Why buy your own home these days? After all, prices (while starting to fall), are still sky high and ‘I don’t really want to be tied down to that‘.
Here’s why, and it’s pretty simple: You have to live somewhere (why not own it?), it’s a strong foundation for building wealth (if you start as early), and it’s a chance to build intergenerational wealth.
Let’s say you’re already sold on the reason why it’s a good idea though – the challenge then becomes, ‘how do I go about doing it?’
Here are the 3 BIG things to consider if you’re going to approach a bank and apply for a mortgage in 2023
Number 1: Income
Ultimately, if you’re asking for money from the bank, you need to know all they care about is pretty simple: Long term, they want to know the probability they’ll get the money back is high.
What you think is a strength around your income though, could be for the bank, a weakness.
If you’re an employee, consider doing the following:
- Work really hard at your job. It’s basic I know, but hey, it’s an easy win! Work harder than anyone else, become indispensable to your employer as fast as you can. Solve not only your own problems, but your employer’s problems. Why this advice? Because in the long term, if prices continue to rise with property, you’ll need more income to qualify for the larger mortgage you’ll one day require.
- Beware of commission only, non-taxable benefits, and bonus income. None of these things are evil in their own right, but most banks will only ‘rely’ on your base income.
If you’re self-employed, consider the following:
- Generally, you’ll need to be working this way for at least 2 years, and the bank will rely on the average taxable income spread out over these two years.
- The more you claim as expenses to reduce your tax bill, remember you’re borrowing power decreases. If you want to maximise your borrowing power therefore, you may need to pay more tax than ideal for a season.
- If you’re an employee currently, switching to become a ‘contractor’ has many benefits, but from a banking point of view, there’s a chance this could result in less borrowing power (for reasons just stated above).
- Banks look backwards, not forwards. Although you may be able to afford it, it doesn’t mean you’ll qualify for the mortgage (those with the gold make the rules!)
Your primary job when preparing to speak to the bank, is to go back in time to figure out how to maximise your taxable income from a banking perspective, right at the point in time that you’re applying for a home loan.
Number 2: Equity/Deposit
Unless you’re being funded by BOMAD (The Bank of Mum and Dad), chances are, you’ll need to scrape together an amount of cash (often referred to as your ‘deposit’) to purchase a home with.
Banks consider this ‘skin in the game’, and allows them to have confidence you’ve got a bit to lose and therefore you’re less likely to hand in the keys and walk away from your mortgage payments. A 20% deposit is going to be the best to aim for. While it’s technically possible to get a mortgage on a smaller deposit, often it can become a lottery more than anything else.
If you’re getting your deposit from family, consider the following:
– Banks will reduce the amount they are willing to lend you in situations where their ‘assistance’, is actually just another loan.
-In order to be able to benefit from parental assistance, the ‘loan’ needs to be documented as an interest-free, payment-free loan, that’s only repaid once (if) the property is sold and the bank is repaid first.
-The term ‘guarantor’, now means something entirely different to what it did the last time your parents helped out your siblings. If parents have equity in their home or higher income than you do however, there’s still a chance they can assist, but don’t assume it’s easy!
Number 3: Your expenses
Thanks to the CCCFA here in New Zealand, there’s a MASSIVE focus now on your ability to service the mortgage, in light of the specific expenses you engage in.
If you’re going to apply for a home loan, before you do, consider the following:
- Can you cut back on some of your expenses? If so, do this now and keep it this way for at least 3 months. You may find this is sustainable too which is great!
- Stay away from laybuys, rent to own, finance leases, hire purchases, and high credit card limits. All of these items will significantly drain your available ‘leftover’ income that’s considered when banks assess your borrowing ability.
- Student loans: Although it’s often beneficial from an interest rate point of view, quite often the lack of a student loan can dramatically increase your borrowing power.
Income, equity, and expenses – the 3 BIG things to consider when buying a home (and you need to get a mortgage). Buying a home is a good thing to do. It’s good for your mental health (stability), it’s good for your wealth, and it’s good for your kids (and children’s children).
You need to be strategic and willing to sacrifice, to buy a property today
The good news however, is that it’s still possible, it’s still a good idea, and even if you don’t every get the job done, the habits formed in the process of trying, can be incredibly good skills to develop.