There’s no two ways about it: it’s harder to get a mortgage today than it has been in a decade. We’re back to GFC conditions, with lenders using strict criteria when assessing home loan applications.
It means that the loan you were pre-approved for 12 months ago, might not be approved today – or that refinancing could be harder than you thought.
If you’re keen to take out a loan, there are a few things you should take into consideration before you begin to apply. These are the factors that may potentially sabotage your approval – so it pays to get in front of them from the outset:
1. Your credit rating
It’s no surprise that if you have a bad credit rating, you’ll struggle to get loan approval. But here’s the thing: these days, even if you have a good credit rating, but you have one or two blemishes, this could seriously hurt your changes.
Credit ratings exist so the banks and lending institutions can make a better estimation of your reliability in repaying any money they lend out, and at the moment, they’re being very conservative.
Tip: Before you apply for a home loan, check your credit score so you have a better idea of where you stand. It also allows you to see any potential credit flaws so you can work to rectify them. Request your credit score for free here.
2. Your personal debts
Personal debts like personal loans, store cards and credit cards can also make you look less attractive to the bank. This is because banks will look at all your debts, savings and income in order to see whether you’d be able to make the repayments on the loan.
If you owe $500 per month on credit cards, $200 per month on your personal loan and another $450 on store cards, thats over $1000 on personal debts – before they even factor in your lifestyle expenses and other bills. How likely do you think it will be that they’ll say “yes”?
Tip: Take a good look at your budget and look for opportunities to knock down that debt. Chat with us about the best strategy to reduce or consolidate your debts, to improve your overall borrowing position.
3. Your credit card limits
It can be a common misconception that the higher your credit limit, the better you’d look in the eyes of a financial institution – because if you’ve been previously given a credit card with a limit of $20,000, that must mean you’re trustworthy with money, right? This isn’t the case.
Instead, the bank will assume that if you have a credit limit of $20,000, you’ll have a debt of the same amount – even if you only owe $500 on the card.
Tip: So lower your limits to something more manageable prior to applying for your home loan. If it’s possible to cancel some cards altogether, then go ahead and do that too.
4. Your car loan
Everyone enjoys the independence of their own set of wheels, but unfortunately, your car can actually reduce your home loan borrowing ability. It might seem strange that a loan for something like a car could be detrimental, because a car is an asset in the eyes of a bank, but it’s not always that simple.
The fact is, car repayments are high – especially if your car is a brand new one – and the bank has to take this into consideration when deciding whether you could afford additional repayments on your home loan.
Tip: If you know you want to buy a house or investment property in the next 12 months, don’t go shopping for a new car loan just yet. It might reduce the amount you can borrow, so either buy a cheaper car or delay the purchase. It’s a good idea to chat with us about just how much a car loan could impact your borrowing power.
5. Your discretionary spending
Takeaway coffees, lunches, restaurant meals, gym memberships… You might not think a bank has any right to dig into your discretionary spending, which is essentially things that can be considered non-essential items, in order to determine whether you’re a good potential borrower. But, they do and they will. They will take into account your daily spending habits in order to gain an even clearer idea of your spending/saving situation.
Tip: You don’t need to cut out the daily coffees and bought lunches – provided you can comfortably afford them. But if your savings need a boost or you have personal debts to pay, it might be time to pack a sandwich and redirect that $50 per week to your debts.
If you’re interested in getting a loan and you’re not sure if some of the above factors might stand in your way, feel free to get in touch with our friendly team today. We can assess your situation and advise you of your borrowing power as it stands today, and how it could look if you make a few changes. Call us on 1300 888 796.