When it comes to buying property, making informed decisions from the beginning can really setup you up for the future. It will also make for a smoother buying and loan application process. Getting the right finance is crucial, but to do so you need the right advice.
We have broken it down into 4 finance fundamentals. It’s as simple as A B C D.
A – Asset
The asset is the property you are looking to purchase, and the bank is willing to lend against. The fact is that banks don’t always see the property the same way that you and I do.
- Type of property
Banks have specific criteria for what they can consider as acceptable security. They will generally accept houses, townhouses, units and apartments. They generally don’t favour properties like high density apartments, serviced apartments, properties with floor space less than 50sqm, student accommodation, defence housing, simply because there is less demand for or an over-supply of these types of properties.
- Post code restrictions
There are postcodes in Australia that are not favoured by banks which again comes back to demand and supply of property in those areas.
- Do your research on the suburb, street and price
It is also important not to pay too much for the property. Banks will conduct independent valuations to confirm the value of the property before approving finance. If you have paid more than what the bank values the property to be, you may need to offer a larger deposit or have the finance application declined. So, do your research before making an offer on a property.
B – Borrowing Power
How much you can borrow is determined by your ability to repay the loan while taking into account your other expenses and debts.
- Incomes and expenses
Your income can be from a number sources like wages, rent, interest, dividends. Your expenses on the other hand are all your costs of living and other debt repayments e.g. Credit cards, other loans etc.
The banks will look at how much you have left at the end of the month. You need to comfortably repay the loan after all living expenses. This is often referred to as your serviceability.
- Self-declared living expenses
How do you the banks know what your living expenses are? They will ask you to declare it. There has been extra scrutiny of self-declared living expenses in the last year. The many of the banks now want to see 3 months of transaction history to confirm your living expenses.
Aside from how much money you make and how much you spend, there are some other factors that will affect your borrowing capacity according to the banks. They can include:
– Credit card limit, personal loans, HELP debt
– Number of dependents
– Credit history
– Whether or not your spouse or de-facto is earning an income.
– Child support payments
Borrowing power pointers:
– A $10,000 credit card limit can reduce your borrowing capacity by $40,000.
– A $30,000 car loan can reduce your borrowing capacity by $80,000.
– A pay rise of $10,000 can increase your borrowing capacity by $70,000.
C – Character
Banks will evaluate your character. Understanding your past credit activities gives banks a better assessment of the potential level of risk involved in approving you for credit. Your willingness and past performance in meeting financial obligations is an important indicator of character and creditworthiness.
They will look at things like:
– Job stability
– Savings history
– Address stability
– Credit file
– Past loan repayment history
– Unresolved legal issues
– Business track record (self-employed applicants)
D – Defence
This fourth finance fundamental is all about risk management and planning. It does not directly impact your loan application, however it can have a profound effect on your financial situation. Insurance is invaluable, and it can’t be stressed enough how important it is.
Types of insurance you need to consider:
- Assets – Home and contents insurance, Landlord insurance
- Income – Income protection insurance
- Lifestyle – TPD and life insurance
Another form of defence is being prepared and having a plan. Knowing exactly what you are getting yourself into and having a plan B. This involves speaking to your accountant and financial planner on a regular basis to plan and review your financial future.
Some things to consider here are:
- Plan for a wedding, starting a family and having kids or a new car.
- Have a financial buffer (don’t stop saving).
- Review your budget regularly.
Your financial and life plans will also have an impact on the types of products your mortgage broker will offer to help you achieve the goals you set out.
For further guidance with next property purchase contact Your Future First on 03 9362 1458 or email andy@yourfuturefirst.com.au