What do lenders look for in a home loan application?
When preparing to apply for a home loan, it can be helpful to understand what the lenders will look for. You can then determine how your situation holds up. But don’t worry, you don’t need to be an expert! A good mortgage adviser will always be able to tell you how a lender is likely to view your home loan application. Still, it’s useful to understand the topic to inform your conversations with your adviser.
Put simply, mortgage lenders will assess your:
- Deposit
- Income
- Credit rating
- Spending habits
- Quality of information in the application
How much deposit do you need to get a mortgage?
Deposit for first home buyers
Most main bank lenders will generally accept a 10% deposit for new builds and a 20% deposit for existing properties. Some banks may even have capacity to accept less than 20% deposit for existing properties (this is always changing, so check in with us). As a first-home buyer, you can use your KiwiSaver if you’ve been in the scheme for at least three years.
You might be lucky and have parents who can gift or lend you money to get you into your first home. But be aware that if the money is a loan, the lender will take the repayments into account when calculating your income.
If you have less than 20% and want to buy an existing property, you may be able to get a loan under the First Home Loan scheme, if you meet the criteria. Otherwise, depending on their current lending policy, you may still be eligible for a mortgage with a bank or non-bank lender. Talk to us about whether you could get a low-equity loan
Deposit for Next home buyers
As mentioned above, most main bank lenders will accept a 10% deposit for new builds and a 20% deposit for existing properties. You can use the proceeds of the sale of your current house for the deposit, or you can get a bridging loan to buy your next home before selling your current one. In that case, you would use the equity in your current house to get the bridging loan.
Deposit for investment property buyers
Most main bank lenders require investors to pay a 30% deposit for an existing property and 10% for new builds. You can use the equity from your current properties towards a deposit.
Some lenders accept an investor with less than a 20% deposit for a new-build investment property. However, the ‘difference’ in deposit must be made up via an external loan (which you can organise as a separate loan). This would be factored in for servicing purposes.
To qualify under these circumstances, the new build must have the title and code of compliance certificate issued, and the purchase must be settled within 90 days following loan approval.
Lenders have ever-changing exceptions and special low-deposit offers
Whether you’re a first-home buyer, a next-home buyer or an investor, using a mortgage adviser is invaluable when finding the right lender for you. Mortgage advisers have an up-to-date bird’s eye view of what lenders are offering and can save you a tremendous amount of time and effort compared to if you did the research yourself.
How much income do you need to get a mortgage?
The answer, of course, depends on how much you’re borrowing. To get an idea, check out our mortgage calculator. Enter the amount you want to borrow, set the period to 30 years, and set the interest rate at 8%. That is the approximate period and rate the banks use to test your affordability at the time of writing (October 2024). However, some banks require a 25-year term for investment properties. The period they will use, also depends on how many working years you have left to repay your mortgage.
The calculator will then tell you what your repayments would be. If your income doesn’t perfectly match the bank’s requirements, don’t panic. Non-bank lenders have different criteria and can often accommodate applicants that the banks decline.
Be aware that any debt you have, will also be taken into account when the lender calculates your income. They’ll also make the calculations assuming that your credit card and overdraft limits will be maxed out. They don’t take into account whether you never use the overdraft or if you pay off your credit card each month. Therefore, reduce your credit card and overdraft limits as much as possible. Or even better, cancel them outright! If you’re concerned about your debt, look at our blog on getting a mortgage when you have debt.
Debt-to-income restrictions
On 1 July 2024, debt-to-income ratio (DTI) restrictions were introduced as an additional affordability check that lenders must complete.
DTI ratios are calculated by the total debt divided by the total gross income. The current DTI is a ratio of six.
Banks have a limited ability to lend outside of that ratio:
- 20% of new owner-occupier lending to borrowers with a DTI ratio over six.
- 20% of new investor lending to borrowers with a DTI ratio over seven.
If it’s been a while since high school maths and the mere word ‘ratio’ is giving you a headache, relax! Your mortgage adviser can calculate your DTI for you.
Self-employed income
The main banks will generally require at least two years of proven income if you are self-employed. This means two years of accountant financials and IRD tax summaries. If you have been in business for less than two years, have read our blog on how to get a mortgage if self-employed for less than two years.
How does my credit score impact my home loan application?
It depends on the lender. Banks are reasonably conservative when assessing an applicant’s eligibility based on their credit score. Non-bank lenders are more flexible and risk-tolerant. However, they do charge higher interest rates as a result. See our blogs about getting a mortgage with bad credit and getting a mortgage after being discharged from bankruptcy.
How do my spending habits affect my home loan application?
This topic is an evolving one. In recent years, the Credit Contracts and Consumer Finance Act (CCCFA) made banks much more conservative in their approach. They treated an applicant’s current spending as indicative of future spending, which doesn’t take into account that the vast majority of people adjust their spending if needed once they have a mortgage.
Thankfully, the rules have loosened as of this writing. The code still requires lenders to determine whether a borrower can afford a loan, but now they can use common sense and allow for individual circumstances.
It’s still a great exercise to live as if you have a mortgage, before you apply for a home loan. It gives you a taste of what your budget will be and demonstrates to lenders that you will be able to support a mortgage. To do this, use our mortgage calculator to determine your approximate fortnightly mortgage repayment, then minus any rent you pay. The figure you’re left with is how much you need to save each fortnight.
The quality of the information in the home loan application matters
What happens if you don’t provide the correct documentation to prove all of the above? At best, you’ll have to go backwards and forwards with the lender; at worst, they may decline you outright. This is where a mortgage adviser adds a lot of value. We manage the application process to ensure you’re putting your best foot forward when applying for a loan. If you want to purchase a property or restructure a current mortgage, get in touch, and we’ll help you get sorted.
