It’s tough out there, but doctors may be able to achieve home ownership sooner than they think.
Want to know a mortgage broker’s secret to securing your loan as a general practitioner? Scratching your head about borrowing money for your first home, investment or private practice and don’t have the time to research?
Here are some of the myths you should be aware of, along with what you can do, how to do it, and what to expect.
Myth #1: Your bank will reward your loyalty with a good rate
The simple fact is, banks will not always reward your loyalty with the best mortgage deal, even if they’ve been holding your savings or current home loan for a long time. While it is true that some banks do reward loyalty, in this competitive environment, it is always worth having a look around and seeing what’s out there in terms of deals. The right mortgage broker could potentially save you thousands and some lenders are even providing cash incentives to win new home loan customers.
Sometimes if your current bank realises you’re considering refinancing, they might pull out all the stops and provide you with their best offer in order to keep your business. For them, it costs more to win new clients than it does to retain existing ones, so make your mortgage broker do some hunting around for you.
Myth #2: You can easily afford and demonstrate your borrowing capacity on today’s rate
Well, maybe, but …
Effective rate versus bank benchmark rate
Even if your current or proposed loan has an interest rate of 5.5%, the Australian Prudential Regulation Authority (APRA) mandates that lenders must apply a minimum interest rate buffer of 3% when evaluating the affordability of home loan applications. This means that the effective interest rate used for assessment purposes would be 8.5%.
This means banks will be lending to borrowers who are able to afford the level of debt they are taking on not just today, but also in the future should rates rise. Given the latest rate of increases by the Reserve Bank, it’s advisable not to overextend yourself on your mortgage.
Debt to income ratio
This ratio looks at the amount of debt you have compared to your overall income and it typically needs to be under 6-8 times. Your cover level combined with how much your loan value ratio is may affect the rate on your home loan.
Myth #3: Your ATO debt, HELP debt and credit card debt don’t have much impact on your borrowing capacity
The fact is, lenders have a “shared” access to all your liabilities across all institutions with comprehensive credit reporting. This includes the government, so if you owe the government money, this is considered a liability that generally needs to be accounted for.
HELP debt
An example could be this. If a client earns $200kpa but has a relatively “small” HELP debt of around $40k, their annual repayments towards the debt is approximately 10% of their income, which would be $20k. While the debt can be considered relatively small, the annual commitment is based on the size of income rather than the actual amount owed. This means that their borrowing capacity is eroded quite significantly.
For some clients, it may be wise to consult their accountant and look into prematurely paying off the debt earlier if they are looking to apply for a loan, depending on the current state of their borrowing capacity.
ATO debt
In a similar vein, if you owe the government back taxes, this will appear on tax portals. It is possible where payment arrangements have not been entered into, the debt can also be recorded on the customer’s credit report. If there is an ATO payment plan in place then the lenders can class the monthly repayment as an expense and would therefore need to be disclosed and accounted for when borrowing capacity is assessed. Speaking to your accountant about future tax obligations can help you plan better and even fund them.
Credit cards
One common misconception is that if you consistently pay off your credit card balance or only use certain cards occasionally, such as when travelling, and leave them unused for the rest of the year, they are not considered liabilities.
However, lenders evaluate your borrowing capacity based on the limits of your debts, such as mortgages and credit cards, rather than the current balances on these accounts. Even if you pay off your $30,000 credit card every month without accruing any interest charges, it is still viewed as a $30,000 liability when your loan application is assessed.
Therefore, before applying for a home loan, it’s important to review any unused cards. If you do use them, consider reducing their credit limits as much as possible or discuss this with your lender. Additionally, remember that buy-now-pay-later services like ZipPay and After Pay are also considered liabilities, similar to credit cards.
Myth #4: A 20% deposit plus stamp duty is required to buy a home
The truth is that if you work in the medical field, there are lenders who may be willing to provide you with 90-95% of the funds needed for purchasing a home, without requiring lender mortgage insurance. Additionally, there are certain lenders who can offer 100% financing for your home purchase through a family guarantee. This involves using a mortgage or second mortgage on your parents’ home or investment property as security, provided they have enough equity. (Depending on your individual situation, DPM may be able to help you secure 100% financing in certain cases.)
Given the high costs of renting and the challenges of saving for a deposit, you might be able to achieve homeownership earlier than you expected.
Myth #5: The best loan is the cheapest loan
Well, maybe … The cheapest loan may not always be the best for you, even if you may pay lower interest. The terms of the loan also need to be considered before you make a decision as some aspects may make the loan more attractive for your circumstances, such as:
- Linking your home loan to an offset account, or the option to make additional repayments and redraws for free. This can help save you significant amounts of money over the life of the loan as well as allow you to pay it off faster.
- Being able to borrow more at a slightly higher rate.
- A loan that requires repayment in a shorter time frame with a low interest rate, versus a loan with a longer repayment period that has a higher interest rate and a lower overall monthly repayment.
- It’s always imperative to look at lender credit policy when choosing where to apply for a loan as each has different credit criteria on how they’ll assess your base income, overtime, self-employed income, loan value ratio against certain property sizes, and locations.
- How long it takes them to make a credit decision. Some lenders can take four to six weeks to make a decision, whereas others can give you pre-approval within 48 hours.
Myth 6: First find a house, then worry about the mortgage
To put it simply, this is just bad advice and is bound to cause a lot of unneeded stress to you, your broker, and your lender. You could also risk losing your deposit if finance falls through.
Getting pre-approved for a mortgage before you start seriously looking at homes is always a good move. Pre-approval means that your mortgage lender has seen your financial situation and has agreed to lend you up to a specified amount of money. This agreement generally lasts three months but you should be aware that in the current environment of rising interest, your borrowing capacity will diminish with each rate increase.
To understand your options better before borrowing money, we recommend speaking with your accountant and a mortgage broker.
Disclaimer: The information in this article, provided by DPM Lending Pty Ltd (ACL number 374850), is general in nature and is not intended to serve as advice as your personal circumstances have not been considered. DPM Financial Services Group recommends you obtain personal advice concerning specific matters before making a decision.
Eyal Judah is a lending consultant with DPM.
