While you’re saving for your first home, it's a really good idea to get ‘bank fit’. What exactly does ‘bank fit’ mean? Basically if you can present yourself in the best light possible and tick a few boxes the bank has, you are more likely to be approved. So what exactly are the banks looking for and how can you get ‘bank fit’?
Size of deposit
Firstly, the bank will look at the size of your deposit and the value of the home you want to purchase. You can start seriously considering purchasing a property when you have a minimum of 10% deposit but we will always say the higher, the better. The higher your deposit, the smaller your loan and the less income you need to have to service that loan.
Anything over 20% is great, as it means you’re a bit less risky in the bank's eyes. Anything less than 20%, and you are a bit more risky and the bank may want to charge you some more interest in the form of a low equity margin. More info on low equity margins can be found on our blog here. They aren’t anything to be afraid about, but you do need to be aware of them.
Level of income
Your level of combined income along with the size of your deposit, gives the bank an idea of what your overall affordability is. Most first home buyers go in with their partners so if you both have steady employment or a steady income this will be a big tick in the bank's box. The amount you earn will generally impact the amount you can borrow so doing whatever you can to earn as much as you can, will help.
The less existing debt you have the better. The bank wants you to have as much capacity available to repay your mortgage. Any existing debt you have such as store cards, car loans, personal loans, credit cards or any other type of debt, including interest free deals will impact your ability to borrow. The more of these you can repay and close, the better.
That’s not to say that you can never have had any debt. The bank likes to see that you are a responsible borrower and that basically means paying off your debt, in full and on time.
Credit cards can be a really useful tool but the higher your limit, the less you can borrow. It’s a good idea to reduce the limit just to what you need to help improve your affordability.
When applying for a home loan, the bank wants to ensure you are conducting your accounts well. That pretty much means that you are paying your expenses and bills on time and basically managing your accounts well. Constant overdrafts, defaults and debt collection will not be a good look.
It’s a really good idea to get a Kiwisaver and savings account going early and to make regular contributions into it. Banks love to see a good record of savings, so start early and make it regular, even if it is a small amount.
The best case scenario is that you have a deposit, an income and secure employment, little to no existing debt, you’re good with your money in general and you have a bit of a savings history. In most cases this will result in a pre-approval. If you don’t quite tick all these boxes or have a tricky situation, the best thing you can do is talk to one of the advisers at My Mortgage. They’ll let you know exactly what you need to do to get yourself into a position to get a pre-approval.