7 tips for getting a great mortgage
Getting a great mortgage can save you thousands of dollars in interest, and many years’ worth of repayments. But there’s a lot more to it than simply comparing rates by “comparison shopping”. Like anything in life, a little preparation and knowledge will go a long way. Let’s examine what lenders like to evaluate before offering you a mortgage, as well as some tips to improve your current standing.
1. Pay off unsecured debts and close any unused accounts
When deciding whether to take you on as a customer, mortgage lenders will look at the total amount of credit available to you (such as the total sum available to you on your credit card, even if you pay it off monthly) – as well as the amount you owe already, such as hire purchase arrangements. It is possible to bundle high interest debts into a mortgage, and then repay them at a lower rate, but the best bet is nearly always to repay these as soon as possible before applying for a mortgage. This improves your cashflow and allows you to borrow more for the home loan. It also proves you can repay debt, otherwise, lenders may be concerned about your ability to keep up with your mortgage repayments.
2. Stump-up with a healthy deposit
It’d be more than a little cheeky to expect a bank or other lender to simply loan you hundreds of thousands of dollars without you contributing anything. As a general guideline, a down payment of 20% of the property’s purchase price is needed to get the best mortgage rates. Loans with less than 20% are considered higher risk to the lender than those with a larger deposit, so will likely carry a slightly higher interest rate. Currently, owner-occupied homes can be purchased with as little as a 10% deposit – but this usually depends on great cashflow, which brings us to...
3. Surplus income is key
Most lenders have complex calculators to assess your mortgage application. They will make all sorts of assumptions about how much it may cost to feed your children, drive your vehicles, and meet any commitments you have – even if you have a proven track record showing exactly what all those things regularly cost you. This means that aside from a deposit (or equity in your existing property/ies to leverage from), the key thing lenders want to see is surplus income.
Things that can help your application include taking on boarders or flatmates and paying off any high interest debts as mentioned in point number one above.
4. Stable income
When banks lend you money to buy a property, they want to make sure you’ll be able to repay your loan. If you don’t have a consistent job or income, banks can’t be sure that you’ll be earning a consistent wage or salary to be able to meet your repayments. This means that long periods of unemployment might not look good on your mortgage application, and neither will a steadily declining salary if you’ve been cutting back hours.
Ideally, before applying for a home loan you would’ve held the same role for at least the last two years, or if you’ve changed jobs, you’ve done so to a higher paying position. Lenders can also be quite strict if you’re relying on anything other than a regular New Zealand salary, such as income from being self-employed, foreign earnings, or casual work. This includes irregular and discretionary income such as bonuses and overtime, which are often discounted by lenders.
Nothing proves how reliable you are like a steady stream of income. When you have consistent income, it not only makes it easier to assess how much you can afford to borrow, but also helps convince the bank that you will be able to make the repayments when they fall due. It also shows banks that you have the character and maturity to commit to something for the long term – which is exactly what your mortgage will be.
5. Only borrow what you need
Some lenders may try and tempt you to borrow more than you can afford, especially if rates were to go up significantly. To protect yourself, ensure you’re able to repay whatever sum you’ve borrowed, even if rates do go up a couple of percent from their current low levels. This will make sure you’re able to ride out any increases in rates, which most commentators now believe are coming.
6. Move quickly
There’s plenty of speculation about changes to the way the New Zealand banks assess mortgage applications, which may include for those who already have a home loan. A lot of these changes are driven by different approaches by the big banks in Australia, who own the big banks in New Zealand. Moving quickly will ensure you make the most of current circumstances.
If you don’t have a home yet, keep in mind that the best start-point to secure your retirement is to have a debt-free roof over your head by the time you retire. Because property prices in New Zealand typically rise over the long term, it’s usually a great idea to get on the property ladder as soon as you can afford to, then repay the mortgage on your home sooner rather than later. Leaving it too late may leave you repaying a mortgage well into your 70s – when most people want to be well and truly free of such commitments.
7. Shop around
Once you’re ready and willing to get a great mortgage, do some homework on the different types of mortgages available, rates, current cash-back offers, structures that might suit your situation, and different lenders. For lenders, some people prefer New Zealand-owned banks (there are still a few!), or especially if you’re a property investor, it’s worth looking at so-called ‘second tier’ lenders who may offer lending when traditional banks won’t. If researching that yourself doesn’t sound like your idea of fun, at no cost you can simply get someone else to do it for you, which means you also get an expert opinion on all matters, assistance through the process, and probably also a better interest rate.
The bottom line
Applying for a mortgage can be a complicated process, but it becomes a whole lot easier if you’ve got your ducks in a row before starting. So, if you’re not quite there yet, it’s time to pay down any debt, and start saving. If you’re ready to roll, or have an existing mortgage coming off a fixed term and want to explore your options, then contact one of our lending advice specialists to get things moving.