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Traps to avoid when shopping for your first home loan
By John Collett
Common misconceptions about getting a first home loan, whether it is that you need a credit card to build a credit score or that paying off purchases in increments, even if interest free, won’t be a red flag to lenders, can catch out prospective first home buyers.
One of the biggest myths about getting a home loan is that you need to build a credit rating before applying, but in fact, cancelling your credit card could benefit the application process, says Barbara Giamalis, lead broker at lender and mortgage broker Tiimely Home.
First home buyers need to beware mortgage myths.Credit: Peter Rae
That will depend on individual circumstances as some people like having a credit card, even if for use only in emergencies, but Giamalis says you do not need a particularly strong credit score to be approved for a home loan.
If you have got credit cards, try and pay them off and consider cancelling them before applying for a loan because it gives you greater borrowing power, she says. A lender will include the credit card limit even if the balance is zero, so credit cards can make a big difference in how much you can borrow.
If an applicant opts to pay off purchases in increments, even interest-free payments, this could also signal to some lenders that the applicant may not be financially stable.
Lenders run the ruler over borrowers’ living expenses, and could see frequent use of “buy now, pay later” (BNPL) providers as a red flag, Giamalis says. Some BNPLs reserve the right to report missed payments on your credit history, which could affect your credit score.
The federal government has introduced a bill to parliament that will regulate BNPL as consumer credit, similar to how credit cards are regulated. Under the proposed changes, new users of those services would undergo a credit check, for example.
Giamalis says that as well as saving for your deposit, you should start saving the amount you need for your monthly mortgage repayment. This 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,” she says.
George Samios, the founder of mortgage broker Madd Loans, says gambling, pay day loans and cash advances are also red flags to lenders, who will “often knock you back if they see conduct like that.”
Even though it is a good idea to tidy up your personal finances, such as paying off debts before starting the search for a mortgage, at the end of the day, it can be the choice of lender that determines how much you borrow, Samios says.
“Each lender looks at income differently, he says. Some count 80 per cent of overtime pay and some will count 100 per cent as income,” he says.
Some lenders treat the income earned by those in certain professions, such as medicine and allied professions, more favourably than income earned in other jobs, or where sales commissions comprise a significant portion of remuneration.
That is where a mortgage broker can help select a lender or lenders who are good fits for the borrower, Samios says.
- Advice given in this article is general in nature and not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their personal circumstances before making any financial decisions.
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