A mortgage broker has listed the five things you should never do when applying for a mortgage in Australia – and the everyday actions that could turn you away.
From using credit cards to withdrawing cash, Barbara Giamalis, the principal broker at Home on timelisted the little-known ‘red flags’ that banks and lenders take into account.
Ms Giamalis said there are a number of misconceptions when applying for a home loan, especially when it comes to credit cards and credit scores.
In fact, she believes it’s better to have a lower credit score and no credit cards than a high score and one or two on the way.
She offered her industry tips to FEMAIL as a way to help Australian home seekers who are finding it harder than ever to break into the highly competitive property market of 2024.
A mortgage broker has listed the five things you should be aware of before applying for a mortgage in Australia – and the everyday actions that could turn you away
Ms. Giamalis (photo) has more than 25 years of experience in the industry
1. Avoid cash withdrawals
It may come as a surprise to some that cash withdrawals are also a ‘red flag’ when applying for a home loan.
This is because the mortgage broker cannot know what the money has been used for and why.
“If you regularly go to an ATM and withdraw $1,000 a month, or $1,000 a week, which we often see, you can’t track where that money has gone. It is better to have purchases that are traceable,” Ms. Giamalis said.
Ms Giamalis added that since there is no trace of the money, it is classified as ‘living expenses’.
‘If you buy a sofa, a car or whatever, it’s better to have a trail to show where that money went so that mortgage brokers can tell the bank that this is a discretionary expense and that they will not accept to take this into account when we look at the cost of living.’
2. Cancel your credit card
Using a credit card can have a significant impact on how much the bank is willing to offer an applicant.
Ms Giamalis said many of her customers believe credit cards can help improve their credit score and borrowing capacity, but this is not the case in Australia or New Zealand.
“It’s a myth that you need a good credit score through a credit card to get approved for a home loan, because your credit score is what it is,” Ms. Giamalis said.
“If you’re a first-time borrower and have never had a loan before, your rating won’t be great, maybe around 700, but it’s better than having 800 with two credit cards.
“If you have a $10,000 limit, we base that on the $10,000 limit, whether it’s a $0 balance or not, so getting rid of credit cards makes a huge difference in the service.”
It may come as a surprise to some that cash withdrawals are also a ‘red flag’ when applying for a home loan
3. Never use the ‘buy now, pay later’ service
Services like Afterpay should be used wisely as banks and lenders want to know how money is being spent and why these platforms are being used.
If an applicant chooses to pay off purchases in increments, even interest-free payments, this can be a signal to some lenders that the applicant may not be financially stable.
‘Most lenders, including us, will look at an applicant’s cost of living. “If an applicant uses ‘buy now, pay later’ services more than what they have in their savings, this could be a red flag and could leave lenders wondering if they can afford a loan,” she said.
‘Services such as Afterpay also reserve the right to report negative activity (missed payments) on your credit history. This means that if you miss payments, it could negatively impact your credit score.”
4. Don’t forget to pay off your HECS debt
It may seem obvious to pay off as much debt as possible before applying for a mortgage, but people often don’t take higher education debt into account.
‘Higher Education Loan Program (HELP) affects your borrowing power. HELP debt is a liability you must declare during the home loan application process,” Ms Giamalis said.
‘The impact of HECS on your ability to get a home loan can vary depending on your income level and the amount of your HECS debt. It is crucial that you seek financial advice before deciding to pay off your debts.’
5. Don’t wait to save for a mortgage
Those wanting to get on the property ladder should pretend they have a mortgage before applying for a loan.
You can do this by contributing to your savings every time you get paid, as it shows lenders that you are disciplined when it comes to finances.
“One of the best tips for young people, and one they can do right now, is to start saving for their monthly mortgage payment before applying for a mortgage, as this shows commitment,” says Giamalis.
“For example, if they borrow $600,000, their payment will be $3,000 per month. It’s beneficial to see them saving $3,000 a month, whether that’s in rent and/or savings.
“It shows a commitment and willingness to be able to pay your mortgage rather than ‘I’ll go out for the night and spend $500,’ because you can’t do that once you have a mortgage.” A three-month savings history is a great way to prove this.”
Besides the five points, it all comes down to salary and reducing spending habits (stock image)
How else can Australians improve their borrowing capacity?
It all comes down to salary and reducing spending habits.
“It’s a tricky issue because other than canceling credit cards and paying off personal debts, there’s not much you can do other than ask for a raise or take a second job,” Giamalis said.
‘You should be wary, however, because increasing your income can also put you in a higher tax bracket and increase your Household Expenditure Measure (HEM). The HEM is a fixed benchmark with which you determine your housing costs based on income, zip code and number of children.’
Applying for a home loan with someone who is not a partner, such as a family member or friend, can increase your borrowing power, but banks will see this as two people with out-of-pocket expenses.