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Understanding Home Loans –Servicing your loan

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One of the main driving factors that banks look at when applying for a home loan is income or what the banks refer to as servicing. In this month’s BLOG, I hope to explain how banks view applicant’s income and their ability to “service” their loan.

What the banks look for is that the income you earn covers your potential home loan repayments plus your living expenses. It is fair to say that the more you earn generally means the more you can borrow.

Banks will also take a variety of sources aside from your job as an income source. These can be:

  • Existing or proposed rental from an investment property
  • Centrelink repayments
  • Child Support Payments
  • Pensions
  • Allowances e.g. Car, Phone
  • Salary Sacrifice

It is important to note that banks may take a harsher view on income that may be considered too unstable. Short term casual position, seasonal work or work that is inconsistent may be used as part of the banks income calculations but this is dependent on individual banks policy.

When applying for your home loan, the bank will typically need 2 most recent payslips or if you are self-employed last two years tax returns (for the business and personal). In some instances, the bank may also require the most recent group certificate, letter from employer or if you are self-employed, BAS Statements.

Part of the banks assessment of your home loan is your overall debt position and living expenses. The more debt (car loans, personal loans, credit cards, HECS) you have, the less amount of money you are able to borrow. The banks also would like to see your average monthly living expenses (you and your family) in order to make sure you are able to afford the loan repayments as well your debts and living expenses. It also worthwhile to note, the banks assessment of the home loan applied for, is calculated at an increased buffered rate to take into any considerations of any potential rate increases over the coming years (short term and long term).

In order to put your best case forward to the bank, here are some tips to potentially strengthen your home loan application:

Increase your deposit – the more deposit you have, the less money that needs to be borrowed. Banks may also consider and use additional income you receive (from other sources) if you increase your deposit.

Reduce/close existing debts – if you have any credit cards that are at a 0 balance but a high limit, the bank will consider the limit of the credit as your debt. If you reduce the limit for example from $15,000 to $5,000 then you will increase your borrowing power.

Joint application – if you and your borrowing partner go into the loan together, you combine your income and therefore are able to show to the bank there is a higher level of income to repay the loan you are seeking. The bank will want to see assets and liabilities for both borrowers.

Servicing is critical to your loan application, ensuring you can show the bank that you can make the repayments for the loan you are applying for with all living expenses and debts included. It is fair to say, a higher deposit and longer term employments (6 -12 months plus) will only assist and strengthen your application when applying for your home loan.

If you need any assistance with your home don’t hesitate to call us

Denny Thakrar – InReach Finance

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