With the Commonwealth Bank bringing forward it’s estimation of when interest rates will rise to June this year, many homeowners will now be looking at paying higher mortgages. As investors look to apply for a loan, they will be using calculators online to see what their borrowing capacity might be and what those repayments look like. However, until you have your loan approved it’s all a bit of a guessing game.
A residential buyers agent can help buyers understand how borrowing capacity, pre-approval and property selection work together before they start making offers.
To ensure you have safeguarded yourself, especially in this climate, here are some common traps people fall into when applying for a loan:
1. Why Do You Need Pre-Approval Before Making an Offer?
Not having your pre-approval ready. When you start looking around its important to note that you will need your pre-approval ready to go, as when you see the property that you wish to buy and make an offer, you’ll need to be ready to proceed with the sale should you be the successful offer. And given that you’ll either have a 5 day cooling off period, or none if you’re looking at buying at auction, you will need your pre-approval at minimum before you’re actually in a position to make an offer and proceed. During the cooling off period, your lender will organise a valuation and your finance approval becomes unconditional. Pre-approval will also ensure that you are looking at properties that are actually within your price range.
For a first home buyer, pre-approval is especially important because it helps define a realistic budget before inspections, negotiations or auctions begin.
2. Should You Apply for Pre-Approval Online Too Early?
Applying for pre-approval online, before you’re ready, before you’ve looked around, or spoken with an excellent mortgage broker. Every time you apply for a loan — pre-approval, or any kind of credit for that matter — the application goes on your credit file. If you aren’t ready yet, or you’re applying for something that simply won’t be feasible for you, your application will go on your credit file whether it gets approved or declined. When you go to re-apply, you may not get the approval as the banks assess what is on your credit file already, and they may wonder why there is an application, or multiple for large amounts that you have previously applied for. Discussing this matter with a mortgage broker and going down that route will ensure that you are applying for an amount that you are most likely to be approved for, therefore limiting the number of applications that eventuate on your file.
3. Why Should You Cancel or Reduce Credit Cards Before Applying?
You’ve been saving, you’ve paid off your credit cards, but you didn’t cancel them before you applied for your home loan! The banks will always see credit cards as a liability, even if there is $0 owing on it. Whatever the limit of the card/s will be taken into account as that many $ worth of debt. You’ve done the hard work in paying it off, so if you can absolutely cancel those credit card/s before making your application, do it! If you have multiple cards, cancel all but one, and as an absolute minimum if you must keep one, reduce the limit prior to applying for your home loan.
4. Why Should You Shop Around for a Home Loan?
Shop around! Like all things, there are some fantastic rates out there, sometimes they may be with lenders you don’t even know about. A mortgage broker is a fantastic option to review and access these rates and lenders. By just simply going to your usual bank and staying with them, seems comfortable, but you may cost yourself in the long run, when you end up with a mortgage account with many fees and a higher rate.
A first home buyer loan should be carefully compared across lenders, because the right structure, rate and conditions can make a major difference to affordability over time.
5. Should You Borrow the Maximum Amount Available?
Borrowing the maximum of your borrowing capacity. This will leave you stretched to make repayments and will close you in at your capacity, meaning you’re unlikely to be able to continue to borrow further in a year’s time to buy another property. If you can try to borrow under your borrowing capacity, making for more comfortable loan repayments, and leaving the door open in the future, you can continue to invest, or upgrade your home without selling your first/last purchase. Given the growth in the market, should it continue, you’re likely to make good equity and have a fantastic chance of being able to use that and continue to buy property should you not borrow to your maximum.
6. How Do Dependants Affect Borrowing Capacity?
Think about the kids! It is estimated that lenders will see each dependant as an approximate additional $2,500 each, to those disclosed expenses in your loan application. Ensure you take this into consideration when evaluating your budget and borrowing capacity before you go ahead and apply for a home loan.
Working with a residential buyers agent can help buyers align their finance position with the right property search, so they avoid overcommitting, making weak offers or targeting properties outside their true borrowing capacity.
If you are looking for a buyer’s agent to assist you with purchasing a home or investment property in the Sydney, Brisbane and Newcastle regions, please get in touch with Lloyd Edge and his team at Aus Property Professionals here or give us a call on 1800 146 837!
