The funder is ultimately looking for three main things:
- Affordability, and
- Documented history of regularly paying your bills on time.
Pro Tip: Did you know when paying bills via Bpay many people don't know there can be a 2-3 day delay before the debt is actually paid? This means if your paying bills on the due day via Bpay, you're probably 2-3 days late paying your bills. This lack of attention to details can be the difference between application success or not.
The 10 steps to help you prepare successfully for a mortgage
- Gather all your own paperwork and check it all twice
- Update your name and address on your bank statements, driver's licence and with your superannuation funds
- The ever-changing Government Stamp Duty Schemes
- Savings - the deposit - the hurt money
- Gifts and Loans and why you need to know the difference
- Consolidate all your savings in one place first
- What's your budget?
- Know what the range of repayments could be
- Understand the LMI fee
- Mortgages for the over 45
Get a copy of your own credit history first.
There are some things you cannot afford to leave to the last moment. One of them is getting a copy of your own credit history report and checking if the information it holds about you and your credit history is still correct.
Lenders don't like to lend money to people with bad credit histories and unpaid debts listed on their credit history.
We recommend every person preparing to be part of a mortgage application, get a copy of their own credit history well before they apply for a mortgage. You can learn how to do that for free in our article How to Keep Track of your credit history, here.
Common problems to look for on your Credit File include;
- Incorrect information in the credit application history
- Bills already paid out but still listed as unpaid debts
- Outstanding telco or utility bills listed as unpaid and in default
- Multiple credit inquiries listed with no results about whether they became actual loans; open car lease inquiries are a common problem
- Identity fraud where multiple credit has been applied for or issued in your name by strangers
If you find a problem with any information on your credit file, get in touch with the credit agency and have it corrected ASAP. Any delay could mean you miss an opportunity.
2. Update your name and address on your bank statements, driver's licence and with your superannuation funds
Now you've got a copy of your own credit history, check to see if the surname it's showing is your current name and not a maiden name and the address it's referring to is the same one on your driver's license.
New mortgage applications need to be in your current names. Don't leave updating your details on your driver's license to the last moment as delays can cause problems later. Alternatively, make sure you have a certified copy of your marriage certificate available confirming the correct surname you now wish to use for all future credit and property registrations.
Pro Tip. If you need to update your name or address with your Superannuation fund, call them and do update your details over the phone ASAP before you apply for a new mortgage.
Government stamp duty is payable upon the purchase of property and is managed by the government's Office of State Revenue.
- At different times the government seeks to manage the Australian economy by either increasing stamp duty, providing stamp duty waivers (and even bonuses) to encourage or discourage property purchases, new property purchases or house and land constructions.
Find out the current stamp duty requirements for your state at the Office of State Revenue or online here.
The first question you should ask yourself when looking to purchase a new property is, not how much will the bank lend me, but how much deposit will I put towards the purchase.
The amount of deposit you provide will determine the fees charged and size of loan you may be offered.
- For example, if you have a deposit of the traditional 20% of purchase price, and you only wish to borrow 80% from the funder, you can expect their best interest rate and low lenders mortgage insurance fees.
At the other end of the scale if you only have 5% of the deposit saved (and half of that has been a gift from your parents), you can expect the funder to apply a higher interest rate and for the lender's mortgage insurance (LMI) fee to be at the highest level too.
In the past funders had very restrictive policies requiring deposits to be from genuine savings only. When it comes to deposits, some parents like to help their children by paying a portion of the deposit as a gift to help them get into the property market sooner. What's important to clearly understand is whether this is a gift, or a loan.
Gifts and Loans from parents
If you have a loan from parents and you have to pay it back, this is one of the additional debts you must disclose when you apply for a mortgage. As a loan, it usually won't form part of the deposit. If this is your situation, you should discuss your circumstances with us ahead of time.
Inheritances or sale of assets to provide the deposit
If you’re fortunate enough to have been gifted an amount of money to put towards your home purchase, a statutory declaration to that effect will be required.
If you have come into an inheritance or sold a large asset to release funds for a deposit, a statutory declaration may be required to verify the source of the funds, if you cannot show a genuine savings history of 3-6 months.
Does paying off your credit cards earlier or making extra repayments on a home loan matter to a funder?
No. Funders are more interested in a predictable behaviour of paying debt obligations on time (they call it servicing debt rather than additional repayments to pay off the debt). Making extra payments on the loan may be a smart strategy for you but has no effect on how the funders see your application.
