By Betsy Westcott
Like many Australians, I nurture the dream of one day owning my own little assembly of bricks and mortar that I can call home. Slowly but surely I’m building up my nest egg of cash savings so that one day I’ll have enough to put a deposit on that dream home.
When the day that I have set aside enough money finally arrives, I will be trotting down to my local bank or mortgage broker and ask ever so politely for a home loan.
Now, I’m sure my good manners and charming smile are only going to get me so far when asking the bank for a fairly considerable sum of money to purchase my first home. So what exactly do I have to demonstrate that I’m am one very eligible mortgagee? The answer is simple: Character, Capacity and Collateral.
In banking terms, character refers to your financial behaviours. The bank wants to determine if there are any telltale signs that could indicate that you will be naughty and not pay your loan back. In other words, how much of a risk do you pose? To determine this they’ll be looking to:
1) Make sure you have a steady income i.e. you’re not on a probation period for a new job;
2) Whether you regularly put savings aside;
3) That you have good account conduct i.e. no overdrawing your accounts or credit cards;
4) A positive financial position i.e. the value of your assets is greater than the value of your debts; and
5) That you have a good credit history i.e. you pay your bills and on time.
To check your credit history contact Veda on 1300 762 207 and ask for a copy of report.
In a nutshell, capacity refers to your ability to afford your home loan repayments. Can you pay all your bills, enjoy a nice lifestyle and make your loan repayments without incurring any financial hardship? At the end of the day, there’s no joy in buying that dream home if it means you’ve got to eat 2-minute noodles every day for the next thirty years! To work out your borrowing capacity you first need to work out your monthly income and expenses. NB: don’t include your rental payments if you’re moving in to your new place. Deduct your expenses from your income, and what ever is left over is the amount you can afford to pay in mortgage repayments.
Monthly income – Monthly expenses = Surplus funds available to pay for a Loan
What does this translate to in terms of actual loan dollars? Just head to any major bank’s website and they will have a Borrowing Capacity calculator. Input your information and, voila, you have a good indication of the loan size that you can afford to pay!
In this case, the bank wants to see that you have enough savings to pay for a portion of this property. Ideally, you want to have saved for 20 per cent of the value of the property and enough funds to pay stamp duty (a type of property tax). For example, if you were to buy a $500,000 property in NSW the amount of funds you would want to save are:
$100,000 deposit + $18,000 approximately stamp duty = $118,000 savings
Some lenders will still approve your home loan even with a little as a 5% deposit in savings. In this case, you will still have to pay for the stamp duty. In addition to this, you will also have to pay Lenders Mortgage Insurance (LMI). This insurance is paid to the bank to protect them (not you) in the event that you don’t have the ability to repay your mortgage and your house had to be repossessed. It’s kind of like paying an extra fee for the pleasure of having a loan. The smaller your deposit, the more expensive LMI becomes. LMI is best avoided so save the 20% deposit, if possible.
So there you have it! The three C’s needed to satisfy the banks and make you a very eligible mortgagee! Of course, your local bank or mortgage broker can provide more detailed, personalised advice to suit your home loan needs – but hopefully the above has armed you with some knowledge to get the ball rolling. Happy saving!
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