If you are looking at investing or buying an owner-occupier home in the new year, you will face the tightest lending conditions in recent memory.
Borrowing power has plummeted for average Aussies over the past 9 months as interest rates have gone up and up.
Rising inflation has also seen day to day costs soar, making it harder to put aside money for a deposit. And on top of all this, the 3% mortgage repayment buffer as mandated by APRA remains in place, even after all those rate rises.
So when loans had 2 or 3% interest, you were being assessed at potential repayments of 5 or 6%. Now they have risen to 5 or 6% and you are being assessed at 8 or 9%!
All of these factors have meant that most of us cannot borrow anywhere near what we would have been eligible to this time last year.
So what can I do?
Have you ever heard the question “How do you eat an elephant?” The response is “One bite at a time”.
Even though the challenges may seem insurmountable when viewed as a whole, it’s important to focus on the small things that are within your control. Getting financially fit is similar to getting physically fit. You don’t go for one jog and lose 30kgs, it takes time and small adjustments.
So here’s how to give yourself the best chance of getting where you need to be in 2023.
Understand borrowing power
The first thing to get your head around is that a bank will likely lend you at least 25% less than what they would have at the beginning of last year.
So even though there have been price falls in parts of the country, the amount you can borrow has fallen by more.
You may have been pre-approved last year to borrow $1 million…but that will now have fallen to $750k or lower.
Of course, it’s not just rates that are taken into account when a bank assesses your borrowing power.
Your loan serviceability is your capacity to meet repayments over a loan term. It is calculated slightly differently by different lenders. Generally, the bank starts by adding up all your income, including salary and wages, rental income, government benefits and investments. For sources of income that fluctuate, such as rent or dividends from shares, they will take a proportion into consideration – usually around 80%.
They then deduct your expenses and all debt as well as your potential ongoing mortgage repayments and then look at your situation.
A big part of getting financially fit is to improve your serviceability.
Get rid of credit cards
Banks see credit cards as debt, even if you pay your bills on time, and even if you never use them!
Generally, lenders will assess credit cards with a repayment of 3.8% of the total card limit, so a $10,000 limit for example translates into $380 per month worth of debt. The same goes for payday loans. Steer clear of all unsecured debts. If you have them already, pay them off as a priority and never go back to them.
Check your credit history
There are several online providers that allow you to check your credit history and score for free. This might also highlight areas where your spending behaviour is negatively impacting your credit score and give you time to make changes prior to applying for your loan.
Tighten your belt
In the six to 12 months before applying for your loan, start budgeting and reduce your expenses over time. Banks will request bank and credit card statements to see where your money is going and low expenses will translate into better serviceability.
Good savings habits and less discretionary spending will also mean you can contribute more to your deposit and perhaps remove the need to pay lenders mortgage insurance. Obvious savings can be made by cutting back streaming services, ditching takeaway food and unnecessary memberships or subscriptions.
Working hard, or hardly working?
Full time employment shows you have a secure income stream so if possible wait until you have passed any probationary periods. If your base salary is low but you receive bonuses or commissions throughout the year make sure you can provide that information, and lodge tax returns on time in case the bank makes an ATO request.
Engage an expert
The world of loans can be tough to navigate for the uninformed and it’s best to have professionals on your side. One of Zinger’s Mortgage Brokers can help you understand what loans you may or may not be eligible for and how to choose the product that will best help you realise your goals in 2023.
