What is the best way to structure your bank accounts when you’re looking for a home loan? It may be a curious question, but experience has shown us that there can be a huge impact on borrowing capacity relating to joint or solo account conduct when someone wishes to purchase a home. While many people operate separate accounts even when in a long term relationship, it should be remembered that transactions to and from those accounts will be scrutinised by prospective lenders when assessing loan affordability.
That means that if one partner has an excellent account conduct and no debts against their name, any liabilities that may be lodged against their partners account or name, will still have an impact on borrowing. Even today I had a client who was looking to purchase a property from a family trust set up by her parents, who wanted to purchase the home on her own so the loan was to be just in her name. However, when putting the application together it became clear that she was responsible for a lot of expenses that were under her husband’s name. These costs and liabilities will need to be taken into account by prospective lenders when deciding to approve or decline a loan. That doesn’t automatically mean that all lenders will assess the applications in the same way. This week we had a client who received a loan approval from a lender while his existing bank failed the application due to their classification of his de facto partner as a dependent as they weren’t included on the loan application.
In another case we had a client looking to purchase his first family home in New Zealand. He decided that as his wife wasn’t working or earning an income then there would be no advantage to including her on the application. However, on this occasion they had joint accounts, and as he was the sole breadwinner, the lenders calculators had to include living expenses for him, his wife and their children. Consequently, in order to pass the lenders affordability calculations the amount of funds that could be borrowed had to be reduced, limiting the scope of options for their house hunting.
The opposite of these examples is when two people wish to be co-owners of a property but one person is the main income earner. We have had clients who have believed that they needed to open up specific joint accounts prior to putting together an application, as they thought that one of the accounts with fewer funds would be detrimental to their application. This is definitely not the case, as any loan application needs to be calculated using budgeting or loan affordability tools that determine the total household income and expenses. That means the mindset of “his debt” or “her loan” needs to be put aside if buying a house together.
It is therefore important that when first considering the purchase of a new home, whether it be your first home, a rental investment property or a move to something better suited to your current situation, that you should have a discussion with a mortgage adviser who is able to work with you to determine your comfortable borrowing level. They should also have access to a range of lenders products (Your first approach to a bank may be to a lender with an overly cautious approach, which will restrict your options or provide the disappointment of a decline). They will also advise on the best structure for you to get into the ideal position to obtain loan approval if you are at present unable to get a home loan at the level required to purchase the type of property you are dreaming of.
