able to repay a loan than someone who earns less. People who earn more can sometimes spend more on expenses and have less surplus to put towards repaying a loan.
- What other debt are you paying off? Is it a reasonable amount for your income and what has your past debt accumulation been like? Do you pay it off or just accumulate more through refinancing and balance transfers?
- Is your employment secure? Are you casually employed or part time/full time? Is your employment history stable?
- The bank servicing calculators are conservative – as well as that, your broker should be taking you through a budgeting process to ensure the loan repayment does fit your lifestyle and not going to be a bit stretch for you.
Does the amount of deposit you’ve saved influence the interest rate that you will pay?
- The lowest rate loans have an LVR less than 80%
- The “average” rates are associated with 80% LVR loan
- If you borrow more than an 80% LVR you will be required to pay lenders mortgage insurance (LMI) which can be expensive.
- LMI can be and usually is capitalised onto the loan so it is not an upfront payment, however, because its capitalised you will then also have to pay interest on it while you pay off your home loan.
What are some other things to consider if you want to try and avoid a high LVR that will mean additional LMI fees?
- Be aware of any Government incentives that are available to first home buyers to ensure you take advantage of whatever grants or tax savings that you can.
- Grants are ever changing so what is available now might not necessarily be available at the time these loans are due to settle so you’ll need to review closer to time of purchase.
- Because of these changes though it’s important that you don’t bank on government incentives when considering the amount you need to save – if they do end up being available then it can be a bonus to either increase your deposit or allow you to reserve cash at the time.
- Family Security Guarantees are also an option to reduce LVR if cash isn’t available. This means that along side your property, the bank also takes security over a family members home to increase the over all value and decrease their risk. To quality for this the family member involved.
- Is party to the loan as a guarantor.
- Their incomes aren’t assessed however they still most be working or financially independent i.e.) self-funded retiree.
- Security property must be unencumbered.
- Your broker / banker would ideally structure the loan and separate the portion of the loan attributed to the guarantors property so that you can pay that portion off sooner.
- As soon as your property has sufficient equity (20%) standalone – you can refinance to release the guarantor’s security. This will be achieved by a mix of debt reduction and capital growth.
Is it better to have a credit card that you pay on time than no credit card at all?
- In Australia our credit system starts all people off with reasonably good credit. You’re not required to get loans or credit cards to “build up” good credit over time before applying for a home loan.
- This means that if you have had a phone or utility bill in your name that you have paid on time you have “good credit conduct”.
- You do not need to get a credit card to build up good credit. Having no credit card is viewed more favourably by a bank and increases your servicing capacity.
- If you do have any credit cards or consumer loans its imperative to pay them regularly and on time.
What if I win lotto? Can I pay off my home loan in full at any time?
- This will depend on the type of loan that you have. If you have a variable loan, you will be able to pay it out in full.
- If you have a fixed interest rate loan, you will be charged a fee for paying it out early.
- The fee is based on how long you have left on your fixed interest rate term and how much you owe on your loan.
How can I prepare for having to pay a mortgage?
- To adjust your spending accordingly, establish what your mortgage repayments will be and, if your home deposit savings require you to put less aside than what your full mortgage repayment will be, start putting the difference aside now, as if you’re already paying your full mortgage repayment. This will assist you in adjusting to living on the money that is left and also get you ahead of the game with your savings.
- Save as much as possible between now and when you purchase to reduce the amount you will need to borrow. This will have the most positive effect on how you will live in the future because it will reduce your mortgage repayments if you don’t have to borrow as much.
- Checking in with a mortgage broker or a bank 1 year before purchase so that you can ensure you have enough time to address any issues that may come up.
Debt to income ratio:
- Clearing as much, if not all, consumer debt (personal loan, car loan, credit cards) prior to your loan application is best and it will increase your capacity for the new loan and improve your cash flow so that you can pay it off in advance of the minimum.
- If you can’t clear all the debt, start with the smallest i.e.) afterpay, zippay etc domino the debts from there. As the higher your monthly commitments the less you can borrow on your home loan.
- Always disclose any debt you have in your loan application. The banks will view any undisclosed debt as unfavourable and not declaring it will also add to their view of your character so – don’t hide it – they will find it.
What do you need to start getting organised?
- Sort out your money and your budget.
- Speak to Assemble financial coach and understand approximate 20% plus costs deposit required.
- Go back to your budget and realign with the property time lines so that you can save the required amount in the time frame.
- Work on paying down any consumer dents – starting with the lowest balance, closing them as you go.
- Check in with yourself each 3-6 months to make sure you’re still on track.
- 12 months from the property settlement – engage a broker.
- 3 months from the property settlement – your broker will organise your pre- approval for a loan based on current factors subject to valuation (a pre-approval expires in 90 days).
