Mortgage lenders are aggressively chasing new customers as property prices continue to strengthen in the main capitals but that doesn’t mean lending institutions are letting their credit standards slip.
The truth is that gaining approval to borrow the sum you need to buy property isn’t always as easy as the advertising campaigns of the big banks suggest. This is certainly the case if you have little equity and are asking for a loan that requires repayments that cannot be supported by your income. But these tried-and-tested ways to prepare for a loan application will boost your chances of success:
– Equity is everything. If you own a property or part of one, or have a deposit of 20 per cent or more of the value of the asset you intend to buy, your loan application is far more likely to sail through.
– Before you approach a lender, “stress test” your finances. Can you meet the repayments if interest rates go up by 1 per cent? What happens if your income falls? What if one half of your household leaves work to have a baby?
– Borrowers must demonstrate consistency of income. Patchy employment records aren’t helpful. But it’s a competitive finance market – lenders now ask self-employed applicants for one year’s proof of financial returns. The standard used to be two years.
– Many people are applying for interest-only loans in the hope that property’s value will rise. It’s easier to qualify for these than for a principal and interest loan, but if you buy a dud property with an interest-only loan you can quickly end up out of pocket.
– The banks can’t lose in a market in which prices are rising – and they know it. Beware of incentives such as “free” holidays or a bonus $1000 credit card for borrowing $300,000. It isn’t free if you pay back more interest than you need to.
– Lenders balance risk and reward. You might think securing a new job is great news, but lenders may want to know if you’re going to stay in the position long-term.
– Banks are more attuned to their customers regularly changing jobs than they used to be. Even so, some won’t give you a loan until you’ve completed a three-month probation, so try to arrange loans before changing jobs.
– If you’ve left work to have children and are now returning to the workforce, most lenders will apply the standard three-month employment restriction before approving a loan. You may get around this rule, however, if you return to a similar job with a former employer.
– Mortgage brokers take the legwork out of negotiating loans and can greatly help investors and owner-occupier buyers. Brokers charge the lender a commission for signing you up for a loan, so it’s vital to ensure a broker isn’t making conflicted recommendations based on commissions received.
– Consider every lender: big and small banks, online banks, credit unions and building societies. A savvy mortgage broker can help to identify lenders who may be prepared to loosen their loan criteria.