Point 1: Find out how much they will lend you

Up to this point I have harped on about how you need to decide what your own maximum home loan is. By now you should know what that is (or at the very least you have everything you need to work that out).

So why am I asking you to find out what the lender will give you?

When we purchased, we could borrow 80% of the value of the property. We knew what we could afford so we searched within our means and within our budget. Because we saved enough to borrow a smaller amount (let’s say 70%—it wasn’t exactly 70%, but this makes for an easier example), we still borrowed the full 80%, but then immediately paid that down to 70%.

On paper we borrowed more money, but as soon as it arrived, we paid it down so that we were really borrowing only that 70%. And we put that extra amount into an offset account. I’ll talk about that soon in Step 5.

For example, let’s say our property was valued at $350,000, and our lender was willing to lend us up to 80% of the property value. This meant we could borrow $280,000. However, our own maximum loan amount was $250,000—a difference of $30,000. So rather than saying, “oh no, we want to borrow $250,000, we actually said great, give us $280,000”… and on the very first day that we took the home loan out we put an extra $30,000 into the offset account and paid it down to $250,000 so our home loan was actually $250,000 on the day we started the loan.

Why did we do that?

If you borrow more money than you need (and you immediately put that money back—don’t lie to yourself and take out the bigger loan, you need to know your maximum loan amount and pay it down straight away), then you have money aside just in case you need it. For example, if this is your first home and you know you want to buy a bigger property or one closer to or in your ideal location later (and you pay your home loan off quickly), you will have slightly more money to be able to use as a deposit when you choose to buy a bigger home. The aim is to have more cash available to you when you have finished paying off your home loan.

Whatever you borrow, you need to be able to pay it down to your own maximum loan amount on the first day of your loan. If you don’t, you won’t be able to pay your home loan off as fast as you were planning.

Point 2: Never sign the loan contract that day

After you have shopped around and discussed your home loan with your preferred lender, take home their offer and go over the information again.

Do your own calculations. Make sure you have a good understanding of the loan product and you are satisfied with the features (you are going to be stuck with them for some time after all).

Some things to take note of are:

• What is the current interest rate;
• Is there a honeymoon period, and if so how long;
• Are there any credit cards you have to take out to get the loan;
• Is it an interest only home loan (for a period of time) or can you pay interest and principal;
• What are the fees
  • What are the fees for taking the loan out?
  • What are the fees if you close the account early?
  • What are the on-going fees (if there are any)?
  • What are the fees for re-draw?
  • What other fees are there?
• What is the total interest you will pay if you take out the home loan over 30 years?
• What is the total interest you will pay if you take out the home loan for less than 30 years?
• How much are your monthly (or weekly/fortnightly) repayments?

Give yourself some additional time before you sign the contract to go through the contract again. This can help you to raise additional questions, to calculate and re-calculate possible scenarios, and to compare each option again fully.

Point 3: Know what evidence you need to provide to get approval for a home loan and watch out for the casual wage

When we shopped around for a home loan, we went to a range of different lenders who were willing to lend us money. We received our conditional approval and went ahead choosing a home. When we did eventually find a property we went back to our lender to provide all our documentation.

Up until this point lenders ask you about all your sources of income (of which we had my husband’s full-time wage and my casual wage). They plug this into the computer and give you the amount you can borrow. Usually if you have an extra wage (like a casual wage together with a full-time wage), this means on paper you can usually borrow more.

If you have a casual wage, like I did, this doesn’t seem to be an issue—that is, until you actually have to take out a home loan.

A casual wage being a casual wage meant that I got paid sporadically—I would get paid one week, miss out on being paid for the next three weeks, be paid three weeks after that, and then nothing again for another six weeks. My pay was all over the place.

Because the lender had always calculated my wage based on my yearly income this didn’t seem like an issue.

However, when it actually came to buying, our lender asked for two consecutive fortnightly payslips (because I got paid fortnightly). I didn’t have two consecutive payslips in a row. I didn’t have two pay slips at that point in time where I had been paid one straight after the other when it came to getting a home loan. I gave them two of my latest pay slips (one within the last two weeks and one from a month prior); but this was a problem. We couldn’t use my payslips. We couldn’t use them at all.

I said to our lender, “Well, you know I am a casual. That’s how we get paid.”

Our lender knew I was a casual from the start. I had two payslips but I didn’t have two current consecutive payslips.

The lender wasn’t happy.

I wasn’t happy because we were lulled into a false sense of security that we could borrow more money when we couldn’t.

Because I was also a casual on six-monthly contracts (even though I had been employed with the same organisation for about ten years) I then went through a process of having to get my managers to sign a letter saying they would keep me employed. This was also embarrassing.

In the end we took my casual wage out of the home loan application because of the issue with two consecutive pay slips and just borrowed money based on my husband’s full-time wage. This, thankfully, was able to cover us for about 80% of the property value (which we paid down immediately to our maximum loan amount).

We were just lucky that we weren’t purchasing a more expensive property (like we thought we could). We had set our own limits on what we wanted to spend and therefore we were keeping our home loan amount low. This was fortunate for us as we wouldn’t have been able to purchase a more expensive property anyway.

We purchased within our means and thus, could get the money we needed to buy the property. If we had found a higher priced property on our conditional approval and then purchased that, we wouldn’t have received the loan and we would have lost our deposit.

If you have a casual wage, be cautious about including it as income when you speak to lenders. Unless you can present two consecutive payslips at any time that you can produce on notice, then it may not be worth the hassle. Opt for a smaller home loan that is more manageable to pay off, and easier to approve past the conditional approval.

Since purchasing, I have enquired again about casual wages and have been told that some lenders do provide approval for casual wages based on the annual amount; but when I dig down about the evidence you need to provide, it’s still the same story—two consecutive current payslips. Sometimes even three!

If this applies to you, check with your lender.

The same might also apply for people who have their own business or are contractors. Whatever your situation, be specific about knowing which evidence you have to provide and ask what alternative evidence is required if it can’t be met. Make sure you know what evidence you need to provide when it comes to actually applying for a home loan.

In the next blog post we put it all together as you prepare to buy. Up next!