Getting a mortgage, especially the first one, can be a bit like joining a three-ring circus.
Want to borrow hundreds of thousands of dollars? The bank is going to need you to jump through a few monetary hoops and walk a financial tightrope first.
The quality of your performance will only intensify as the market becomes more volatile. So when you go for that first mortgage, you better be ready to show off your financial flair.
We spoke to Lower Hutt mortgage broker Ash Shergill of Shergill Mortgage Brokers, and financial coach Elizabeth Blake of allow meon how to improve your finances.
1. Know your non-negotiable expenses
These are the things you Absolutely has to spend money every week. Everyone has different non-negotiables, but all areas need careful consideration when saving for a deposit.
“That doesn’t mean spending $300 a week at restaurants. It means what’s essential and what’s nice to have,” says Blake. “Can you go to a cheaper gym/exercise at home using an app? Don’t go shopping for clothes and get out of all mailing lists. Remove all programs from immediate purchase and subsequent payment.
Want to learn more about how to prepare to buy your first home? Sign up for our six-week course, The First Time Buyers Club, and you’ll receive an email every week to help you through every step of your journey.
2. Account Conduct
“The bank has no idea how you’re going to handle your mortgage payments, especially if you’ve never dealt with them before. All they can really do is what they see happening in those accounts,” says Shergill. “Account driving is something that people don’t focus on enough, and it’s the easiest thing to fix.”
The main thing to watch out for is having an overdraft when you don’t have one in your account. Banks take this as a sign that you are living beyond your means and not in control of your spending.
3. Keep track
Know exactly what you are spending your money on. Keep track using apps, spreadsheets, or even writing it down. “It’s amazing how much you can save if you’re responsible, even to yourself, but telling someone your goal will speed up your ability to reach it,” says Blake.
Sacha Wacrow & Sungmi Kim/Stuff
If you want to borrow, you have to jump a few monetary hurdles and walk a financial tightrope first.
4. Multiple Accounts
If you use a banking app on your phone, creating accounts for all aspects of your finances is easy. You can have one for your savings, your vacation, that car you’re planning to buy, that upcoming birthday party. Great!
Except that “when the bank assesses the application and they see so many statements, they’re actually a bit put off,” Shergill says. Even if you know exactly why you have each account and what happens there, it could suggest to the bank that you are not organized with your money. Close as many surplus accounts as possible.
5. Be nice
The bank will be looking for red flags, but having a normal life shouldn’t be one of them. Under CCCFA legislation you will have heard stories of incredibly picky banks, but some of the stricter rules have since been rolled back.
However, your expenses determine your loans. It is therefore preferable to eliminate or control the most discretionary elements.
“I think you have to have a balance,” Blake says. “There’s a sweet spot where you push yourself to find out what you’re capable of – because most people have no idea – but you also have to be able to live. Some people want and can live like a monk, but most people are not.
Ella Bates-Hermans / Stuff
Banks, like any business, want to charge as much as they can. That’s what it means for your interest rates.
6. Ditch the credit card
“A $10,000 credit card, with a zero balance, will essentially be considered an actual expense,” Shergill explains. “The bank will consider this as a debt of $10,000 that you have, which may impact how much you can borrow.”
Shergill advises paying your credit card debt to a minimum, reducing the amount you can access to the bare minimum, and sticking with it for the duration of the application process.
“We want the balance to be zero because if the bank comes back and says, ‘Hey look, this credit card potentially impacts how much they can borrow.’ We can just say, ‘Well, we’ll get rid of it.”
7. Provide proof
It’s much easier to get approved if you’re an employee than a freelancer. If you are self-employed, you must provide financial statements for the last two years – for some people this can be difficult.
“If you’re thinking of quitting your regular job and becoming self-employed, it’s going to be harder to get approval,” says Blake.
“That doesn’t mean it’s impossible, it just means there are more hoops to jump through. So delay this if you can, but bearing in mind that a pre-approval is not only in the short term, so you will need to stay employed until the property is settled.
SUNGMI KIM / Stuff
Get rid of extra accounts.
8. Explain your savings
Some banks will count the amount you save each pay packet as living expenses, even if you are saving for your deposit.
“In my applications, I write, ‘Hey, look at the time they save X dollars for a deposit and once they get a loan, they won’t,'” Shergill says. “I actually have to put that in the app as a safety net.”
9. Keep your eyes on the prize
There are many ways to stay on track, but a good one is to collaborate with your friends and family.
“If they know your goal, they’ll support you,” Blake says. “Try not to reward yourself for your big savings by starting to spend them. If you’re a visual person, use an image of your goal — say, a house — to motivate you.
10. Three Month Cleanse
You want to present three months of the best version of your bank account possible. A mortgage broker will review everything thoroughly and look for things that are red flags from banks.
“If it’s bad enough, then you actually have to wait another three months to get a cleaner account,” Shergill says. “But waiting another three months could mean that interest rates will rise further or that banking criteria will become stricter.”
In other words, forget the spring cleaning, get your account in tip-top shape now.
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