The banking sector has loosened the belt on who qualifies for a home loan since the global financial crisis, yet lenders remain cautious of high-risk prospective borrowers.
It’s estimated that almost one in four mortgage applications is rejected and usually for one reason – lack of preparation by the potential borrower.
So where do borrowers go wrong?
Not enough deposit
It’s almost impossible to get a loan without at least 5 percent demonstrated savings and no less than a 20 percent deposit if you want to avoid the added charge of lender’s mortgage insurance. By comparison, only a few years ago you could quite easily borrow 100 percent with some loan products.
Lenders want to see that you are responsible with your money, have been saving for at least three-to-six months, and are not solely reliant on a windfall gain like a bonus or inheritance. Genuine savings are seen as step-by-step increases in your bank account or savings that have been untouched for at least three months.
Michelle Hutchison, spokeswoman for RateCity, said anytime a first home buyer enters the market with a larger deposit, it’s a good thing.
“They’re less susceptible to movements in interest rates, and in a much better position to withstand shocks in their own income,” she said.
Similarly, having too much debt will not make you a good prospect to lenders.
A lender will assess a potential borrower’s ability to repay a home loan. If they see a high level of debt already held then the mortgage is just an added financial burden to take on.
Not showing a steady employment history could work against you too. Ideally, lenders want borrowers who have been in one position for two years, which demonstrates stability.
Issues with the chosen property
In the past, major lenders have not been keen on writing mortgages for studios, or small one-bedroom apartments in the belief that they pose a financial risk and are difficult to on-sell.
“Lenders and their mortgage insurers often work to a set range of criteria when deciding whether to approve a home loan. Some have restrictions around the property’s size, location in terms of the postcode, whether it is a high-density building,” said a spokeswoman for Mortgage Choice.
“Floor size restrictions are primarily driven by the mortgage insurers, who won’t insure anything under 40 square metres due to its limited saleability,” she said, adding that the size of a property often excludes any car space, balcony or storage space.
Issues with the credit file
Your credit file is a vital consideration and those with low scores will be rejected.
Lenders view too much activity on your credit file as a negative and even an overdue electricity bill could be closely scrutinised and assessed for risk, according to RateCity’s Hutchison.
She recommends checking your credit file before applying for a home loan – it can be accessed for free from organisations such as Dun & Bradstreet and Veda Advantage.
“You may not realise that making a late payment on your mobile phone bill could be recorded on your credit file for up to seven years,” she said.
Often borrowers are rejected simply because they apply to borrow too much money on a home loan. Even if you have strong savings and a clean credit record, applying for a million-dollar loan on a low income is bound to lead to disappointment.
If you’re unsure about what you can afford to borrow or, more importantly, repay, experts say a good rule of thumb is to allocate no more than 30 percent of household income towards home loan repayments. Using a home loans calculator such as the one at RateCity will help you estimate your mortgage repayments or for more information, talk to your lender.