Squirrel: Tips for a Successful Home Loan Application

Getting your finances in tip-top shape is always an important part of setting yourself up for a successful home loan application. Read on for tips for mortgage success.

A lot’s changed in the New Zealand housing market since the end of last year, and for first home buyers, that’s created fresh challenges and opportunities.

On one hand, the market is slowing. Gone are the days of insane house price growth, fuelled by collective FOMO. A combination of higher interest rates, the removal of tax deductibility for investors, increased supply, and a relatively static population has brought back some balance.

And, thankfully, last month, the government announced that the much-needed (and hard-fought for) changes to the Credit Contracts and Consumer Finance Act were on the way. These changes mean would-be borrowers aren’t going to be subjected to such intense scrutiny over their expenses and outgoings anymore – and that’s awesome!

That’s the good news.

On the flip side, in the short term, tightened LVR restrictions mean big trouble for low deposit borrowers. (Although as the reduction in house prices trickles through, we can also expect to see the Reserve Bank ease back on the tightened LVR restrictions it introduced late last year.)

And as rates have gone up in recent months, it’s dealt a really significant blow to borrowers’ affordability.

But don’t lose hope. There’s plenty you can do to set yourself up for success.

Tips for a successful home loan application

1: Get your spending (and saving) in order

Lenders look for proof of regular, intentional savings – and that between those and your rent, to know you’ll be able to cover your mortgage.

If you know roughly how much you want to buy for, what your deposit is, and therefore what you need to borrow, then jump online and put all of that into a mortgage calculator at about 6% interest.

That repayment figure is what you need to prove you can afford. And every dollar you spend, when you could be saving it instead, is going to make that harder to do.

As you’re tidying up your finances, remember: the goal isn’t to cut out everything that makes you feel good in life. So, you’ll need to cut back on things like going out to dinner, but you probably don’t need to cancel your gym membership.

And the sooner you can start, the better.

2: Pay off consumer debt

Getting your finances in order also means cleaning up credit. Pay off credit cards ASAP, and get rid of unused credit limits or accounts.

Buy Now, Pay Later services, and interest-free purchases from retailers should be avoided like the plague. Even if you’re not using these facilities when you go to apply for your mortgage, a lender can factor them into your expenses – so they’re bad news all round.

If your student loan is small enough, nix it ASAP.

Student loans are probably the single biggest expense impacting on your affordability.

A student loan sucks up 12% of every dollar you earn over the repayment threshold, after tax. If you’re on $80,000 a year, that’s roughly $600 a month – which, in your bank account, would give you about $95,000 more in borrowing power.

It could be worth using some of your deposit to pay off debt.

When it comes to home loans, a 20% deposit is gold. If that’s within reach, keep saving.

Anything between 10% and 20% is considered low deposit*. And to the banks, it really doesn’t matter which end of the scale you’re at – they treat them all the same.

So, if you’re comfortably over 10%, but 20% is too much of a stretch, you could have more to gain by using some of your deposit to pay off debt.

Before you forge ahead, you should always chat to a mortgage broker to see if this approach is right for you.

(*Working with anything less than 10% is really tricky right now. You’d need to satisfy a whole lot of criteria and tap into a niche product like Squirrel’s Launchpad to help get you over the line.)

3: Don’t throw everything at KiwiSaver

We see a lot of people maxing out their KiwiSaver contribution as a means of forced savings for a house deposit. But unless your employer is matching that contribution, you could be better off sticking with 3% and putting the extra funds into savings.

That’s because, to my last point, it’s a lot harder to use KiwiSaver to pay off debt before buying than if that money’s sitting in the bank. You’ll also be demonstrating intentional saving behaviour – and lenders really love that.

4: Manage childcare costs

If you’ve got kids, not much can be done about childcare costs, but they’re going to have a big impact on your affordability, so anything you can do to reduce them is worth considering.

There are milestones when costs may drop – when you can claim the ECE subsidy (ages 3-5), or when kids start school, and those can make a big difference. Remote working can also be great if it means you can manage childcare around school hours.

Tips for a successful home loan application: talk to an expert

When the stakes are so high, applying for a home loan can feel like daunting stuff – and a good mortgage broker is going to be your best resource to help you through.