Financing can feel overwhelming whether you’re considering refinancing or buying your first, second, or even third home. Even for those who’ve been through the process before, securing finance approval can be a stressful journey, particularly with the added scrutiny brought on by COVID-19. Being prepared has never been more critical. Getting your finance approved on the first attempt is the dream, and with some groundwork, it’s a dream that can become a reality. Here are ten tips to set you on the path to achieving that:
1. Evaluate your goals
Determining how much you need to borrow from a lender is a crucial aspect of the process. The property you’re considering and the plans you have for it will significantly impact this. Understanding what you’re after from a lifestyle and financial perspective is essential. Aligning these will help you plan for the future.
Thinking ahead is vitally important. Ask yourself, ‘Will this property still suit me in a year or two’? While the current price may seem reasonable and matches your current lifestyle, are these factors going to change? Upgrading later down the track is often more costly than getting it right the first time.
Additionally, calculate your borrowing limit. Banks and lenders’ maximum lending rates are stress-tested against interest rates. If interest rates rise, you could face severe mortgage stress if you borrow at the maximum rate lenders offer. Using a loan repayment calculator will give you a clearer picture of what to expect today and at higher interest rates. This will let you determine your loan size before speaking to lenders.
2. Conduct your research
Knowledge is power, and with mortgages, it’s no different. Understanding available products, their features, and the jargon will leave you well-prepared before making a decision. While some features can seem tempting, such as offsets, you need to ask yourself: ‘Is this beneficial for me’? ‘Is this offset worth higher rates or extra fees’? Often, the most basic mortgage products can be as affordable and effective as more complex ones.
Also, understand the differences in the policies of lending institutions. The policy is one of the biggest differences between lenders. Knowing what can and can’t be done will allow you to approach the finance-securing process with more confidence.
3. Consult with an experienced mortgage broker
There’s a significant difference between discussing with an experienced mortgage broker and speaking directly with a lender. Lenders will only offer one product and set of policies. An experienced mortgage broker, however, has access to a broader market. With this wider view, brokers can identify a solution that’s customised to your scenario and needs. Experience counts.
Given their knowledge of lender products and policies, an experienced broker’s advice is priceless. They can explain policies and help you secure a product based on your needs. Brokers are plentiful, with some having more experience than others. As always, research is vital, so investigate brokers. Check their websites and Google reviews. Even better, ask for a personal referral. This could provide a perfect opportunity for a personal introduction to Sydney’s best home loan brokers, Unconditional Finance, a quality broker.
4. Provide the necessary information and documents
When it’s time to submit documentation and information, getting it right the first go is beneficial. Lenders will meticulously examine your supporting documents, looking for discrepancies between them and your customer fact-find responses. Providing everything required and answering the facts honestly can prevent many potential issues.
Banks and lenders must report on the conduct of savings and mortgage accounts. Lenders use many tools to automatically read documents to gauge your conduct as a customer. Keeping accounts paid up and up to date, without overdrawing, ensures your account is in good standing. This is a crucial factor in securing finance.
5. The Significance of Savings
The importance of saving cannot be overstated. One of the first questions a bank or broker will ask is: ‘What’s the size of your deposit’? Generally, the larger your deposit, the easier it is to secure finance approval.
When it comes to savings, lenders and banks look for what’s termed ‘genuine savings’. Genuine savings are identified as funds that have been maintained for at least three months. Unexpected windfalls are usually not that favourable when securing finance. Genuine savings can also include shares or equity in other properties the customer owns, or even rent currently being paid.
Ideally, your deposit should be at least 20% of the property value you wish to acquire. This will help you avoid paying mortgage insurance. Although it’s a one-off fee and may sound fine, mortgage insurance doesn’t benefit the customer. It only protects the lender and offers no insurance to you. Despite being a one-off fee, it can become quite costly. The higher the loan amount, the more expensive the fee, relative to the Loan to Value Ratio (LVR). An LVR of 80% (loan is 80% of the price, deposit 20%) means no mortgage insurance is paid. An LVR of 82% keeps mortgage insurance at a more reasonable level. Once it exceeds 90%, the mortgage insurance premium becomes incredibly costly. Talking to a broker about your current LVR and where you’d like it to be is a crucial step before making a finance application.
