Lenders are becoming more diligent at working out your expenses when applying for a home loan. Previously most banks did not make use of an actual assessment of borrowers’ monthly income and instead used a measure called HEM (Household Expenditure Measure). This was an estimate of expected expenditure and did not always reflect true expenditure and therefore the ability to service a loan. Banks are now more likely to ask for proof of expenses.
What can you do to be as financially fit as possible prior to applying for a loan?
To maximise your borrowing capacity, and to be as attractive to the bank as possible, it is a good idea to pay down as much debt as possible, especially credit cards, store cards, motor vehicle loans, HEC, and personal loans. Start repaying the debts with the highest interest rates first.
Credit card credit is the worst kind of debt, with a rough rule of thumb being that for each dollar of credit card credit you have, you lose approx. $3-$4 dollars of borrowing capacity for a loan. If you have a couple of credit cards and you never approach the borrowing limit, it is a good idea to either cancel your credit card or reduce the limit to something that is more in line with your needs. A $10,000 credit card that you never use could reduce your borrowing capacity by up to $40,000 and that could be the difference between getting into your next property or not.
Hold off on any major purchases until after you have borrowed so that it does not affect your borrowing capacity.
Keep a budget so that you keep track of every expense. This will both highlight where you can make savings, and by extension, how you can pay off debt faster.
Consider taking lunch to work and drinking coffee from the office.
My experience has been that it is very easy for a couple to spend $20,000 or more per year on buying lunch, coffees, snacks, taking the family to McDonald’s after sport, and a myriad of other incidentals. Every four years you could put a deposit down on an investment property instead. Generally, the more we earn, the less we worry about the small costs, but all these small costs add up over time to a significant amount.
By doing the above you could start to ramp up the savings ready for your first/next deposit.