Applying for a mortgage is much like creating a Tinder profile. You want to make yourself as attractive as possible to get a bank to “swipe right”. Banks aren’t interested in photos of you taken from a good angle in flattering lighting, but they do want to know you have enough deposit. They don’t care whether you love to go kitesurfing (you did it once on holiday, that counts, right?), but they do care whether you have the income to pay a mortgage. They don’t care if you love the beach (except for the sand, yuck), but they do care that you are responsible with your money.
Warning: It’s important not to confuse your mortgage application with your Tinder profile, you do not want to put your income details or bank statements on dating sites. Unless that’s the angle you’re going for, no judgement, you do you. Actually, a little bit of judgement; you should not put personal financial information out in the Tinder open market.
Now more than ever banks are looking at your spending habits when deciding whether to approve your application. They review your bank statements for the last three months and if what they see causes concern they may reduce the amount they are willing to lend you or even decline your application outright.
For first home buyers preparing for a mortgage application, we suggest you play a bit of a game. Pretend you have the mortgage amount you are hoping to borrow, at a 7% interest rate. For instance, if you were to borrow $500,000 at 7% over 30 years, you would be looking at $767 per week in mortgage payments. Assuming the amount is higher than what you are paying in rent, put the difference between your pretend mortgage and your rent into a savings account each week. So if you’re paying $550 in rent, you would be putting aside $217 each week.
“7% interest!” you yelp, “That’s just cruel, rates are currently below 3%!” Although interest rates are currently extremely low, the banks will still calculate your ability to pay a mortgage at 7% in order to ensure you can weather fluctuations in interest rates over the life of your mortgage. So to give the banks three months of bank statements showing you are already living within a budget that covers a mortgage at 7% is a powerful strategy to get your application across the line. Not only that, once you have a mortgage you’ll already be used to living within this new budget. If you stuck with that budget and locked in your payments at $767 per week, with a fixed rate of 2.65% (based on rates in the market at the moment), you would be mortgage free within just over 15 years, rather than 30. You would also have saved over $500,000 in interest, a life changing amount.
A key rule when doing the above exercise: do not dip into your savings. If you do, the bank will infer that you can’t actually live within the budget, negating the whole point of the exercise. Stick to the budget and when you do get the mortgage your savings account will be healthier thanks to playing this game. Depending on how long you’ve played, it could mean the cost of moving to your new home is covered or maybe even a smaller mortgage. Or perhaps you can get the backyard of your new home fully fenced for the miniature schnauzer that you’ve wanted forever but couldn’t get because you were renting. Maybe you’ve already got a name picked and are regularly stalking breeders online. Or is that scenario too specific to be relatable?
Of course with life being messy and often expensive, it may not be possible for you to play this game at 7%. This can be demoralising and you may feel like home ownership is unachievable. But while you might not be in a position to buy right now, playing the game at a lower pretend interest rate will still help grow your deposit and instill great money habits.
Whether you’re playing at 7% and keen to get in front of the bank soon or playing at 5% and preparing for possibilities down the line, our Mortgage Lab mortgage advisers can give you advice specific to your individual situation. And when the time is right, they can manage the finance process for you. This is free to you as the banks pay brokers for their services directly. Get in touch today to get on your way to buying your first home. For general advice on the other aspects of purchasing a home, from finding a property to moving in we recommend Settled.govt.nz.
A final note: Please do not provide your Tinder profile as part of your bank application. It unnerves the loan assessors and causes confusion as to what you are actually applying for.
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