6. Don’t be tardy
Lenders are increasingly focusing on good conduct with your accounts. Therefore, it’s vital to avoid overdrawing your savings. The same applies to missed payments on mortgage loans or credit cards. When you provide account information to lenders for assessment, their systems will often automatically scan for signs of poor conduct, such as late fees. This can jeopardise your chances of securing finance.
Typically, lenders will look back over a six-month period on the accounts provided. So, in the lead-up to applying for a mortgage, it’s best to keep all accounts ‘squeaky clean’. Issues may arise around credit defaults that could be listed, such as late payments on bills and utilities. Ideally, defaults of this nature should be avoided. While it isn’t entirely detrimental, it can create unnecessary obstacles.
7. Do you genuinely need it?
The rise of ‘Pay now, buy later’ systems such as AfterPay and Zip Pay has introduced new challenges in the finance securing process. These systems, while technically not treated as credit, can negatively impact the approval process. Lenders view these systems as indicators of conduct and affordability. They perceive this conduct as showing the customer didn’t have funds at the point of purchase. Ideally, it’s best to avoid having an AfterPay system, or equivalent, attached to your accounts.
8. It’s not all about the rate
While your initial reaction may be to ask ‘What’s the lowest rate in the market’, you shouldn’t become fixated on the rate. Yes, it’s an important question, but not all mortgage and loan accounts are structured the same. Multiple factors influence the rate you pay. The size of the loan, your LVR and credit history, loan features, funding models, and more all play a role in determining the rate you pay.
A more meaningful question to ask is, ‘Can you identify the best products based on my situation’? A competent lender will ask you a series of detailed questions to understand your situation. They can then guide you through and compare products that best suit your needs. Products that align with your scenario will increase the likelihood of your finance being approved.
9. Be realistic
With heightened compliance requirements and the disruption to bank processing systems caused by COVID-19, patience will be necessary. Approving pre-approvals and overall loans will likely take a bit, depending on which lender you choose. It’s crucial to be realistic about this time frame. Even pre-COVID, this process took a while, with processing times varying from a few days to several weeks among different lenders.
Instant approvals or ‘instant pre-approvals’ should be taken with a pinch of salt. These systems are usually computer-generated and still require the verification of supporting documents. There’s often a disconnect between the questions you answer and the assessment the lender applies to you. So, applying for finance well before bidding for properties is wise.
10. Be realistic about your borrowing capacity
Lenders don’t just look at your self-assessment of repayments based on current interest rates. They consider potential future interest rate increases. They evaluate whether the loan you’re acquiring will still be suitable if interest rates increase. They’ll also account for inconsistent income, such as commissions or overtime. As a result, lenders will often reduce a portion of this payment to about 60% to 80%. Rental income might not be accepted fully either and may only be accepted at around 70%.
The living expenses banks apply to you might differ from your own estimates. Banks usually apply a Living Expense Ratio lower than your actual expense ratio. So, it’s crucial to realistically assess your expenses before completing a Customer Fact Find or finance application. Lenders will digitally review savings account statements to perform a reality check and compare your estimates to theirs. This is yet another crucial consideration when applying for finance approval.
Lastly, it’s important to have back-up plans for both lenders and your income. Consider who your second or third choice would be if your ideal lender doesn’t work out. Think about what might happen if your income is disrupted or substantially reduced. It’s not wise to dedicate every spare dollar to mortgage repayments. It’s also not wise to secure finance approval without emergency funds. We strongly recommend looking into insuring the asset you’re acquiring. Seek information and advice from a licensed financial planner on this topic. They can provide valuable income and risk insurance guidance related to life, trauma, and Total Permanent Disability (TPD).
Obtaining approval for finance from a lender has many components. With the right guidance and research, you’ll be ready to secure approval that’s tailored to your situation. With that, you’ll be on track to refinance and secure a better rate or obtain approval that allows you to bid competitively at the next auction.
Good luck with your endeavors! If you have any more questions, don’t hesitate to contact Unconditional Finance. We’re eager to help you secure the best possible loan structure.