- If you’re PAYG your broker will require at least (possibly more):
- Statement of position or fact find
- Debt statements
- 100 points of ID
- 2 most recent payslips
- NOA – last 2 financial years
- If you’re self employed your broker will require:
* The above as well as 2 years tax returns
- You don’t have to be ready to buy to talk to a lender – they can provide you advice or answer your questions anytime.
What do lenders look for in terms of stability of income?
- Full Time or Permanent Part Time.
- Casual Employment is considered differently by different lenders – for example ANZ looks for a minimum of 3 months employment in the same role.
- See my point above re: Casual income and the timeframes.
- If you are self-employed – your servicing capacity is based on net profit, not gross sales.
- If you let your accountant write off all your income to reduce expenses there won’t be income available for the loan.
- Think about what your tax returns need to do i.e. if you about to get a mortgage they need to prove that you earn a certain amount. You can speak to a broker in advance of lodging your returns by sending them a draft – that way they can let you know if you’ve declared enough income to service the loan.
- ANZ will take 1 year financials for self-employed.
- Most other full document loans / lenders will need at least 2 years of financials.
- There are Low and Alt doc options for self-employed clients which don’t require the tax returns and instead require an accountant declaration.
Is it wise to change jobs close to the time that you will apply for your home loan?
- Short answer no – long answer is that it depends…
- Banks like consistency but if you can show it is in a similar industry or an increased income it will be okay with some lenders.
- If you are changing industries or have a big gap in employment then that could pose an issue.
- If it cannot be avoided, then check with your lender/broker before making the change to get some clarity on what that will mean for your home loan application.
How are banks dealing with gaps in employment based on Covid restrictions?
- Banks might request a letter from your employer to confirm your employment is stable and the business is back to operating at pre covid capacity.
What are brokerage fees like?
- A mortgage broker is paid by the bank. This includes an initial once-off payment and a percentage of the loan placed for the life of the loan (generally 0.25% of the loan), this is called trailing commission. This is standard practice by all banks.
- Commissions from banks are the same so brokers do not have a conflict of interest / incentive to suggest specific banks.
- When you work with a broker at a bank, the same payments apply – their brokerage doesn’t mean it costs you more.
- Brokers can charge brokerage on top of what the bank pays at their discretion.
- ALL commissions paid to brokers need to be disclosed in the NCCP documents (Clients Needs analysis and Statement of credit) that they will issue you initially as part of the loan application process.
Are New Zealanders treated differently when getting a loan?
- Lenders treat New Zealand citizens the same in Australia as Australian citizens.
Refinancing, how often should I do this?
- It’s very important that you don’t have an attitude of set and forget as a 30-year loan term is a long time and lots of things can change during this time, both for you and what the banks offer in home loans. Refinancing often can be expensive though and not as worthwhile as some people think.
- It’s important to review your home loan regularly (every 12 months) to ensure that the structure, interest rate and progress of debt reduction is working well.
- Refinancing purely for a lower interest rate is not always the best option! A lower interest rate does not always mean better savings for you.
- There are pros and cons to refinancing. These depend on the benefits of changing, the costs of changing, the overall savings made, your financial goals. Discussing this with your mortgage broker so that they can review what else is available and whether it would be worthwhile to change is the best course of action.
- If you notice a reasonable change in interest rate it is worthwhile contact your lender to ask whether they can reduce your interest rate. If they can reduce the interest rate without you needing to change to a different lender it will save you money.
Ethical lending options – are they a thing?
- Yes, more people are interested getting their loan from an ethical source.
- Figure out what “ethics” means to you and if there are particular sources that you would not want to get a loan from – this can help when you go to a lender.
What if I have shares? Are they a good or bad thing?
- Shares are an asset.
- Unless you’re a professional investor, income from shares won’t be considered for income.
- If you contribute income to your share portfolio regularly and don’t plan on stopping, that will be considered an ongoing commitment (reducing your capacity to service the loan). Given that this is “voluntary” though, if it affects servicing you can stop making those contributions to assist with the loan application.
What about HECS debt?
- HECS is also a commitment that reduces your serviceable income.
- The total debt remaining on HECS will matter with some lenders who have DTI (Debt to income) restrictions.
I’m an essential worker, how does a varied income influence my capacity to get a loan?
- Some banks will accept income earned via overtime in their serviceability calculations if it a regular occurrence, but others do not; so, do your calculations based on your base salary – don’t count on bonuses, overtime etc if you can.
- If you require the overtime to service the loan then your mortgage broker will be able to discuss this with you and determine which is the best lender to use for your home loan.
- As an essential worker – provided the OT is consistent and more than 6 months there are lenders who will take 100% of the OT into consideration. Most lenders, however, will shade it back to 80%.
When looking to obtain a home loan, what is the difference between going to a bank versus going to a mortgage broker?
- A Bank will have access to the loan products that are available through their own bank.
- A Mortgage Broker will have access to a range of different loan products through all different Banks and Lenders.