With recent interest rate reductions and softer property prices, many Australians are considering buying an investment property, their first home or upgrading.
If you’re thinking about buying a property, our experts have some tips to help work out exactly what you can afford before you sign.
The most important objective for any mortgage holder is to ensure repayments are made on time. Defaulting on a mortgage is not only costly in the short term but can have major long term implications for your credit rating too.
Defaulting can happen if a loan is taken out that you end up not being able to service. The best way to avoid such a situation is to be as prepared as you can for what is for one of life’s biggest financial commitments.
There are dozens of online tools that help you work out how much you can borrow. What you really need to understand is how much you should borrow, rather than how much you can borrow. Under-estimating daily costs such as entertainment, petrol and even new costs such as council and water rates is quite easy - and this can be costly once you’ve locked yourself into a repayment schedule. For information on Loan repayments or for Loan comparisons try our online calculator at http://www.keyinvest.com.au/lendingservices/toolandcalculators .
We’ve also asked some of our mortgage brokers from across Australia for their top tips to ensure you get the right mortgage.
Tip 1 – Get your financial records in order
Victorian based KeyInvest mortgage broker, Lorna Stott-West , of Sandhurst, says in recent times lenders have a tighter rein on assessment and serviceability issues when it comes to loans.
”Their main objective is to provide funding to clients who they believe can service the housing loan without undue hardship given normal circumstances,” she says. ”The last issue any lender wants is to follow up late repayments on a regular basis and they certainly don’t want to spend time, expense and ultimately get the bad publicity of ejecting the home owner.’
“Whilst lenders will assess risk differently, a history of solid financial management is a big advantage when looking to negotiate a loan. Make sure your credit card is paid on time and where possible consolidate debt to reduce account costs and interest payments.”
“It’s also worthwhile talking to your existing bank or financial institution before you seek a loan to see if your existing accounts are working for you as best they can. Is there a savings account paying a higher interest if you only access it online? Should you be paying existing debt weekly rather than fortnightly?”
“Getting your house in order is important before taking on more debt and shows you have financial awareness which can make you a lower risk.”
Tip 2 – Be honest with yourself about current and future spending.
Victor Moo, a KeyInvest broker based at Norwood, South Australia, says every financial institution assesses people’s serviceability differently, so how much you can borrow may change from lender to lender.
While calculators will go some way to determining what someone can borrow, these should be used as a guide only – and only you know what is a safe amount based on your living costs, required standard of living and likely future expenses.
”It is important to have a close and honest look at your personal situation so you can determine what you can realistically and honestly manage,” Victor says.
”Even though you may be able to borrow a certain amount, only you will understand what really goes on with your spending. A lending institution can question the information you’ve provided however they won’t come and live with you for a month to see how truly accurate it is.”
When someone goes into long-term debt, particularly first-time borrowers, they need to know they can make the commitment week in, week out, for years.
Personal circumstances and priorities change, but loan repayments still have to be made. If you find yourself struggling with repayments it’s often better to make contact with the bank or mortgage broker as soon as possible to work out solutions. For first-time borrowers especially all the planning in the world can’t always help avoid real-world issues – so keep the lines of communication open.
Think about what might happen if you lost your job or wanted to go travelling for a couple of months. Factor in how you might cope if interest rates rise by, say, 2 or more per cent.
”It is critical for every borrower to understand that interest rates, like property prices, are cyclical, so you need to be comfortable with your financial situation, not only now but in the future,” Victor says.
Tip 3 – Information is not as powerful as knowledge
Online calculators such as those available on the KeyInvest website assessing how much a person can borrow generally consider your income, household size (single or couple, number of dependants) and existing loan commitments.
They may or may not ask for your living expenses. This is because some calculators use built-in estimates of average living expenses for different household types.
Loan calculators also generally regard the bulk of income after tax and living expenses as being available for debt servicing. Whilst they are a useful tool for understanding the size of mortgage repayments or how much you may be able to borrow, they shouldn’t be used to apply for a loan without getting personalised advice first.
In real life, the assessment needs to take into consideration not just your income and regular expenses, including any credit arrangements, but also where you are in your life cycle, says Adelaide based KeyInvest mortgage broker Grant Winchester.
”This can take into account … how many children you have or when you plan to have children and how long you are likely to continue working,” he says.
Lenders also consider estimated future income and overall spending patterns.
”You need to take the time to really understand your spending habits and commitments and the sort of lifestyle you want after purchasing” Grant says. “Do you need to pay higher school fees in the next few years. Are you planning a holiday or changing cars? Have you factored in higher council, energy and water costs?”
“Having your financial affairs close at hand does help, as do calculators and other online tools. An experienced professional will ask the questions a website can’t.”
Tip 4 – Understand what the banks want
Grant says there are four main criteria a potential borrower will generally be assessed on: the amount and stability of income; the capacity to repay the loan (income versus expenses); future plans, such as starting a family; and credit history.
”As a mortgage broker when we’re helping a customer work out their borrowing capacity, it’s important to make sure they can cope with their repayments, without unrealistic changes to their lifestyle,”.
“ A big advantage is to have completed your most recent Tax return. This allows recent evidence of earnings and provides the bank with some confidence that your financial affairs are up to date. In addition, using a budgeting tool to work out what you’ve actually spent in the past 12 months – this is often more accurate than forecasting what you will spend. Start with your banking records (most of these can now be accessed on-line) and this will show your spending history very quickly. It’s a lot easier than searching for a vast collection of bills and receipts.”
Tip 5 – Make it easier for the banks to say “yes”
Victor adds “I often advise my customers to set up a bank account when they start looking for a home and make regular (weekly) deposits into it. This does three things – demonstrates to the bank that you have the capacity to meet mortgage repayments of this amount and also allows the customer to adjust their discretionary spending to suit what life will be life after a mortgage. Most importantly it also serves as an additional deposit amount or savings account for those items you always end up having to deal with after the settlement – such as the new hot water system or air conditioner”.
For more information visit http://www.keyinvest.com.au/lendingservices/
This newsletter is provided for general information only. Please do not rely on this newsletter as a substitute for specific legal or financial advice. Before making any decisions you should consider your specific objectives, financial situation and needs. To obtain the relevant Product Disclosure Statement or any other offer document from KeyInvest Ltd (ASFL No. 240667) please call 1300 658 904