Applying for a mortgage in tight lending conditions
Leading property & finance expert, Ayda Shabanz shares her tips on successfully applying for a loan in 2018.
Since I’ve been in the finance game (around 16 years now), I can’t remember a time when it’s been harder to get a loan. It doesn’t matter if it’s a personal, home or car loan, unless you know exactly what the bank is going to assess your application on, you’ll find it difficult because the criteria for lending has changed.
Here are some tips that will when preparing to apply for a loan in today’s climate.
Get familiar with your credit file
Did you know you can buy your personal credit file online? Not many people do! In my experience the best online source for this is www.mycreditfile.com.au Once you’re in possession of it, you'll be able to view every enquiry that has ever been made on you (many of which may come as a surprise). I say this because on your credit file you'll see loans listed that you didn’t even take out, but may still be affecting your credit rating.
The benefit of having your credit file is that you can see how the bank will review and assess you - except now you can answer the questions before they make assumptions. You can also understand how every application, regardless of whether you took the loan or not, shows on your credit. Furthermore, your credit file will highlight any outstanding loans or defaults you may have - the latter of which will remain on record for five years. Whilst inconvenient this isn’t a deal breaker if it can be explained from the outset.
However, if it comes as a surprise to you (if you haven’t viewed your credit file and forgot you had it, or have no idea what to say about it) you risk your loan applications being automatically declined.
Pay your bills on time
I know it sounds silly to say even include this, but hey, we lead busy lives and our time poor nature makes it very easy to forget to pay a bill. I’m not judging, after all I’m guilty of this too. But if you’re applying for a loan soon, it’s really important to be on top of all of your bills, especially repayments to credit cards and other existing loans.
Lenders are obliged to check your credit history and one of the latest queries I’m seeing is around late payments on cards or over limit fees.
Moving forward, banks will be extremely hesitant to extend a loan or credit if you can’t pay your current cards on time. Increase the chances of your application being approved by setting up automatic payments and reminders. At the very least, make sure that the last three months of repayment history are up to date.
Check yourself before you wreck yourself
You may be spending money just because you can, but in the eyes of a lender, if you spend all your money, there’s no way you'll be able to (or interested to) make any additional repayments. Upon any loan application being received, it's likely you'll be asked to list your expenses.
This isn’t something you can make up as the lender assessing you will check your day-to-day account over the past six months to make sure your story checks out. That’s why it’s super important to have a budget that you stick to.
Save cash regularly
I can’t emphasize this enough: SAVE, SAVE AND SAVE SOME MORE. Each payday, you should be consistently saving the same amount in a separate account to prove that you have the ability to manage money. Typically speaking, banks will want to see a historical pattern for a minimum of six months.
In terms of a dollar value amount, the minimum amount I recommend saving is 10% of your wages but if you’re seriously looking to apply for your first home loan then that figure should be higher.
If you’re buying your first property and want to live there, you should be able to save the difference between how much you would pay in rent and how much the normal mortgage repayment will cost you. If you can't do that then you need to adjust a few things to afford to live in (or purchase) the property you're aiming for. Consider reducing your expenses or lowering your price point expectations for the property. Lenders are looking for proof that you can afford the loan comfortably, regardless of what you earn.
The importance of stability
Banks want to be sure that you’re stable. Stability is demonstrated through your employment history and how long you’ve lived at the same address. To help the chances of your loan application being processed, lenders will look favourably upon those who have maintained the same residential address for 2+ years. In addition, it helps (but isn’t a defining factor) to have been in the same job for 12+ months.
If you’ve just got a new job in the same industry that you’ve been in for several years which pays more money, this won’t affect you provided that your probation period is over.
Maintain good loan conduct
It goes without saying that banks, just like humans, enjoy being repaid quickly. Therefore, if you’ve paid off any loans faster than required this is viewed upon admirably. Make sure that, at the very least, you always pay on time and you don’t miss any payments throughout the entire term of any loan that you have.
Avoid unnecessary debt!
If you’re privileged enough to be able to avoid being in debt, don’t be in debt! I say this because when it comes to home and commercial loans, it’s best to not have any unsecured debit in your name. By avoiding personal loans, car loans and credit card, you make your borrowing power stronger.
Also, most people have credit cards with large limits that they don’t use, but they don’t understand that lenders calculate the limit you have, regardless of what you actually use. This can affect your borrowing capacity. So, be sure to reduce any credit card limit down to what you realistically need and pay it off quickly.
Use Zip Pay and Afterpay Cautiously!
You may think this isn’t a loan but don’t be fooled, it is classified as credit. Always remember that each time you apply for Afterpay or Zip Pay you’re effectively getting a loan which is recorded on your credit file. This is viewed unfavourably by banks, because it implies that you’re already struggling to afford your lifestyle. What’s the best way to avoid this? Just like the saying goes, don’t spend what you don’t have.
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