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Organisation early in the buying process is essential for all first property buyers, writes Lisa Montgomery.
Before you even go looking for a property you need to find out how much you can borrow – which can vary between lenders, and may even be higher than you feel you can comfortably afford.
And before you make an appointment to see a lender, you need to be fully prepared.
It’s extremely important to be realistic and determine the loan amount you can effectively manage over the long term to allow you to realise your future plans.
Think about how the loan will affect your lifestyle and how you want to live over the next ten to fifteen years – and then customise your approach to suit. I always suggest that borrowers factor in an additional margin of around 2 per cent on repayment figures to give you room to breathe while also build a buffer for any future rate rises.
To prepare for the loan application, you need to be aware that the lender will assess three key areas: your income, assets and liabilities. In addition, they will look at the size of your deposit, the value and type of property you are looking to purchase, and of course your credit history.
In terms of income the lender will need to see some form of documented evidence of your earnings and how your income is derived. Recent pay slips and group certificates from at least the last two years are commonly requested from many borrowers.
Credit reports are a routine part of the lender’s assessment and include reviewing not only your credit cards, but any other financial commitments you have.
So that’s the basics – but it’s also worth knowing a few other things in relation to how you are assessed:
Remember that high limits on credit cards can damage your servicing capacity as the repayment is calculated on the maximum facility, NOT the current balance of the card.
In general, you need to demonstrate a genuine savings pattern of between 3-6 months, which usually equates to between 5 and 10 per cent of the property’s value, but some lenders will view accelerated personal loan and car loan repayments as an acceptable form of genuine savings.
High numbers of credit enquiries may label you as a habitual credit seeker, which can lead to an application being declined, even if the rest of your credit history is relatively clean.
Lenders will also look at your dependents (generally anyone you are supporting financially) and determine how that will affect your ability to service a loan.
Loan approvals and borrowing capacities can be affected if a property falls outside the residential norm – including some in rural and remote areas, dual use properties, as well as those that don’t fall within a minimum size requirement. Make sure you fully disclose the ‘style’ of property you are intending to buy – and ask questions – to avoid wasting time.
In summary, go in with your eyes wide open when buying your first property and be realistic about this new phase in your life – because a property will only offer security if you manage your expectations in line with your finances.
Lisa Montgomery is the CEO of Resi Mortgage Corporation