By Carina Stathis For Daily Mail Australia
16:29 02 May 2024, updated 16:29 02 May 2024
A mortgage broker has listed the five things to never do when applying for a home loan in Australia – and the everyday actions that could see you turned away.
From credit cards usage to taking cash out, Barbara Giamalis, the lead broker at Tiimely Home, listed the little-known ‘red flags’ banks and lenders take note of.
Ms Giamalis said there are a number of misconceptions when applying for a home loan, especially when it comes to credit cards and credit scores.
In fact, she believes it’s better to have a lower credit score and no credit cards than a high score and one or two on the go.
She offered her industry tips to FEMAIL as a way to help Aussie home-seekers who are finding it harder than ever to break into the highly competitive 2024 property market.
1. Avoid cash withdrawals
It may come as a surprise to some that cash withdrawals are also a ‘red flag’ when applying for a home loan.
This is because the mortgage broker has no way of knowing what the money was used for and why.
‘If you’re going to an ATM regularly and taking out $1,000 a month, or $1,000 a week, which we often see, you can’t track where that money has gone. It’s better to have purchases that are traceable,’ Ms Giamalis said.
Ms Giamalis added that as there’s no trace of the money it’s classed as a ‘living expense’.
‘If you’re buying a couch, a car or whatever it may be, it’s better to have a trail to show where that money has gone so mortgage brokers can advise the bank that these are a discretionary expense and they won’t take them into consideration when looking at living expenses.’
2. Cancel your credit card
Credit card use can significantly impact how much the bank is willing to offer an applicant.
Ms Giamalis said a lot of her clients believe credit cards can help improve their credit score and borrowing capacity – but this isn’t the case in Australia or New Zealand.
‘It’s a myth that you need a good credit score through a credit card to get approved for a home loan as your credit rating is what it is,’ Ms Giamalis said.
‘If you’re a first-time borrower and never had a loan, your rating won’t be great, it might be around 700, but it’s better than having 800 with two credit cards.
‘If you’ve got a $10,000 limit then we base it on the $10,000 limit, whether it’s on a $0 balance or not, so getting rid of credit cards makes a huge difference on servicing.’
3. Never use ‘buy now, pay later’ services
Services such as Afterpay should be used wisely as banks and lenders will want to know how money is being spent and why these platforms are in use.
If an applicant opts to pay off purchases in increments, even interest-free payments, this could signal to some lenders that the applicant may not be financially stable.
‘Most lenders, including us, will look at the living expenses of an applicant. If an applicant is using buy now pay later services more than what they have in their savings this could be a red flag and lenders could question whether they can afford a loan,’ she said.
‘Services like Afterpay also reserve the right to report negative activity (missed payments) on your credit history. Meaning if you miss payments this could impact your credit score negatively.’
4. Don’t forget to pay off your HECS debt
It may seem obvious to pay off as much debt as possible before applying for a home loan, but people often don’t factor in higher education debt.
‘Higher Education Loan Program (HELP) impacts your borrowing power. HELP debt is a liability that you need to declare in the home loan application process,’ Ms Giamalis said.
‘The impact of HECS on your ability to get a home loan may vary depending on your income level and the amount of your HECS debt. Seeking financial advice before deciding to pay off your debt is crucial.’
5. Don’t wait to start saving for a mortgage
Those wanting to get on the property ladder should act like they have a mortgage before applying for a loan.
This can be done by contributing towards your savings every time you’re paid as it shows lenders that you’re disciplined when it comes to finances.
‘One of the best tips for young people, and one they can start doing now, is to start saving for their monthly mortgage payment before applying for a home loan as it shows dedication,’ Ms Giamalis said.
‘For example, if they’re borrowing $600,000, their payment will be $3,000 a month. It’s favourable to see that they’re saving $3,000 a month whether that be in rent and/or savings.
‘It shows a dedication and willingness to be able to pay your mortgage instead of ‘I’ll go out for the night and spend $500′ because you can’t do that once you’ve got a mortgage. A three-month saving history is a great way to prove this.’
How else can Aussies improve their borrowing capacity?
It all comes down to salary and reducing spending habits.
‘It’s a tricky one because apart from cancelling credit cards and paying out personal debts, there’s not much more you can do other than ask for a salary increase or take on a second job,’ Ms Giamalis said.
‘However, you need to be wary as increasing your income could also put you into a higher tax bracket and raise your household expenditure measure (HEM). The HEM is a set benchmark used to determine your living expenses based on income postcode and number of children.’
If you’re applying for a home loan with someone who is not a partner, such as a family member or friend, this may increase your borrowing power but banks will see this as two individuals with their own expenses.
