Applying for a mortgage is much like creating a Tinder profile. You want to make your mortgage application 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 bit of judgment: you should not put personal financial information out in the Tinder open market.
Now more than ever, banks are evaluating 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 game. Pretend you have the mortgage amount you hope to borrow, at an 8% interest rate. For instance, if you were to borrow $500,000 at 8% over 30 years, you would be looking at $846 per week in mortgage payments. Assuming the amount is higher than what you pay in rent, put the difference between your pretend mortgage and your actual rent into a savings account each week. So, if you’re paying $700 in rent, you would put aside $146 weekly.
As of the time of writing, the banks will calculate your ability to pay a mortgage at 8-9%. This is to ensure you can weather fluctuations in interest rates over the life of your mortgage. So, if you can play the above game at 9% even better! But even at 8%, if you play the game for three months it gives the banks three months of bank statements showing you are already living within a budget that covers a mortgage at 8%. This 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.
An important rule when doing the above exercise is not to dip into your savings. If you do, the bank could infer that you can’t 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! Depending on how long you’ve played, you could have the money to cover the cost of the move. Or maybe even a smaller mortgage. Or perhaps you can get the backyard of your new home fully fenced for a miniature schnauzer. You’ve wanted forever but couldn’t get one 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 8%. 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 instil great money habits.
Whether you’re playing at 9% 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. 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 include your Tinder profile in your bank application. It unnerves the loan assessors and causes confusion about what you are actually applying for.
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