How first-home buyers can maximise their borrowing

Ways to become more financially attractive to lenders

Buying your first home is meant to be an exciting process, but it can also be daunting – and sometimes downright scary. If you’re in the market to purchase property, you likely need to borrow money to buy it. A dream of buying the perfect first home can quickly fade because of lenders with tight purse-strings.

If you’re struggling to borrow as much money as you need, the good news is there are steps you can take to make yourself more financially appealing and increase your chances of getting a bigger loan.

When lenders decide how much cash they’re willing to lend you they look at a number of things, including your income, any existing debts and your credit rating. They also look at how much they think you can afford to repay. The trick to maximising the amount you can borrow is minimising any ‘red flags’ so that your finances are in the best possible shape when applying for a mortgage.

Here’s what you can do to maximise your borrowing power:

Minimise your debt

It’s no surprise that the more debt you have, the less you’ll be able to borrow. A bank won’t loan you money if you’re not in a position to keep up with your mortgage repayments. So, if you have savings set aside, consider using a portion of it to pay off your debts – you’re probably paying more in interest than you earn from your savings account anyway. Or, simply focus on getting that debt down as quickly as you can. The less debt you have, the more ‘financially attractive’ you’ll be to lenders.

Get rid of excessive credit

Having multiple credit cards and overdrafts – whether you use them or not – will influence how much you can borrow. Even if you’re saving that credit for a rainy day, from the bank’s point of view it’s still debt that you might have to repay in the future. If you have excess credit, either ask to reduce credit limits or get rid of the cards altogether.

Improve your credit score

Those with good credit scores tend to qualify for the best mortgage deals. A credit score gives lenders an indication of your credit history – how well you’ve looked after your finances in the past. Defaulting on a loan, having a credit application denied or falling behind on debt repayments will all bring your credit score down. A not-so-good credit score isn’t a deal-breaker, but it is something the banks will look at. To avoid any surprises, find out what your credit score is and clean up your credit history.

Organise your accounts

To add another tick in your favour, especially if you’re self-employed, you should get your accounts in order. Generally, lenders will need evidence of your accounts and income for the past couple of years. For self-employed people, the evidence requirements may be greater. Make sure you have all the paperwork you need before approaching your bank or lender.

Save a bigger deposit

The most obvious (but not so quick) step to improving your chances of getting a bigger home loan is to save a healthier deposit. It’s simple math – the bigger the deposit, the less you need to borrow. Deposits that are of 5% or 10% must be genuine. What this means is that a loan applicant must show that they have the capacity to save and that is reflective in the deposit being made up from genuine savings as in money in the bank, KiwiSaver – including money from the government and employer, and/or a bonus from salary.

Get a pay rise

Earning more is another sure-fire way to increase your chances of borrowing more. The higher your income, the more able you are to service a larger mortgage.

Spend less, save more

If increasing your income isn’t an option, then your best bet is to spend less and save more. Lenders also consider how you spend your money, so reduce any unnecessary expenses by setting a realistic budget to help you stay on track with your finances. Then, put any extra money into a savings account. Regular savings will put you in good stead and give you an advantage in the mortgage-approval stakes.

Consider a slightly longer home loan term

A typical mortgage term is 30 years. While opting for a longer-term can make monthly principal repayments more affordable, a word of caution – the longer the mortgage term the more interest you’ll pay. Age plays a factor as well, most lenders these days would like the loan to be paid off within the working life of the customer.

Get a helping hand

Joining forces with other people can significantly maximise how much lenders will allow you to borrow. Here’s how:

Joint mortgages

Two is better than one – purchasing a home with a partner or family member can boost your borrowing power, as the bank will consider both incomes.

Use a guarantor

Having a parent guarantee your mortgage is another option. Just be aware that lenders will check your parent’s financial situation too, and your parent will be held liable if you can’t make your repayments.

Family offset mortgages

With this type of mortgage, a family member puts money into a linked savings account that acts as a deposit, lowering your monthly repayments as interest is only charged on the remaining balance. This can help boost the amount you can borrow if your family’s savings massively increase your deposit. Just be careful they don’t need to access the cash anytime soon.

Use a broker to borrow more

In today’s property market, how lenders assess you against borrowing criteria can make or break how much you’re able to borrow – and could mean the difference between buying that property you love or missing out. There are lots of ways for first-home buyers to maximise their borrowing, which can be overwhelming. A mortgage broker can assess your current financial situation, help you increase your borrowing power and when you’re ready to make an application, help you find the best possible deal for your circumstances.

Want to know more about how you can maximise your borrowing today? Talk to one of the brokers at Global Finance now.

**These are general guidelines and are by no means a reflection of bank or lending policies