When you apply for a home loan, you’ll need to verify the amount of savings you have to commit to the loan and provide the last six months of bank statements verifying where those savings have come from.
If you have 10 savings accounts all with different amounts of money to use for deposit, this can mean you have to provide 6 months history of 10 separate savings accounts. Save the trees! Consolidate.
In practice, it's usually easier to combine all your savings into a single high interest earning account ahead of time, so when applying for a mortgage, all your deposit is in the one place.
A good mortgage broker will require you to complete a money budget to show you have thought about your future financial responsibilities and to make sure there's room in your budget for the new home loan repayments. Ask us for a copy of our Checklist of Documents Required for a Home Loan and Monthly Budget.
You need to know what the range of interest and repayments will be before you commit to a loan. It makes good sense to also know what the repayments will be at 1 and 2% higher interest rates as well.
Recommended Reading: You may like to read our article Understand how an offset accounts works, read it here and How much should I have in my emergency savings fund, read it here.
Lenders Mortgage Insurance (LMI), sometimes also referred to as a risk fee, is the amount of additional money you will pay to the funder for them to insure the loan, rather than them taking the risk of you defaulting on its repayment.
Why do they do this?
In the same way, we all outsource the risks of having a car accident to a car insurance company, a bank also outsources the risk of you defaulting on a mortgage to a mortgage insurance company.
- You need to be clear this is insurance to protect the lender.
- LMI does not protect you, the borrower, in anyway whatsoever.
- You need to arrange your own income protection insurance and make your own backup plan in case something unexpected happens and you can’t afford to make the mortgage repayments.
Need to start some deeper thinking about this? Watch our Explainer video How Much Life Insurance is Enough? here.
How much is the LMI fee?
The amount of LMI increases as the size of your deposit decreases.
- If you have a deposit that covers 20% of the purchase price, you might expect not to have to pay the LMI fee (or risk premium).
- If you have a deposit of only 5% of the purchase price, you should expect to pay up to 2% of the home loan in an LMI fee to the funder.
As you are the person applying for the loan you pay the fees of the funder providing the loan. Lenders mortgage insurance is one of those fees.
In practice, lenders have to be sure you can reasonably repay the loan.
Pro Tip If you’re 45-50 years of age or over and you can’t demonstrate how you will be able to repay a 30-year loan, there is a good chance your application will be knocked back.
Most mortgages are for a 30 year term and of course, this presents a problem for people who have turned 45 years of age and over who are set to retire at 65.
Many funders are now asking for additional financial information about what the plan is for a couple who is borrowing later in life.
- It's not unusual for funders to now request copies of superannuation statements to show a balance that would enable the applicant to use their superannuation funds at retirement, to simply payout the residual of their mortgage.
- The closer applicants are to 65, the more additional information may be required and even a financial plan from a financial adviser like Sapience Financial, to show the strategy and the capacity of the borrow to repay the loan as required.
So if you're over 45 it makes sense to start the process early and perhaps check-in with us early if you intend to do renovations later in life and may need to refinance.
What happens next?
Now you have all your documents ready, your information up to date and you’ve begun to get an idea on the range of repayments and potential interest rates, it's time to apply for a mortgage and seek a formal pre-approval.
What is a Pre-Approval?
This is where a funder has assessed the documents you provided and have issued a written indicative approval (also referred to as a pre-approval and usually for a 90 day period.)
- It's usually dependant upon you finding a suitable property and you complying with any additional document updates or requests before the formal loan approval is issued.
- For example. For loans with smaller deposits, the funder will want to make sure the property being used as security is in good condition and appropriately valued. If the property is derelict and unlivable, you can expect the funder may have difficulty lending on this grade of security property.
Pro Tip: There is always an element of doubt until you have unconditional approval from the funder. This is why your solicitor or conveyancer will require a full approval prior to exchanging contracts or committing unconditionally to the purchase.
What are the benefits of getting a Pre-Approval first?
- It gives you a clear idea how much money you can spend
- It's valid up to 3 months
- You won’t be setting yourself up for disappointment if you think you can spend more than your funder agrees to lend you
- It allows you to bid at auctions with confidence
- It tells the real estate agent you are serious and ready to buy a home.
Pro Tip: Remember the real estate agent is the agent of the seller and not you, the borrower. I would never tell a real estate agent what my pre-approval amount was and you shouldn't either.