Getting prepared to buy a home in today's world
As has been widely reported over the last year, government lending rules have tightened banks' purse strings regarding mortgage lending. Not to get too heavily into the economics of it, but this is to protect the borrower from overextending themselves, especially in times of global economic flux when interest rate manipulation is the government's primary tool to curb inflation.
As much as the government regulations may seem overly cautious, especially when they lead to the examination of all facets of a borrower's finances and, at times, lifestyle, they are absolutely necessary to ensure that the indirect effects of the government's inflation management policy don’t exacerbate the economic issues New Zealand is facing.
With that said, banks that were extremely gun-shy to lend at the start of 2022, mainly due to their conservative interpretations of the legislation, are becoming more amenable to lending due to amendments to the law that went active in July this year.
Therefore, if you are trying to get into the housing market, considering moving house, or even buying a second property, what you would have been approved to borrow in the past is likely to have changed.
If you have previously received a pre-approval or have a pre-approval that is still active, you may be in a better borrowing position than you were when you received it. Now is a good time to re-engage with a mortgage broker like myself and discover your borrowing options.
Remember also that getting your finances in ship-shape condition is good practice before applying for mortgage approval or pre-approval. These may sound like simple steps and quite mundane, but failing to meet the criteria can raise red flags with banks during the approval process:
Ensure that you are managing your credit facilities correctly. This includes bills, credit cards, and any buy now, pay later facilities. Make sure you are paying them on time each month. Non-payment of credit facilities is a major red flag to a bank about to provide you with significant credit to buy a house.
Clear your credit card debt monthly and cancel unneeded credit cards. If you don’t clear the debt before it starts accruing interest, risk-averse banks may assume you will have to pay a portion of the credit limit in interest each month.
It sounds silly, but have money in your bank account; try not to live on the sniff of an oily rag coming through to payday and have leftover monies at the end of the pay cycle that you put into a savings account.
Be frugal in the months leading up to an application; the bank will be analysing your outgoings, so Uber eats 6 nights a week might raise some eyebrows. Present as a saintly (or almost saintly) borrower.
Ensure your employment is stable. If you are a contractor or own a company, make sure your drawings over the past couple of years can be evidenced and that there are still positive cashflows in your business post these drawings. In some scenarios, the bank may want to see any contractual agreements and personally guaranteed debt obligations that you have through your company. Banks will also ask about any potential changes in employment circumstances, so now might not be the time to follow your dream of quitting your stable job to write the great novel of our age.
Show the bank that you work to a personal budget, have your bank and credit facility statements filed and easily available, and have a good personal financial management history. Show the bank that you are financially competent.
If you would like to discuss your lending options feel free to contact me, and I can help you work through the pre-approval process to ensure that when the right property hits the market, you are ready financially to start the purchase process.