Thanks to the low home loan rates, many New Zealanders are applying for home loans to buy properties. First home buyers feel it’s good timing to buy a property because the home loan repayment may be cheaper than the rental cost. For property investors, the rental income is more likely to cover the interest costs and other outgoings, such as insurance and maintenance.

However on the other side of coin, considering the Covid-19 pandemic, New Zealand banks have tightened up their home loan lending criteria. So, if you are looking to borrow to buy your family home or rental property in the current market, how can you prepare yourself so your application will have the best chance of approval outcome? There are certain areas you need to take a close look that will make your application more attractive in the eyes of lenders. Watch the video below to find out 5 tips for maximise your chances of getting approved, and the loan amount.

Maximise your chances of getting approved for a home loan

The first five tips:

Here’s a checklist of tips on getting approved for a mortgage:

1. Stable income – 02:24

2. Receiving full rental income – 03:44

3. Boarder income paid through bank transfer, not cash – 04:58

4. Spring clean your expenses – 05:32

5. Existing home loan structure – 06:23

The remaining five tips:

6. Review your credit card limit - 01:17

7. 20% deposit is preferred when buying a house - 02:28

8. Use property equity to buy another - Is your equity in the “right” bank? - 03:50

9. Pay off as much personal loans as possible - 04:58

10. Watch out your bank account conduct - 06:00

1. Stable income

Income stability is one of the most important factors that lenders consider when you are trying to get approved for a mortgage, as this is generally the main source of income used to meet your loan repayments.

Some industries, such as travel and flights, have been hit severely by the Covid-19 pandemic – some people had their working hours cut, or worse, they lost their jobs.

Before you apply for a home loan, you need to make sure your income is stable during the past few months. If you were impacted by COVID-19 and the lockdown, you need to show your lenders you have recovered through your payslips.

If you are on PAYE job, it’s relatively easier to proof your income was unchanged during the lockdown or have recovered through the latest payslips. But if you are business owners, you may find it harder to provide sound evidence satisfying lenders’ requirements, as business recovery often takes time to happen. Plus, additional financial reports such as forecast and business plan are required.  

2. Receiving full rental income

If you are a property investor, you can use rental income on the property that you already own to qualify for a home loan servicing test, as long as you can show your ‘full’ rental income to your lender. But in some scenarios, it may be impossible to show the full rent amount, such as:

• Your tenants just left.
• Your friends or family are living in your rental property, so you are not charging them the full rent, or even not charge at all.
• You rent the property by the room, and it doesn’t add up to the full rent figure.

The above situations can affect how the banks look at your rental income. In the past, you can use the rental appraisal report on the property as the evidence of your rental income, but now given the Covid-19 atmosphere, banks are reluctant to use it. This is because the rental appraisal is based on the performance of the previous rental market. The market is changing, and tenants are not likely to move frequently and, in some instances, pay full rent due to the Covid-19.

So, the ideal situation is, your tenants already in your rental property and plus it’s fully rented.

3. Boarder income paid through bank transfer, not cash

If you rent out the spare rooms in your home, please ask your boarders or flatmates to pay you the boarder income through bank transfers, instead of cash. From the view of lenders, it is hard to track how much you earn through boarder income if the payment is made by cash. During the Covid-19 period, the cash payments may not be accepted by your lender.

4. Spring clean your expenses

When banks calculate your borrowing power, they assess your living expenses in two perspectives:

Each lender has their benchmark to calculate the minimum living expenses. The calculation is mainly based on your household structure (such as the number of adults and kids). Some lenders also believe the income does make a difference. The more income you earn, the more living expense you have.

On the other hand, when you apply for a home loan, they’ll also look at your bank statement and see how much you actually spend each month. If you spend a lot more than the number on their benchmark, it can seriously hurt your chances of being approved for the same loan amount.

So, before applying for a home loan, you may need to work on minimising unnecessary spending and look like a little budget ninja when your lender looks at your bank statement.

5. Existing home loan structure

If you have an existing home loans, then your existing home loan structure has a direct impact on whether you are eligible for a mortgage and how much you can afford to borrow. This is because the lenders need to make sure you can service your existing financial commitments before you can service more loans. They’ll look at details of your existing loan, such as the current loan amount, the interest rates, the repayment amounts, and the loan maturity dates.

If you adjust the structure on your existing home loan, then it can improve your future borrowing capacity. For example, say you are on a higher interest rates now, and you are thinking about breaking your loan and re-fixing at lower rates. It turns out that the break cost may be equal to the savings if you act. But it still worth re-fixing at a lower rate because it may improve your chance of getting a new home loan and even can borrow more money. So, before you apply for a home loan, we highly recommend you engage with a professional mortgage adviser to review your existing loan structure. 

