If you’ve decided that 2025 is going to be your year to purchase your first home, now is the time to make it happen! Interest rates are falling, and further interest rate decreases are predicted for this year, which will make your mortgage more affordable.
Preparing for a successful Mortgage Application
So, what do you need to do to ensure your mortgage application is successful?
Some key points to consider:
- What is your credit score?
- Debt to Income Ratio
- How are your bank accounts looking?
- Can I show that I can afford my new mortgage repayments?
- Do you have unused credit card limits?
- Increasing your deposit amount
- Extra costs you need to factor in when purchasing a home with less than 20% deposit
Check your Credit Score
Debt to Income Ratio (DTI)
The DTI ratio measures the percentage of your income that goes toward paying your debts. Banks use this ratio to determine how risky it is to lend to you.
DTIs are calculated by dividing your total debts (eg. mortgage + credit card limits + finance loans etc) by your total income (before tax) to give you a ratio number. The higher the number, the higher your debt is relative to your income and therefore considered a higher risk.
For example – if you had a $500,000 mortgage + $20,000 credit card limit + $30,000 student loan, and your income was $90,000 pa, you would divide $550,000 (being the total debt) by $90,000, to get a DTI ratio of 6.11 – meaning your debt is 6.11 times your income.
A high DTI ration means a big part of your income goes towards debt repayments which can make it harder for you to manage extra costs like a mortgage.
Lowering your DTI ratio by paying off your debts (such as student loans, personal loans, vehicle loans etc) can boost your chances of getting a mortgage.
How are your bank accounts looking?
Can I show that I can afford my new mortgage repayments?
Do you have unused credit card limits?
Increasing your deposit amount
- Personal savings
- Term Deposit
- KiwiSaver funds
- Financial gift from immediate family
Extra costs you need to factor in when purchasing a home with less than 20% deposit
If purchasing with less than 20% deposit, you’ll need to factor in additional costs with your mortgage due to the extra risk involved to the bank.
You’ll need to factor in the following additional costs:
- You’ll need to get a Registered Valuation on the property you’re looking to purchase
- You’ll either be charged a Low Equity Premium (which can be added to your loan); OR
- You’ll have a Low Equity Margin added to your interest rate
- Loan Mortgage Insurance – if purchasing through the First Home Loan Scheme, you’ll need to pay 0.5% of the mortgage balance as a one-off fee, which is normally added to the loan balance
- The bank will not be able to offer any of their ‘Special Interest Rates’ as they’re reserved for clients who have 20% or more as a deposit
- As your mortgage will be larger, your loan repayments will also be higher – however it does get you on the ‘property ladder’ sooner
What is a Low Equity Premium (LEP)?
A LEP is an additional fee charged by lenders and is often added to your home loan amount.
What is a Low Equity Margin (LEM)?
Want to find out more?
If you’re considering purchasing your first home, we recommend you seek expert help from one of our experienced Mortgage Advisers.