If you have ever applied for a personal loan, car loan or credit card then you will know that the advertised comparable interest rate is rarely the rate you will receive. The same goes for home loans.
The final interest rate which you end up paying on your loan is the result of a series of calculations and risk assessments carried out by your lender.
Simply put, the better your financial capacity and credit history then the lower your interest rate will be – potentially saving you $10,000’s over the life of your loan.
Therefore, it is extremely important to make sure you are prepared to win over your lender before you apply for any loans.
The following tips will help you put your best foot forward.
Tip #1: Have an appealing credit history
It is standard practice for banks to check your credit history before offering you a loan proposal. Banks don’t like dealing with individuals whose credit history suggests a loose attitude towards money.
They will look through your credit history to see how good you are with making repayments on time, whether you missed any payments, did you file for bankruptcy or make any defaults or debt arrangements.
Your credit history is like a scorecard of your financial performance and there are things you can do to improve this scorecard.
• Avoid making too many credit applications
A big mistake many people make is to make too many home loan or credit applications. Each time a new application is made it places a hit on your credit file. While an application in itself is neither good nor bad, a bank may interpret this as you having been refused credit by other lenders for whatever reason. It’s fine to shop around and compare lenders, but make sure that once you a ready to get a pre-approval, that you have already decided on your preferred lender.
• Only use one credit card at a time
It doesn’t matter whether you use the cards or not, any open credit cards you have can reduce the amount which you are able to borrow for your home loan.
A bank views an $8,000 credit limit as money which you need to repay – even if haven’t used that credit limit.
Ideally, you should reduce your credit card limit and close all your credit cards except for one.
• Make your repayments on time
Always make sure to make your credit card repayments on time, or even better before it’s due. The early payment shows lenders that you are financially responsible and keep to your obligations. Setting up automatic payments it’s a great idea to make sure you never miss a repayment.
• Pay more than the minimum repayment
A good policy to keep in the eye of your lenders, and your personal finances, is to pay more than the minimum repayment amount.
This will help you repay your debt quicker and pay less interest over time. It will also show that you are an excellent customer and may put you in a position to negotiate better terms in the future.
Tip #2: Prepare Your Proof of Income and Expenditure
Once upon a time banks would look at an applicant’s ability to repay a loan based on their income and living expenses. Generally, the banks would trust that the borrower was telling the truth about their living costs and how much money was available to repay the loan.
Today things are a little bit stricter. Most banks have a standard set of assumed basic living expenses which they use to decide how much you can borrow, even though these living expenses may be far higher than what you actually spend. So be prepared that your bank will have a more conservative view of what you can afford to borrow.
Banks will also want to see solid evidence of a stable income, usually over 6 months of employment history with an employer. If you are self-employed, they will want to see several years of previous tax returns stating your income.
Many self-employed contractors and business owners get caught out here as they are in the habit of claiming many expenses against their business and minimizing their income for tax purposes. Keep in mind the banks will assess your borrowing capacity based on the declared income – even though your true financial standing may be much stronger. Make sure your previous year’s tax returns paint the best picture of your financial capacity.
Prepare yourself before approaching a lender by making sure you are properly declaring your income, provide several years’ worth of tax returns, recent payment slips, any other income such as from investments and an itemized list of your outstanding debts, repayments, and expenses. That way you can handle anything which comes your way.
Tip #3: Have your deposit ready
When it comes to buying a property, the more cash you can bring to the table, the happier the bank will be to lend to you.
Buying property with a 5% or 10% deposit is still possible, however not all lenders are willing to finance loans with such a low deposit.
Those who do finance low deposit loans will often counterbalance their risk by charging Lenders Mortgage Insurance (LMI). This is essentially your lender’s insurance policy against you defaulting on your loan, and they pass the cost of this policy directly onto you. While this is not a cost you pay upfront, it is added to the total sum of your loan and you will need to pay it back with interest. That’s why ideally if possible, you should always aim to have a 20% deposit saved.
Tip #4: Collateral
When banks offer you a home loan, they will not lend you more than the market value of the property. So, if you have mentioned that a property will cost $500,000 and the evaluator says it should be $400,000, you will only get $400,000 from the lender.
This is important to note because there have been occasions when off-the-plan buyers or developers have found that the market value of their property drops between the build start date and final settlement date.
Although the market value may have dropped, the contracted sale price hasn’t. In these circumstances, the bank will use the current market value to set a cap on the loan amount – not the sale value. Buyers are then left scrambling to try and make up the shortfall or face losing their property and deposit as they are unable to settle the purchase.
Make sure you don’t get yourself into hot water buy understanding the true market value of a property before you bid at auction or enter any contracts.
At Sydney Home Buyers we can help you assess the true market value of a property before you purchase it. We are also experts at seeking out properties that sell for a discount beneath their true market value.