How to Prove Home Loan Affordability

23 January 2015

Once again, the subject of housing affordability has come into the spotlight. In this article we’re going to cover what information the banks use and how you can improve your chances of passing their criteria to be able to get a home loan. Whether you are showing that you can make the jump from renting to owning your own home, or providing proof that you have enough income to cover the shortfall on rental or commercial property costs, it is important to be able to provide some comfort to the lenders that the debt can be repaid.

So, what are the key things that are going to help you pass the lenders calculators?

The first important piece of information is income.

Any income coming into the house should be included, including Family Tax Credit payments, rental and boarder income received, as well as wages or salaried income. The hardest income to prove is for those self-employed who have financial statements showing that they earned next to nothing in the previous year. This is often done to avoid a large tax bill, but can sometimes compromise your borrowing ability, if it’s then hard to prove that there will be sufficient funds to pay the lenders debt and cover your expenses. When working on your own budget it is important to take an average figure to determine affordability, but bear in mind that banks will often take the base or lower wage only for their figures. Overtime payments may only be included if they’re on a regular basis and it’s best to take an average of the high and low months rather than just working on extremes. 

While on your own budget 100% of the income generated will be used (because that’s what you receive), whereas lenders will generally only use 75% of rental income and 50% of the amount received from boarders as legitimate income to service your lifestyle.

But income is only one part of the affordability equation. On many occasions we have seen people with great salaries who are unable to show any surplus funds to cover new debts because of the lifestyle choices they have made previously. 

I’m talking about those payments that need to be made on a regular basis such as Hire Purchases, Personal Loans and although a surprising amount of people forget that they have them as a debt, car loans. These are the payments for those things that we have to have now and as they are usually set up over a relatively short term often with higher interest rates, the repayments can eat into your available funds quite significantly.

Then, there are Credit Cards and Store Cards. While you may only have them “for emergences” and may only pay the minimum required each month, as far as lenders affordability calculators are concerned, around 3% of the limit on your card/account is used as the monthly repayment figure. Therefore, if you have a $10,000 limit on your credit card, the lender will assume an extra cost of $300 per month. You may argue that the most you’ve ever spent on it was $1,500 but in theory, you have the potential to go on a mad retail spending spree and rack up that debt to its full limit. That’s why the bank’s practice of increasing card limits and requiring the customer to have to actively contact the bank to stop the increase seems a little unjust. The exception to this is for those who pay off the whole Credit Card balance each month. It should also be remembered that Revolving and Line of Credit facilities also fall into this category, as even though you may be going great guns on reducing your debt, it is the limit rather than the balance that is taken into consideration on the bank’s calculator.

The final expenditure amounts are your normal monthly living expenses, such as groceries, rates, insurances, power, phone, as well as takeaways, nights out, child care, trips to the dentist/hairdresser/doctor/pokie machines, which all need to be taken into consideration.

Ideally and from a sensible budgeting perspective there should be a surplus of funds or positive figure after all your expenses have been subtracted from the provable household income, but sometimes due to the lenders required structure of borrowing or their estimated cost of general living expenses, there may be a slight negative. Your registered mortgage adviser will work with a lender to explain any mitigating circumstances and can help you turn the negative into a positive. This happened with one of our clients recently, but rather than saying the deal didn’t fit, which is what they’d been advised by their own bank, we worked with them and the bank to find a solution.

The key advice is that in these tighter times, the better the surplus of funds, the more likely you are to having your lending request approved and finding a way to maximise your income and limit your debt is the first step towards your ultimate financial goal.

 

Published In Whakatane Beacon

This post was written by

John White - who has written 90 posts

Comment on this post