PART 1 - FIRSTLY, HOW LENDABLE ARE YOU?
There are a variety of factors that can influence how much you can borrow to obtain a home loan. Each bank has its own specific criteria and calculations to determine how much they can lend you.
Ultimately, all banks want to see how “lendable” you are.
The following factors play significant roles when it comes to determining how lendable you are:
Income and Employment
The bank needs to see that you have stable income that can service your expenses as well as your home loan. They will ‘stress-test’ you (see ‘Part 2' of this article) to see if your income can support your mortgage at a higher interest rate.
Banks prefer stable employment and regular income.
What if I am self-employed?
People who are self-employed have more obstacles in their way. The way you will be viewed by the banks is not concrete as it depends on a multitude of factors such as experience, industry, whether you are a contractor, sole trader, or an SME business owner.
The rule of thumb is that the banks would like to see two years of financial statements. They use your taxable income to determine what your income is. Ideally, your financial statements should show that your business sales/ taxable income are increasing. If you are self-employed, it's highly advisable to speak to a Mortgage Adviser (also known as a Mortgage Broker) as they will be able to help you understand your position and how the banks will view your income.
Age and Loan Term
Your age and the loan term (length) are factors that can impact your ability to repay the loan over time. They younger you are, allows you to take out a longer mortgage terms (30-years is the maximum).
Generally, the banks cut-off age is 70. Therefore if you try to get a home loan after the age of 40 - you will be expected to pay off your home loan in less time than someone younger than the age of 40.
As a result, after the age of 40 - you will need a higher income to service the same home loan that a person less than 40 would need to earn.
Deposit/ LVR (Loan-to-Value Ratio)
You need to have a deposit ready to purchase a home. It will need to meet LVR (Loan-to-Value Ratio) criteria. You will need 20% deposit to purchase a home to live in and 35% to purchase an investment property (as of January 2024 - however there are exceptions to this. A Mortgage Adviser can go through deposit options with you).
Having larger deposit can result in more favourable borrowing outcomes and in some cases result in increased borrowing capacity.
Account Conduct and Debt
The bank wants to see good account conduct and management. Banks will typically request your last three to six months' bank statements (transactional, savings and credit card statements).
For the six months leading up to you applying for a home loan – make sure your account conduct is as follows:
Bank accounts should never go into a negative balance.
No unarranged overdrafts.
No dishonoured direct debts/ automatic payments.
Regular and consistent savings should be seen on the statements.
Income should clearly be shown in the bank statements (should align with pay slips).
Credit cards should be paid off monthly (ideally). If not, there should be good control shown. Having your credit card constantly hovering around the limit with only the minimum monthly repayments being made is not particularly good financial character from the bank's perspective.
Avoid buy-now-pay-later (BNPL) arrangements (ideally).
Debt Management
Debt management and spending habits contributes to “financial character”. You need to be lendable from the bank’s perspective. Having debt will impact the amount the bank is willing to lend you.
Debts such as student loans, credit cards, personal loans, hire purchase and buy-now-pay-later (BNPL) arrangements are examples of debts that should be reduced or exterminated before applying for a home loan.
Credit History
When you apply for a home loan (or any debts) - the bank will get access to your credit report which includes information about your current credit accounts, payment history and if there have been any defaults or late payments.
You will also have a “Credit Score” - which is a numerical representation of your “creditworthiness” for 0 to 1,000. A higher score represents higher creditworthiness and therefore lower risk to the bank. A credit score above 600 is considered good.
You can get a copy of your credit report at the following:
ClearScore - https://www.clearscore.com/nz
Equifax - https://www.equifax.co.nz/
No matter how large your income is or how much deposit you have - if you have a poor credit history/ credit score - you could be declined when you apply for a home loan.
To find out how lendable you and what your home loan options are - you can get in contact with us.
Click here to go to Part 2 of this article.
Disclaimer
The information contained in this article is general information and is not intended to be financial, legal or tax advice. Vive Financial Services Limited and Jith Rajenthiram accept no liability for any loss caused as a result of any person relying on any information in this guide. Before making any financial decisions, you should consult a mortgage adviser or an appropriate professional.
