Top Tips for Getting Mortgage Approval in Australia
Getting approved for a mortgage in Australia requires careful planning and preparation. Lenders assess your financial situation thoroughly to determine your ability to repay the loan. By taking proactive steps to improve your application, you can significantly increase your chances of success. Here's a comprehensive guide to help you navigate the process and secure your dream home.
1. Improve Your Credit Score
Your credit score is a crucial factor in the mortgage approval process. It reflects your creditworthiness and history of repaying debts. A higher credit score indicates lower risk to lenders, making you a more attractive borrower.
Check Your Credit Report
Obtain a copy of your credit report from a credit reporting agency like Equifax, Experian, or illion. Review it carefully for any errors or inaccuracies. Common errors include incorrect personal information, accounts you don't recognise, or late payments that were reported incorrectly. Dispute any errors immediately with the credit reporting agency. This can take time to resolve, so it's best to do this well in advance of applying for a mortgage. You can also learn more about Mtge and how we can help you understand your credit report.
Pay Bills on Time
Late payments negatively impact your credit score. Set up reminders or automatic payments to ensure you never miss a due date. Even a single late payment can lower your score. Focus on consistently paying all bills on time, including credit cards, utilities, and loans.
Reduce Credit Card Balances
High credit card balances relative to your credit limits can hurt your score. Aim to keep your balances below 30% of your credit limits. For example, if you have a credit card with a $10,000 limit, try to keep the balance below $3,000. Consider paying down your credit card balances before applying for a mortgage.
Avoid Applying for New Credit
Each time you apply for credit, a hard inquiry is made on your credit report, which can slightly lower your score. Avoid applying for new credit cards or loans in the months leading up to your mortgage application. Too many inquiries in a short period can signal to lenders that you are a higher-risk borrower.
Common Mistakes to Avoid
Ignoring your credit report: Failing to check your credit report for errors can lead to unnecessary rejections.
Maxing out credit cards: High credit card balances significantly lower your credit score.
Closing old credit accounts: Closing old credit accounts can reduce your available credit and negatively impact your credit utilisation ratio.
2. Save a Substantial Deposit
The size of your deposit plays a significant role in mortgage approval. A larger deposit reduces the lender's risk and can result in better interest rates and loan terms.
Aim for at Least 20% Deposit
A 20% deposit is generally considered ideal, as it allows you to avoid paying Lender's Mortgage Insurance (LMI). LMI protects the lender if you default on your loan, and it can be a significant expense. Saving a 20% deposit demonstrates financial discipline and reduces the lender's risk.
Consider Government Schemes
Several government schemes are available to help first-home buyers save for a deposit. These schemes may offer grants, stamp duty concessions, or guarantees that allow you to purchase a home with a smaller deposit. Research the eligibility criteria and benefits of these schemes to see if you qualify. For example, the First Home Guarantee scheme allows eligible first home buyers to purchase a home with as little as a 5% deposit, with the government guaranteeing the remaining 15%.
Explore Alternative Deposit Options
If you're struggling to save a large cash deposit, consider alternative options such as using a guarantor or accessing equity in an existing property. A guarantor is someone who agrees to be responsible for your loan if you default. Accessing equity in an existing property involves using the equity you've built up in your current home as security for your new loan. Our services can help you explore these options.
Budgeting and Saving Strategies
Create a detailed budget to track your income and expenses. Identify areas where you can cut back on spending and allocate those savings towards your deposit. Consider setting up a separate savings account specifically for your deposit and automating regular transfers. Small, consistent savings can add up over time.
Common Mistakes to Avoid
Using borrowed funds for the deposit: Lenders prefer to see that your deposit comes from genuine savings, not borrowed funds.
Underestimating associated costs: Remember to factor in additional costs such as stamp duty, legal fees, and building inspections.
Not having a savings plan: Without a clear savings plan, it's difficult to reach your deposit goal.
3. Prepare Your Application Thoroughly
A well-prepared application demonstrates your organisation and attention to detail, which can positively influence the lender's decision.
Gather Required Documents
Collect all the necessary documents before you start the application process. This typically includes:
Identification (driver's licence, passport)
Proof of income (payslips, tax returns)
Bank statements
Details of assets and liabilities
Purchase contract (if applicable)
Having these documents readily available will streamline the application process and prevent delays.
Complete the Application Accurately
Fill out the application form completely and accurately. Double-check all information to ensure there are no errors or omissions. Inaccurate information can raise red flags and lead to rejection. Be honest and transparent about your financial situation.
Seek Professional Advice
Consider seeking advice from a mortgage broker or financial advisor. They can help you navigate the complex application process, identify the best loan options for your situation, and ensure your application is presented in the best possible light. You can also find answers to frequently asked questions on our website.
Common Mistakes to Avoid
Providing incomplete or inaccurate information: This can raise suspicion and lead to rejection.
Failing to disclose all debts and liabilities: Honesty is crucial in the application process.
Not seeking professional advice: A mortgage broker can provide valuable guidance and support.
4. Demonstrate Stable Income
Lenders want to see that you have a stable and reliable income source to repay the loan. Demonstrating income stability is crucial for mortgage approval.
Provide Proof of Employment
Provide evidence of your employment history, such as payslips, employment contracts, and letters from your employer. Lenders typically prefer to see a consistent employment history of at least six months with your current employer.
Self-Employed Applicants
If you're self-employed, you'll need to provide additional documentation, such as tax returns, business activity statements (BAS), and profit and loss statements. Lenders may require a longer history of self-employment, typically two years or more.
Document Other Income Sources
If you have other sources of income, such as rental income, investment income, or Centrelink payments, provide documentation to support these claims. Lenders will assess all sources of income to determine your overall financial capacity.
Common Mistakes to Avoid
Changing jobs frequently: Frequent job changes can raise concerns about income stability.
Underreporting income: Be honest and accurate about your income on the application.
Not documenting all income sources: Provide evidence of all sources of income to strengthen your application.
5. Reduce Existing Debt
High levels of existing debt can negatively impact your borrowing capacity and make it more difficult to get approved for a mortgage. Reducing your debt can significantly improve your chances of success.
Pay Down Credit Card Debt
Prioritise paying down high-interest credit card debt. This will not only improve your credit score but also free up more cash flow for your mortgage repayments. Consider consolidating your credit card debt into a lower-interest personal loan.
Reduce Personal Loan Balances
If you have personal loans, aim to reduce the balances as much as possible. Consider making extra repayments to pay off the loans faster. Lenders will assess your debt-to-income ratio to determine your ability to repay the mortgage.
Avoid Taking on New Debt
Refrain from taking on any new debt in the months leading up to your mortgage application. This includes car loans, personal loans, and credit card debt. New debt can negatively impact your borrowing capacity and raise concerns with lenders.
Common Mistakes to Avoid
Ignoring existing debt: Failing to address existing debt can significantly reduce your borrowing capacity.
Taking on new debt before applying: This can negatively impact your application.
Not having a debt management plan: A debt management plan can help you prioritise and pay off your debts more effectively.
By following these tips and taking proactive steps to improve your financial situation, you can significantly increase your chances of getting mortgage approval in Australia. Remember to seek professional advice and carefully consider your options before making any decisions.