If you’re tired of home ownership sitting in the too-hard basket and want 2020 to be the year that you get your plans underway, this read is for you. Read on for five key components to getting home loan ready.
Understanding your home loan affordability
One of the first things to understand is what you can afford; that is, the regular repayment amount you can commit to, with some room to breathe.
If you don’t have it already, create a budget that lists all of your regular and one-off costs across the year (groceries, petrol, utilities, insurances, credit card payments or other debt, car rego and maintenance etc) to arrive at a monthly average for your living costs – and don’t forget to include new expenses you’ll incur as a home owner like council rates.
Next, add in any regular savings like KiwiSaver or rainy-day funds you have going, then subtract your expenses and savings from your monthly income. What’s left is approximately what you could afford in regular repayments, subject to ‘safety’ buffers applied by your lender. It’s also important to know that lenders have calculations for living costs, and will use the higher of their allowance or your actual expenses when assessing affordability.
Getting your deposit together
There are a number of ways you can get your deposit together – your own savings, KiwiSaver first-home withdrawal, gifted funds from parents etc. Whether you are just starting out or have been growing your ‘deposit egg’ for some time, it makes sense to have a deposit-plan in place.
By understanding what you can afford in regular repayments, you’ll have an idea as to the maximum loan amount you can borrow. For example, if you could afford $2,500 in monthly repayments, at current interest rates your maximum loan amount will be around $400,000*.
Then it’s a question of how much you can save or organise for your deposit. For example, on a loan of $400,000:
Whether you qualify for a deposit of less than 20% will vary depending the credit and lending criteria of different lenders, so it can be a good idea to ask around amongst both banks and non-banks about options specific to your needs. If you’d like help with this or about the various options for getting your deposit together, just get in touch.
Taking a good look at your spending
What story does your bank account tell? Are you over-extending your discretionary income and dipping into credit cards or unauthorised overdrafts on your account a little too regularly?
When you’re getting ready to apply for a home loan, it’s a good idea to take a good look at your bank statements and if needed, take the opportunity to tidy up any money behaviours that aren’t showing just how reliable you are and can be.
Most lenders tend to look at three to six months’ worth of statements when assessing home loan applications, so the earlier you can take a look at how you are tracking (being on time with payments, curbing any excessive spending etc), the better.
Tidying up your debt
It can be tricky paying off debt faster when you’re also saving for a deposit, but it’s well worth having a look at your options. Any debt you’re repaying when you apply for a mortgage will reduce the amount you can borrow, and - depending on the level - debt can be a cautionary flag for the lender.
Start by making a list of all your debts - how much you have left to pay, the regular repayment amounts, and how long you have until each is paid off in full. Then have a good think about whether you can pay any debt off faster, and ideally before you plan to apply for a home loan.
Understanding your credit profile
In New Zealand there are three Credit Reporting agencies: (1) illion, (2) Equifax, and (3) Centrix. Each agency scores individuals between 0 and 1,000 or 0 and 1,500 (depending on the agency) based on things like whether you pay your bills on time, credit defaults, how often you apply for credit etc.
It can be a bit confusing – because there are three agencies – but the most important thing is to start somewhere. You can choose to request your record from all three (some charge, some don’t), or just start with one to get the ball rolling. One of the key benefits of taking a look at your credit score and profile is understanding the effect of things like late bill payments etc, which with a bit of discipline can be rectified, and over time have a positive impact.
Talk to an expert
Deposits, affordability, credit criteria etc are just the start. As experienced mortgage advisers, it’s our job to help Kiwis understand how to get mortgage-ready, explore the options they have, to negotiate with lenders and ultimately secure a mortgage that’s purpose-fit for individual needs. If you have any questions, we’re here to help: just get in touch.
*Based on a $400,000 mortgage for 25 years at 5.5%.