New Year, New Goals, New Home!

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Lisa Barton

Senior Mortgage Adviser

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

When applying for a mortgage, the bank will check your credit score as part of their assessment to determine how responsible you are with your finances. Multiple applications for short-term debts can lower your score. Before applying for a mortgage, you can check your credit score for free via centrix.co.nz/my-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?

When applying for a mortgage, banks will want to look at your last 3 months bank statements to make sure you’re managing your finances responsibly. If you’re regularly missing payments or overdrawing on your account, this will negatively impact your application.

Can I show that I can afford my new mortgage repayments?

It is recommended that you ‘demonstrate’ that you can afford your new mortgage repayments. You can do this by using any of the mortgage calculators available online, to work out what your new repayments will be. If you’re paying rent or board, you can transfer the difference to make up the amount you would be paying as a mortgage repayment to a savings account.

Do you have unused credit card limits?

When banks assess mortgage applications, they take into account your total credit card limits (not the balance you have owing) and will allocate anywhere up to 5% of your total limits as a ‘fixed monthly expense’. So, the higher your credit card limits are, the more the bank will allocate as an expense, which will negatively impact on your borrowing ability. If you don’t use your credit card, or you don’t need the full limit, you should consider closing or reducing your limit on your credit card.

Increasing your deposit amount

Buying a home is one of the biggest financial transactions you’ll ever be involved in. The price you pay for your first home is usually made up of a deposit and a home loan. Your deposit can be made up of funds from the following sources:
  • Personal savings
  • Term Deposit
  • KiwiSaver funds
  • Financial gift from immediate family
Ideally your deposit should be 20% or more of the property value, however, it may be possible to buy with a lower deposit amount. By having a larger deposit available, not only decreases the amount you need to borrow, but it can also mean you’ll get access to better mortgage interest rates and do not need to pay a Low Equity Premium or have a Low Equity Margin applied to your interest rate.

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)?

A LEM is a percentage amount, typically between 0.25% and 1.5% per annum (depending on your deposit amount), that is added to the interest rate of your home loan. This margin stays in place for as long as you have less than 20% equity in your home.  The good news is that this margin can be removed when the equity in your property increases to above 20%.  This occurs as you pay down your home loan and your property value increases over time.  Often this is not revised by the bank, so it is up to you to reach out to the bank and request for a review of your current equity position.

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.

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