Thinking about buying your first home? Exciting times are ahead! However, it’s essential to understand how your financial behaviour can influence your chances of securing a home loan.
Lenders scrutinise various aspects of your financial life to identify the risk involved in lending to you, and certain habits you may not even think are problematic can raise red flags.
Let’s look at what behaviours lenders are watching so you can maximise your chances of getting the best possible loan.
Your spending
While treating yourself occasionally is important, excessive spending on luxury items can concern lenders. If your bank statements show regular large purchases, dining out frequently, or indulging in expensive hobbies that aren’t consistent with your income, lenders may perceive you as a higher risk. They want to see that you can manage your finances responsibly, so it’s wise to monitor your discretionary spending as you apply for a loan.
Your savings
Building a solid savings buffer is crucial for homebuyers, especially when making a deposit. If you frequently dip into your savings for everyday expenses or impulsive purchases, this could raise eyebrows with lenders.
Lenders also look for a pattern of regular saving and sustained growth over time so if you’ve received a large bonus at work, a financial gift or inheritance, bear in mind that it may not necessarily be viewed favourably by a potential lender unless you can also demonstrate your capacity to save – and to meet the loan repayments.
Your credit score
Lenders will review your credit file to see your history of credit usage and repayment behaviour so take the time to review your credit report and correct any inaccuracies. You are entitled to one free credit report per year.
Your credit card use plays a big role in determining your credit score. If you carry high balances close to your credit limits, this can be viewed negatively by lenders. Aim to keep your credit use below 30 per cent and try to pay down any outstanding balances. Not only does this improve your credit score, it also demonstrates to lenders that you are responsible with your credit.
Having several store credit cards can hurt your credit score. While these cards may offer tempting discounts, they often come with high-interest rates and lenders view multiple credit accounts as a potential risk factor, suggesting you may struggle to manage your finances effectively. If you have store cards, consider consolidating them or paying them off to improve your financial profile.
Your debt management
Being proactive about managing debt can help you present a stronger application. Red flags for lenders include the obvious ones like court judgements, bankruptcies, and defaults. But more innocent things such as multiple credit enquiries (often just shopping around or chasing sign on bonuses for credit cards) or credit with some types of lenders, can lead to questions or even a decline.
While Buy Now, Pay Later (BNPL) services have gained popularity, it’s important to understand that the Australian Prudential Regulation Authority (APRA) now requires BNPL debt as well as HECs-HELP debt to be included in your debt-to-income ratio calculations so it can be wise to avoid BNPL schemes and consider paying down your education debt if possible.
Your income patterns
For those who are self-employed or have commission-based jobs, irregular income can be a significant factor when applying for a home loan. Lenders prefer consistent and stable earnings. If your income varies, work on documenting your earnings over time and consider providing additional financial information to support your application. Having at least two years of tax returns and financial statements can greatly improve your credibility.
The unknowns
Finally, lenders don’t like unknowns. They can scrutinise PayPal transactions and dislike those with vague descriptions which can be associated with gambling or other high risk financial activities.
Frequent cash withdrawals can also make it difficult to trace your spending, raising concerns about what you might be hiding and your ability to manage a home loan. To mitigate this, try to keep your transactions transparent and within a documented spending plan.
Navigating the path to homeownership can be daunting, but understanding and addressing these financial red flags can help. If you’re feeling uncertain about your situation, we can help you present the best possible application to lenders and maximise your chances of securing a home loan with the most favourable terms. Reach out to our experienced finance and lending team here to book a chat.
