By Wayne Jones Mortgage Choice in Brisbane North, Queensland
Small change make big impact in home loan search
Making basic lifestyle changes can help people get their first home loan – and an amount that they can comfortably repay.
During the home loan hunt, the question on many first homebuyers' lips is "how much can I borrow?". Some potential borrowers are quite surprised to discover that their credit card debts, other personal debts and savings strategies may affect their borrowing capacity.
When applying for a home loan, the lending institution almost always takes your credit card limit into account, even if your card is paid off in full each month. It's generally not a question of how much you owe on credit cards – it can be the credit limits a borrower has. Generally, lenders don't like to see too many credit cards, as it implies a lifestyle supported by credit.
How debt can affect borrowing capacity
Broadly speaking, every $1 of personal debt will reduce a person's borrowing capacity by $5.
For example, someone with a $10,000 credit card limit and a $10,000 personal car loan may find their borrowing capacity is reduced by almost $100,000.
I usually recommend to people wanting to maximise their borrowing capacity to get rid of, or at least reduce, their credit limit on credit cards.
Deposit sizes and borrowing capacity
The size of your deposit is another factor that could limit your ability to borrow. While some lenders accept a 5% deposit, it's becoming more common for lenders to require 10%.
If you haven't saved enough for a deposit, asking a parent to become a guarantor for your home loan is another option to consider. I usually find that younger borrowers return from travelling; secure a well-paid job, only to find they still can't get a loan. Many haven't started a savings strategy.
How employment types may affect borrowing capacity
The nature of your employment can impact borrowing capacity, too. Permanent part-time employment tends to be viewed more favourably than casual work, despite casual work often paying a higher rate.
Self-employed people may be eligible for what's known as a ‘low doc' loan. These loans are suited to people who may find it difficult to provide common documentation (such as regular pay slips or tax returns) to validate their income and savings.
Top tips to help you prepare for a home loan
It's a good idea to review your credit history. You can visit the Australian Securities and Investments Commission (ASIC) website for more information.
Get to work on building genuine savings. Having genuine savings is critical to getting a home loan. If you have plans to sell a car, or other items, so you can put the money towards your first home, I encourage people to do it sooner rather than later. Get your cash in the bank.
You need to show evidence of savings over a 3-month period.
Be consistent with your savings strategy
Put aside a regular amount each week or fortnight/month rather than making ad-hoc savings. A regular savings pattern certainly augurs well for that first loan.
If you need help with preparing for your first home loan, feel free to give Mortgage Choice a call on 13 77 62, or fill out a form on our website and we'll contact you.
Are you hunting for your first property? What challenges have you faced when saving for your first home? Tell us about your experiences.
Keen to discover how much you can borrow? Try our home loan calculators.