6. Review your credit card limit

If you have good credit history, the bank may offer to increase the limit on your credit card even if you don’t need it. They assume the higher the limit you have on the card, the more you will spend and the more interest they will make from you. Some people think this is a sign of good credit history to qualify for accessing such amount, which is true.

But very few people realise the increased credit limit will lower your borrowing capacity because at the end of the day, it is a kind of financial commitment. Suppose you’re not using your credit card to the maximum amount, in that case, we highly recommend you reduce the limit on the credit card to the lowest possible amount for your situation, which boosts your borrowing power. You can temporarily increase the limits whenever needed it, the holiday season for example.

7. 20% deposit is preferred when buying a house

Generally speaking, most New Zealand banks accept 10% deposit (or 5% for First Home Loan) when purchasing your family home and 20% deposit for purchasing investment property.

Post COVID-19 lockdown, it is getting hard to borrow when you only have 10% deposit as banks have tighten up policy for lending over 80% (High LVR lending). If you do not provide 20% deposit, it’s not only make interest rates less competitive, but more importantly you will borrow much less compare to before COVID with the same income.

Covid-19 looks like the black swan event that kicked this change off, and banks are more cautious about lending now because:

• Due to the Covid-19, there’s some apprehension that property prices could fall. Also, less job security impacts on lenders’ confidence and appetite.
• During the crisis time like this, some banks only have the compacity to consider their own customers (whose income being paid into that bank for at least 3 months) therefore your options are very limited to only your own bank.

So, most lenders prefer to ask for at least 20% of the property value as deposit. The deposit can come from gifting, your own saving, sale proceeds of your assets, with first home buyers, you can consider using Kiwisaver withdraw and First Home Grant (subject to eligibility criteria) as well. We are not saying you have to have 20% deposit but if you can it will be very helpful.

8. Use property equity to buy another - Is your equity in the “right” bank?

If you’ve owned a property for some time and the value of the property has increased because of a rising property market for example, which means you have built up equity in your property over time.

Lenders may allow you to borrow money against the equity you have in your current property and use it as deposit for your next property purchase. Before you can leverage the equity in your existing property to buy another one, make sure your property equity is in the right bank.

No matter which banks hold your current property, the equity is the same. The main point is, having equity doesn’t necessarily means you can top up from the loan against that property. Not all the banks are equal regarding how they calculate your borrowing power based on your income, so the results may have huge difference from bank to bank.

Say your equity is staying in the bank that cannot lend you too much while the other bank can. Considering they don't have the equity in place, so they will ask you for 20% deposit or you have to move equity. But moving your equity from one bank to the other may cost you a lot of money if you're in the middle of a fixed-term interest rate.

So, engage with your mortgage broker to find out the best bank to hold your equity, and plan well to minimize the cost.

9. Pay off as much personal loans as possible

Personal loans, such as car loans and consumer loans for buying big items, can have a negative impact on your home loan borrowing power. From the perspective of lenders, it indicates you may spend more than you earn. When assessing your home loan application, lenders factor in your existing personal loan commitments to determine whether you are able to meet the proposed commitments.

If you were attracted by the low or zero interest rates offered by your personal loan lenders, it’s understandable. But lenders may concern there's no guarantee you would repay entirely by the time the free interest term expires. So if you’re thinking about maximizing your borrowing power for a home loan, it would be better not to have or minimize your personal loans.

10. Watch out your bank account conduct

In order to improve your chances of getting approved for a home loan, you should ensure that your bank account conduct is crystal clean and no unfavourable transaction behaviour in the eyes of lenders.

• No unarranged overdraft

Many New Zealand bank accounts allow you to continue withdrawing money even when the account has insufficient funds to cover the amount of the withdrawal. From a lender’s perspective, unarranged overdrafts indicate your financial situation is insufficient to support your expenses, which will affect your home loan application.

• No casino transactions

The occasional casino night is understandable, but a lender may perceive that you have regular gambling habits, and may be also concerned that there’s a higher chance of you getting into financial difficulties and being unable to keep up with payments, which can have a negative impact on your chance of being approved. So, before submitting a home loan application, avoid visiting the casino.

Getting approved for a mortgage

Tighter lending criteria have made it more difficult to secure a mortgage. The good news is that there are steps you can take to improve your chances of getting a home loan, especially during the Covid-19 environment.

Getting approval for a mortgage may be a daunting process. At Prosperity Finance, we can help you to step closer to applying for a loan that suits your needs – with less stress. Call us at 09 930 8999 for a no-obligation chat with our adviser.

Other related articles: 

Mortgage serviceability test rates have finally dropped – You may afford to borrow more now

How to improve loan structure to save on interest, repay your debt faster, and become mortgage free?

Top 5 reasons your home loan application is declined and what you need to avoid

Disclaimer: The content in this article are provided for general situation purpose only. To the extent that any such information, opinions, views and recommendations constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised financial advice. We therefore recommend that you seek advice from your adviser before taking any action.