Applying for a mortgage can be complex so it is important to adopt a strategic approach to achieve the best result.
There are three alternative paths to obtaining a home loan: apply to your existing bank, do your own research and shop around, or use a mortgage broker with a network of lenders that offer a variety of financial products.
All lenders will determine your eligibility for a loan based on credit and job history, your debt-to-income ratio and debt obligations.
So, a first step is to assess your own credit history and rating. Lenders will want to see a strong record of timely repayment of credit.
It is a good theoretical exercise to use a loans calculator, which is featured on most bank websites, to assess your capacity to meet the repayment schedule of a desired loan.
Your ability to meet repayments will be significantly impeded by large repayments on credit cards and loans for items such as a car or boat. Consider the amount of debt you currently carry and see whether this can be reduced in the short to medium term.
Lenders also want the reassurance of regular employment and sufficient income to meet the obligations of monthly repayments. In the current market, most banks are reluctant to provide loans that require more than 30-35 per cent of household income to service.
It has become the trend to ask for a three-month record of income and monthly household expenses.
If you are confident you can afford a loan, the next step is to put that belief to the test by obtaining pre-approval of a loan.
A bank or mortgage broker will assist with this. It provides guidance on the price range of property you can consider. However, do not confuse this as an actual loan approval. That comes later in the process.
An approved loan will be issued only when a lender has assessed the value of the property that you wish to purchase. Before that happens, however, you must consider the sort of loan that is best for your needs.
You must consider the benefits of fixed-rate and adjustable-rate mortgages, the interest rate and associated fees, length of the repayment period, whether an attractive interest rate can be locked in, and the benefits of including a period of interest-only payments in the lifetime of the mortgage.
Your choice of lender is also important as you will want some confidence that they will be able to help should any unforeseen events occur in the future. Alternatively, you might believe other criteria to be more important, such as internet banking services. A mortgage broker can assist in providing information on the quality of services offered by a variety of banks.
Tips to secure a mortgage
- Build a strong credit history
- Reduce debt as much as possible
- Demonstrate regular and sustainable income
- Collate records of income and household expenses for the past 3 months
- Gain a pre-approved loan for guidance on the price range you can afford. This is NOT a formal loan approval
- Seek the advice of a mortgage broker or a bank loans officer on the right type of loan for your situation
- Do not over-extend yourself
This article is of a general nature. Readers should seek professional advice.