A mortgage broker has listed the five things you should never do when applying for a home loan in Australia and the everyday actions that could get you rejected.
From using credit cards to withdrawing cash, Barbara Giamalis, senior broker at opportune homelisted the little-known ‘red flags’ that banks and lenders take note of.
Giamalis said there are several misconceptions when applying for a home loan, especially when it comes to credit cards and credit scores.
In fact, you think it’s better to have a lower credit score and no credit cards than a high score and one or two on the go.
He offered his industry advice to FEMAIL as a way to help Australian home seekers who are finding it harder than ever to enter the highly competitive 2024 housing market.
A mortgage broker has listed the five things you should consider before applying for a home loan in Australia and the everyday actions that could get you rejected.
Ms. Giamalis (pictured) has over 25 years of experience in the industry.
1. Avoid cash withdrawals
It may surprise some that cash withdrawals are also a “red flag” when applying for a home loan.
This is because the mortgage broker has no way of knowing what the money was used for and why.
‘If you go to an ATM regularly and take out $1,000 a month, or $1,000 a week, which we often see, you can’t track where that money has gone. “It’s better to make purchases that are traceable,” Ms. Giamalis said.
Mrs. Giamalis added that since there is no trace of the money, it is classified as a “living expense.”
“If you’re buying a couch, a car, or whatever, it’s best to have a trail of where that money has gone so the mortgage brokers can tell the bank that it’s a discretionary expense and they won’t accept it.” into consideration when considering living expenses.’
2. Cancel your credit card
The use of credit cards can significantly affect how much the bank is willing to offer the applicant.
Giamalis said many of his clients believe credit cards can help improve their credit score and borrowing capacity, but this is not the case in Australia or New Zealand.
“It’s a myth that you need a good credit score through a credit card to get approved for a home loan, because your credit score is what it is,” Ms. Giamalis said.
‘If you’re a first-time borrower and you’ve never had a loan, your score won’t be very good, it could be around 700, but it’s better than having 800 with two credit cards.
“If you have a $10,000 limit, then we base it on the $10,000 limit whether you have a $0 balance or not, so getting rid of credit cards makes a big difference in service.”
It may surprise some that cash withdrawals are also a “red flag” when applying for a home loan.
3. Never use “buy now, pay later” services
Services like Afterpay should be used wisely, as banks and lenders will want to know how money is spent and why these platforms are used.
If an applicant chooses to pay off purchases in increments, including interest-free payments, this may indicate to some lenders that the applicant may not be financially stable.
‘Most lenders, including us, will take into account the applicant’s living expenses. “If an applicant uses buy-now-pay-later services for more than he has in his savings, this could be a red flag and lenders may question whether they can afford a loan,” he said.
‘Services like Afterpay also reserve the right to report negative activity (late payments) on your credit history. Which means if you miss payments, it could negatively affect your credit score.
4. Don’t forget to pay your HECS debt
It may seem obvious to pay off as much debt as possible before applying for a home loan, but people often don’t take higher education debt into account.
‘The Higher Education Loan Program (HELP) affects your borrowing power. HELP debt is a liability that must be declared in the mortgage loan application process,” said Ms Giamalis.
‘The impact of HECS on your ability to obtain a home loan may vary depending on your income level and the amount of your HECS debt. Seeking financial advice before deciding to pay off your debt is essential.’
5. Don’t wait to start saving for a mortgage
Those who want to get on the real estate ladder should act as if they have a mortgage before applying for a loan.
This can be done by contributing to your savings every time you get paid, as this shows lenders that you are disciplined when it comes to finances.
“One of the best pieces of advice for young people, which they can start applying now, is to start saving for their monthly mortgage payment before applying for a home loan, as it shows dedication,” Ms Giamalis said.
‘For example, if you borrow $600,000, your payment will be $3,000 a month. It is favorable to see that they are saving $3,000 a month, either in rent and/or savings.
“It shows dedication and a willingness to be able to pay your mortgage instead of ‘I’ll go out for the night and spend $500′ because you can’t do that once you have a mortgage.” A three-month savings history is a great way to demonstrate this.’
In addition to the five points, it all comes down to salary and reducing spending habits (file image)
How else can Australians improve their borrowing capacity?
It all comes down to salary and reducing spending habits.
“It’s complicated because, apart from paying off credit cards and paying off personal debts, there’s not much you can do other than ask for a raise or look for a second job,” Ms. Giamalis said.
‘You should be careful, however, as increasing your income could also put you in a higher tax bracket and increase your household expenditure measure (HEM). The HEM is an established benchmark that is used to determine your living expenses based on your income ZIP code and number of children.’
If you take out a home loan with a non-partner, such as a family member or friend, this may increase your borrowing power, but banks will see you as two people with their own expenses.
