When you don’t have a mortgage it’s easy to splash your cash on living it up. But did you know that your spending habits can influence how much lenders are willing to loan you? Read on to find out how your lifestyle can affect your borrowing capacity.
We all love a good online shopping splurge, and let’s face it, with pandemic lockdowns keeping us indoors much of the time, little luxuries have become our go to.
Yet, when it comes time to borrow the money needed to buy a home, all of those UberEats, streaming services and Insta purchases could be hurting your ability to borrow.
That’s because lenders consider a range of things when working out how much they’ll lend you, and the cost of maintaining your lifestyle is one of them.
Now that’s not to say that your lifestyle is the reason why it’s hard to get onto the property ladder – it’s not. Research shows that a range of structural, economic and policy issues contribute to poor housing affordability.
But with the dream of home ownership soaring further out of reach for many, first (and even second or third) time buyers need every extra ounce of borrowing capacity they can muster.
Why do mortgage lenders need my bank statements?
Many first time borrowers are surprised to find out that they need to supply copies of their bank statements along with their home loan application.
For anyone who enjoys the good life a little too much, this can be a scary thought!
So why do lenders need this information?
- To check your income is regular and consistent. Before agreeing to your mortgage, lenders want to be sure you have a secure income stream. They’ll check your bank statement to see if your wages are hitting your account regularly. And, while self-employed people can get a home loan, it’s generally looked on favourably to be employed in a job for a solid period of time.
- To understand your living expenses. Lenders carefully review your bank statements to get a picture of your living expenses and how much it costs to maintain your lifestyle. They want to know if you’ll have enough money left over to pay your mortgage instalments. Sometimes people apply to borrow more than they can easily afford to repay, thinking they’ll cut back on their spending. In reality, this can lead to a default down the track, since people aren’t as good at changing their lifestyle as they might think.
- To check for any other liabilities you haven’t mentioned. This can include direct debits such as services you’re contracted to pay, or credit card and personal loan repayments.
- To see how financially responsible you are. Lenders will question any late payment fees or dishonour fees that appear on your statements, as it suggests poor money management.
- To check that you have the funds available for your deposit. Lenders will often ask to see proof of your account balance so they know you have the cash available to pay your deposit.
How to clean up your lifestyle
Most lenders will ask for at least three months’ worth of bank statements to support your mortgage application. The statements need to be current, generally within the last 30-60 days. So it’s worth getting into good spending and saving habits several months before you’re planning to apply. This will also help ensure you’re comfortable with the lifestyle you’ll have once you’re making mortgage repayments.
If you need a little help getting your lifestyle into line, here’s what to do.
1. If you haven’t already, start a regular savings habit. Transfer a set amount from your income to a dedicated savings account each month – and don’t touch it once it’s there.
2. Rein in your discretionary spending. Go through your statements and cancel any subscription services you don’t need, and find better deals on other services. If you’ve been spending excessively in one area, such as eating out or shopping, cut it back to a reasonable amount. Don’t worry, you don’t need to be a miser, you can still get takeaways and buy things you need, just be reasonable with your spending.
3. Pay your bills on time. Don’t allow late payment fees to appear on your bank statements. This will also help with your credit rating.
4. Don’t allow your account to become overdrawn. Dishonour fees can raise a red flag and suggest that you don’t have enough income to live on.
5. Cut up your credit cards and pay them off. Reducing how much debt you have will put you in a better position to borrow more.
A few little tweaks here and there can help show lenders that you’re a responsible financial bet, and increase your chances of getting that mortgage.
Money and Life
(Financial Planning Association of Australia)