There seems to be a lot of mystery as to what lenders are actually looking for when assessing a potential client’s application. Each bank seems to have their own lengthy list of requirements and it almost seems impossible for the typical client to know it all – that is why mortgage brokers exist!
A proficient mortgage broker understands what different lenders require and what banks policies are best suited to the individual needs of the client.
In short, all lenders will require both cashflow and equity prior to considering a client’s application. This ensures lenders of two things; sustainability and safety.
Lenders want to ensure that when a client takes out a mortgage, they have surplus cash flow each month to meet their repayment obligations. That is – they want to see consistency within their income history, as well as the applicant’s outflows and inflows.
Depending on your own unique situation you could be asked to provide the following documents to confirm your surplus cashflow:
Base Wages and Salaries
Some lenders may require only a single payslip for a permanent employee, whilst other lenders may ask for multiple payslips or bank transaction history to confirm receipt of payments.
Commissions, Overtime and Bonuses
Lenders will generally require further evidence and history to accept these payments as a reliable form of income. . All lenders will treat these forms of payment differently, so it is important to have a well-informed broker that understands the banks different policies.
Generally, lenders will want to see a two-year minimum of business financials prior to lending to a self employed applicant. That is, two years of individual tax returns for sole traders and two years of tax returns for companies and trusts.
There are a number of other income sources such as rental income, child support, family tax benefits and dividends. All lenders will treat each of these income sources differently.
Lenders will want to know what your current living expenses and liabilities are. For example, if you live at home rent free with your parents, your living expenses are going to be substantially lower than a couple with four dependent children.
All existing liabilities will need to be factored into your cashflow. Consider recurring monthly expenses such as your rent, personal loans, car leases, credit cards and any existing mortgages. The less recurring expenses you have the more favourably an applicant will be viewed by the lender.
Lenders will always build in a safety buffer between the amount of money they lend an applicant and what the security is worth. Lenders will want to ensure that they are protected should the worse happen, where they will be able recover their losses by selling the property they have lent against.
Again, depending on your own unique situation you could use the following forms of equity:
Generally a lender will want to see a 10% to 20% cash deposit prior to approving an applicant for finance. It is important to know that when you purchase a property, you will also incur a stamp duty and this needs to be factored in when considering your initial deposit. When buying your first property you will also hear a lot about loan to value ratios. For example, a $400,000 loan against a $500,000 property will result in a loan to value ratio of 80%. Anything above this and the borrower will incur lenders mortgage insurance. Lenders mortgage insurance is a one off insurance premium that is charged to the applicant upon settlement if the loan to value ratio is above 80%. Some lenders will add it to the loan amount; others will require it to be paid up front. It is important to remember that lenders mortgage insurance protects the lender and not the borrower.
Equity in Existing Property
For applicants that already own a property, you can potentially utilise the existing equity in your home or investment property to purchase further properties. This is an effective strategy that greatly assists in the accumulation of investment property portfolios.
A common strategy that we often utilise is equity guarantee. This is where a member of your family guarantees the equity in their property for the purpose of your loan. For instance, picture a Mum and Dad trying to help their children get into the property market. They can do this by utilising the equity in their home as a replacement to their children saving up a 10% or 20% cash deposit.
In summary, there are numerous variables that your mortgage broker will take into account when securing the best lender for your unique situation. However, it is worth keeping in mind that all lenders will require both cashflow and equity when assessing an application for finance.