Following are some tips for first home buyers, with perhaps less than 20% deposit who want to make sure they are in the best possible position to apply for mortgage finance.
Savings
- Typically the banks want to see a consistent savings history of 3-6 months for at least 5% of the properties purchase price.
- The savings can be made up of personal savings, kiwi saver and the sale of assets (where there is proof of ownership).
- The consistent savings history shows the lender that as a prospective borrower, you have the required self-discipline and would be able to apply that to repaying the mortgage.
- Banks will also take the following into account as part of a deposit, but these will not be considered as part of a 5% saved deposit – gifts from family, equity in family property and deed of debt
Short term debt
- When applying for a mortgage, having too much short term debt such as unpaid paid credit cards, hire purchase, personal bank loans, car finance or store cards will adversely impact on cash flow.
- The advantages of clearing any short term debt prior to either saving for a first home, or applying for a mortgage, is that you will have better cash flow and will be able to save faster and be able to pay down the mortgage quicker.
- Having more savings will mean you need to borrow less and along with paying off the mortgage faster, will save significant mortgage interest cost over time.
- Any over due or unpaid bills that appear on your credit history should be taken care of quickly.
- A letter of explanation should then accompany the loan application, confirming the unpaid bills are all upto date, the reason they were not paid i.e. change of address, overseas and give the lender comfort as to why this won’t happen again i.e. recent history of bills paid on time, rental history is in tact and no further arrears.
Transactional Banking History
- The lender/mortgage advisor has a duty of care to ensure that the prospective borrower can afford the new mortgage repayment’s without adversely affecting their cash flow or life style commitments.
- To measure this affordability, the lender will often look at previous transactional history and calculate costs for fixed living expenses and also check that the account does not go into an overdraw position.
- If the borrowers net income being direct credited into the account, less the fixed living costs is not sufficient to meet the required mortgage repayments, then the lender may decline an application for a loan.
- The lender will also look for any short term debt and credit card payments being made from the account.
- Each of these would need to be accounted for, outlining the lending limits and monthly repayment commitments.
Saving the difference between home ownership costs and rental costs
- When putting an application together, the onus is on the borrower is to prove to the lender that they can afford to service a new mortgage.
- One of the ways to achieve this is to calculate the costs of home ownership, which would include the monthly mortgage repayment, house insurance and land/water rates, then subtract the monthly rent being paid, and look to save the difference for a 3-6 month period.
- This would prove to both the lender and yourself, that you have the capacity to service a mortgage and cover the associated home ownership costs.
- It would also serve to increase your savings which would also be of benefit.