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We break down the banks

Before you go looking for your new home you need to know how much you have to spend, and for most of us, that starts with one question, “How much can I borrow?” We break down the detail here, including what you can expect from each of the banks.

How much you can borrow VS how much you can afford

There are three main factors that determine how much you can borrow to buy a home. One is your income – how much you can afford to repay every week or month. Another is the house you want to buy – its age, location, state of repair and market value. The third is how much you have on hand for a deposit.

All the major banks ASB, ANZ, BNZ, and Westpac as well as other banks Kiwi Bank, SBS, TSB, co-operative bank, Heartland and Sovereign, are concerned that you can pay off the loan and still manage to live and support your family. They work out the amount they’ll lend in different ways.

Percentage of income

If your fixed payments – your potential mortgage plus any other debts – are more than 30-40% of your net income, most of the banks may hesitate to grant you a loan, however, few exceptions are there.

Our mortgage calculator can help you work out what your repayments will be, and also show what you’re in for if the interest rate goes up. Some of the banks also have calculators on their websites, but take care to include your current debt situation when using them – or consult to Global Finance for help on 09 255 5500.

Minimum surplus

A bank may also deduct your fixed payments and living expenses from your income, to arrive at an uncommitted monthly income (UMI). The level the bank is happy with will vary from bank to bank, and also depends on your household.

If you’re two working adults with no children, the bank will count both incomes, calculate less for a living allowance, and assume you have plenty of UMI. Children will lift the living allowance level, and the UMI will be calculated as less.

The higher percentage of the purchase price you need to borrow, the more UMI banks will expect you to have to qualify for a loan. They don’t want you to default, even when your income drops or interest rates go up.

Other things that will make a difference to how much you can borrow

Flatmates helping with bills

If you intend to have flatmates or boarders to help pay the bills, some banks will consider up to 70-80% of this income. Enlist the help of a GFS adviser to find out which banks will include flatmate contributions in their calculations.

When taking account of your situation, lenders may give ‘pre-approval’ of the amounts they’re willing to lend, but it’s wise to think of those loan amounts as upper limits when you’re making an offer on a house.

How much deposit you have

You will need a deposit or equity to buy a home, and the more you have the better. That could be money you’ve saved, a gift from a parent or an inheritance – but most lenders are really only concerned if it comes from a loan, as it could affect your ability to repay your mortgage. They’re happiest when your deposit comes from savings, as it’s evidence of your good financial habits.

You can access your KiwiSaver for your first home grant, but only if you’ve been a member for at least three years. You may even qualify for a KiwiSaver HomeStart grant which will help boost your deposit.

If you have bad credit

Bad credit means you’ve missed payments on bills, loans or hire purchases, or you might even have defaulted altogether. These things get recorded, and lenders can easily see your poor financial history when you apply for a home loan. They may still lend you money, but probably not as much and they’re more likely to turn you down as too great a risk.

If that happens, GFS adviser might be able to find a non-bank lender who deals in higher risk. Be aware that loans from this type of lender will have slightly higher fees and interest rates.

The current policies of each bank

The major trading banks’ lending policies are not all the same, and they’re not set in stone. In fact, they can change from day to day, subject to global banking trends and often volatile overseas lending markets. What the banks might say ‘Yes’ to on Monday, could be a ‘No’ on Tuesday. Similarly, banks may offer an amazing interest rate on Friday that is no longer on the table after the weekend.

For this reason, it’s a good idea to consider all the trading banks and your options with each, to get a good deal. You’ll want to borrow the right amount, at the best interest rate, and the best arrangement for your situation. That’s a lot of work, which is another good reason to work with a mortgage broker. They have access to tools that will shortcut the process for you, then find you the right lenders who will come to the table.

Save, do the rounds – and get a broker on your side

When you’re thinking of buying a house, your first job is to start saving for a deposit. Next, do a careful and detailed budget of your income and outgoings, and look for ways to tighten your belt if you need to. When you’re ready to start house-hunting, it’s also a good time to shop around the banks to get pre-approval. That way, funds will be ready to go when you find your perfect house.

Your budget figures will help get you the best offers possible from lenders – they can see your UMI at a glance and can calculate accordingly. To really do the rounds of every major bank – and get the loan amount you need – a mortgage broker can be your new best friend. Don’t forget, mortgage brokers, get their fees from the lenders, which means their service to you is free. ( T&C’s apply)
A Disclosure statement can be made available upon request for free.

Thinking of buying a property? Talk to Global Finance today about how much you can borrow, and from which lender.