Finding it harder to obtain a home loan? Donâ€™t take it personally. The banking regulators are placing tighter limits on how much banks and other financial institutions can lend. This is largely in an effort to exert some control over Australiaâ€™s infamously high housing costs and, more generally, to reduce our historically high level of household debt.
On top of that, the banks themselves are concerned that an increase in interest rates will put more households under financial stress, leading to a rise in missed mortgage repayments.
That said, in a tighter home loan market, there are still things you can do to put yourself ahead of the pack.
Your lender will want to know all about your employment, income, assets, liabilities, credit history and more. They will want to see:
- A steady income, preferably from stable employment. If you run your own business or are self-employed, the bank will want to look into your business finances too. If youâ€™ve just ditched your day job to work on your internet start-up, now may not be the ideal time to apply for a home loan.
- A clean credit history. Your history can go back as far as seven years for serious credit infringements. On the plus side, it can contain positive information such as your record of paying bills in full and on time. Get a copy of your credit history to ensure it is correct and work on creating a good history well before you plan to borrow.
- A track record of saving. Show the bank that you have the discipline to regularly save money. This will also help you build a bigger deposit â€“ another plus that will make it easier for the bank to lend to you.
- Low debts. If you have borrowed to buy a luxury car it might be worth trading in the Ferrari for a second-hand Toyota. And try to pay off any other loans as quickly as possible.
Also, be aware that lenders donâ€™t take into account the actual amount owing on your credit cards but your total limit â€“ i.e. the amount you would owe if you went crazy with your plastic. Cancel any unnecessary cards and reduce the credit limits on others to the level that you genuinely need.
- A budget. Following a budget demonstrates financial responsibility. Keep it realistic so you can stick to it but flexible enough to cope with the odd unexpected event.
- Time to repay. Older borrowers may find that lenders are reluctant to grant a 25-year mortgage to someone with 10 years to go before they retire. However, lenders may look at when and how much superannuation you can access in the future, and your current savings and repayment capacity.
- Honesty. Itâ€™s important that you provide full and accurate information to your lender. Remember that they have access to a range of information sources, from your credit history to your payslips and bank statements.
Your financial planner can help you get your debt under control, work out a budget and establish a savings plan.
When it comes to borrowing, itâ€™s worth talking to a licensed mortgage broker. Brokers work with many different lenders, know their policies and information requirements, and can guide you through what can be a daunting process.