Serviceability - Tidy up the backyard
In a recent blog I discussed putting together a deposit for a first home, or even subsequent home.
Mortgages are a double edge sword, yes you need a deposit however having that doesn’t guarantee the bank is going to come to the party with lending to us.
Servicing the mortgage is the next hurdle.
I have collated some tips and ideas to help prove to the bank that you are a worthy customer to lend hundreds of thousands of dollars to.
Without it, it isn’t happening. Sounds brutal but the reality is, is that if there isn’t money coming in to our accounts then the bank is going to put our application straight into the waste bin. What I am more referring to with income is trying to increase it.
When the bank assesses our application for a mortgage, they will want to see at least three months of bank statements, three most recent payslips or your total past 12 months IRD earnings summary.
If you are determined to get a mortgage, then what about the following:
- Take those extra hours on offer from the boss where possible. Every dollar is going to matter.
- Don’t be afraid to ask for a pay rise, proving why you deserve it of course, especially if you are in the private sector. If you don't try, you will never know.
- If you have a partner who you are doing a joint application with, then consider moving your incoming wages into the same bank account. It just keeps it clean, tidy and easy for the bank to assess. You are wanting to create a picture of a stable and well managed borrower.
2) Bad Debt
Property is good debt. It is an asset that typically goes up in value, especially in the long term. It is tangible, as in it has four walls and a roof.
Cars, boats, furniture and holidays are bad debt. They go down in value. Don’t get me wrong, holidays are important and create memories, but we should avoid getting a personal loan to take a trip to Vegas or Queenstown.
However I also believe that having some bad debt is almost a fact of life. While the typical NZ car only goes down in value, they are also a necessity for most of us. Without a car, most of us wouldn’t earn an income. So having a car on 1% finance or perhaps a bit more, is just something we have to absorb some times.
Another option with bad debt is if you already own a home, then see if you can absorb your bad debt into your home loan. It will lower the outgoing monthly cost of that bad debt.
3) Credit Card Limits
This goes for store cards or interest free cards as well such as GemVisa. It is okay to have them, but if they have $10,000 limit then the bank treats them as though you owe $10,000 on them, even if you are good and pay them off each month. Simply drop the limit on your cards down to what you actually need. Something like a GemVisa card is ideally paid off and closed, but if thats not possible, ring GEM and drop the limit down to as low as possible before applying to the bank.
4) Savings History
Ideally it is good to show the bank that you can save. This gives the impression to the bank that you can afford to cover your mortgage payments each fortnight or month and that you understand your responsibility to them. It doesn't have to be massive amounts of stored cash, but showing that you can manage your money is always a bonus.
5) Credit Score
It is worth checking your credit score which you can do free through websites such as:
If you have any blotches against your name that aren't correct, it is worth following up with the company involved to have these corrected.
Any missed payments on phone bills, power bills or others such as a current mortgage, is all going to go against your credit score.
6) Live on less!
I covered this in my blog about getting Deposits together. Its even more important when it comes to servicing. Your bank statement tells the story. The banks have a calculation and figure in mind of what it takes to live in NZ, this includes some discretionary spending on things such as coffee, clothes or entertainment. If your figure for those items is a lot higher than what the bank expects it is going to raise eyebrows.
I recently saw a post on the NZ Investors Chat group on Facebook where someone who spent $1,000 a week on discretionary things such as entertainment, was quite bamboozled as to why he didn't get a home loan approval.
Toby's four-month clean up
This is a personal rule that I stick to and it is basically to have a spring clean through everything financial in the four months leading up to submitting a bank application. It involves trying as hard as I can to have good income such as taking those extra hours or not taking any unpaid leave.
In terms of any bad debt, credit cards or store cards; I make sure that they are all tidy and paid up. I drop the limits on any cards - these can always be increased later on if need be.
I make sure that if I am using a cash component as part of my deposit, that it is sitting there ready and then over the four months I add to it with savings, even if I am not going to need it - just to show the bank I am committed.
And lastly, I write down everything I own and everything I owe, so when it is time to apply everything is ready to go and the process is quick and easy. Really important to not leave anything out of your application - the bank will find it.
The importance of commitment
You are drawing a picture with the bank of what type of lender you will be. The bank is looking to effectively go into partnership with you by putting a huge sum of their money on the line to support you.
The banks use several systems to analyse your application, but at the end of the day there is still someone who makes a decision as to whether their bank will lend to you. To achieve this, whether it is your first home, second home or tenth home - some sacrifices will have to be made.
It is all for the bigger picture and comes back to my first blog on Chasing Dreams.
For now, that one less coffee a week, or holding off on the new car, is all going to be worth it, whatever stage of property ownership you are at.
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