Finding it tough to get a home loan? It is in your best interest that it is that way. No, really it is!
It is a given that banks want to lend money as that’s how they generate income and ultimately make a profit and also people want to borrow that money to buy homes. So then why do they make it so hard? The main reason is that the banks want to be sure that they will firstly get the money back they loaned and preferably get that money back plus a swag of interest you pay over the duration of the loan. The longer they can keep you in debt paying off the loan and interest the better. For both parties a mortgagee sale is the worst case scenario and one that is a last resort and ultimately a testament that someone got something very wrong when loaning the money out.
So you ask, what does the home loan provider look at and why?
The riskiest time for a bank is when the amount of the loan is closest to the value of the property and that is generally when you first get a home loan. This is why the LVR is such a critical measure for the bank, as the higher the LVR the closer it is to the value of the property should the worst case scenario of a mortgagee sale occur (especially given that there will also be real estate costs involved to sell the property as well). In a market like Auckland’s where the property prices are increasing rapidly this gives the banks some additional surety that they would be able to get their money back again, but market situations change and some towns actually have property values decreasing and it takes a long time for sales to occur.
For the home owner they ideally want to have as much equity in the property as they can as this reduces the amount of money they need to borrow and the interest repayments they need to make.
The bank also needs to ensure that you are capable of meeting the monthly repayments for repaying the loan principal and the interest on it. It is important that you do a budget to ensure that you do have the funds to meet the loan repayments and have a reasonable ability to meet any unexpected contingency that might eventuate. For first home buyers that have been renting for a while, they know that they can reliably make the rent payments but a home loan is often many times that amount and there are additional home owning costs such as rates, insurance and maintenance that need to be accounted for. Also, legally all lenders are bound by the Responsible Lending Code to check a borrowers financial circumstances to satisfy themselves that borrowers have capacity to repay the proposed loan and still have sufficient to meet their actual projected living expenses.
For the loan provider there are two main areas of risk that they have when lending you the funds. The first is to cover the asset that they have security against (i.e. house) and secondly your ability to repay the loan should you or your partner become ill (or even worse die). If you are not able to earn an income you are not able to make the repayments.
The above is a rather simplistic summary of what the loan providers look at and I expect that you can see why from their perspective they require this information before loaning you the money. The upside of it all is that if they approve the loan to you then that is some form of surety from them that they are quite sure that you are able to repay it and that you have the necessary risk protection in place.
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The information contained in this article is of a general nature and should not be taken as advice. It reflects the opinions of the writer only and does not necessarily reflect the opinions of New Zealand Home Loans.