Co-author: Michelle Norton
It’s an unfair assumption that because you’re looking for a house, you must be looking for one with your hunnybunch/significant other/insert relevant term of endearment, here.
And, while it is pretty widely acknowledged that housing affordability is tough in New Zealand at the moment, it is most likely magnified further if you’re relying on one income. That being, said, Canstar offers some advice on how to have the best shot at securing a home loan on a single income.
Getting home loan approval: watch that credit rating
Being approved for a loan is dependent on a number of factors, including your income, assets, and credit score or credit history. But unless you’re a doctor or lawyer, offering you a home loan based on your income alone probably won’t be particularly alluring to a bank or financial institution
This means you’ll need to be golden when it comes to your assets and credit rating if you want to nab that single income home loan. So with that in mind, here are some tips on how to get a single income home loan. Good luck!
How to get a single income home loan
Getting a single income home loan is a lot easier – although it’s never guaranteed – if you have the following things lined up:
- A large deposit
- A smaller loan
- Home loan pre-approval
- A loan guarantor
Canstar explains each of these in more detail below.
1. Single income home loan? Start with the biggest deposit possible
It may sound like we’re stating the obvious here, but it’s crucial that you save the largest amount of money possible before setting your sights on taking out a single income home loan. You’ll want to have at least 20% of your maximum borrowing power (more on borrowing power below) saved up.
The other benefit of a larger deposit, is that you may be able to negotiate a lower interest rate for your single income home loan, because you pose a lower investment risk to your bank of choice.
According to Canstar’s database, first home buyers can get a minimum interest rate of 4.19% for loans at a loan-to-value (LVR) ratio of 80% for a one-year fixed rate. This compares with the maximum rate of 4.99%. Looking at a 3-year fixed loan at an LVR of 80%, first home buyers can get a minimum interest rate of 4.29%. Interest rates are based on a loan amount of $350,000 at 80% LVR, for products on Canstar’s database. Source: www.canstar.co.nz.
Differences in interest rates may look small on paper, but home loan calculators show this adds up over time.
For example, if you were making monthly mortgage payments, you’d pay $101,663 in interest if your interest rate was 3.54% p.a, but $111,426 if your rate was 3.84% p.a. That’s only a 0.30% difference in interest rate but it means paying roughly $10,000 more over the life of your loan, which isn’t exactly small change!
2. Consider a smaller loan amount
It might sound disheartening and we’re sorry to say it, but a single income may mean less income overall, which in turn means less borrowing power. It’s all about being able to prove to the bank what your single income home loan serviceability factor is – showing that you can afford to repay the loan of your choice while still putting food on the table and fuel in your car.
In general, your chances of being approved for a loan only get better as the risk you pose in terms of the amount of money the bank is lending you decreases.
A lower loan amount is not a bad thing by any means – it can mean you make smaller monthly repayments. This is nothing to sneeze at in terms of your overall budget for a single income home loan. Find out what the monthly repayments might cost for loans of different sizes:
Whether this means looking at ideally sized home in cheaper locations, or looking at smaller homes in your location of choice, the bottom line is that a compromise may need to be made somewhere.
3. Get pre-approved for your single income home loan
When it comes to taking out a single income home loan, you’ll have a much easier time of it if you know what your price range is before you start house-hunting. Don’t waste time finding houses you like, only to be told they’re out of your price range – get the bank’s tick of approval first.
Pre-approval is when your lender of choice assesses your financial situation, in advance of you actually applying for a home loan, and conditionally approves you to borrow up to a certain amount. Pre-approval will usually be valid for three-to-six months, making it that much easier to get the ball rolling if your home buying offer is accepted.
Don’t forget to compare home loans before you go hunting for home loan pre-approval! There’s no point applying for pre-approval on a loan that you later decide would be a dreadful loan for your situation.
4. Consider finding a guarantor for your single income home loan
Another thing that could convince a lender that your single income home loan is a good idea is if you have a guarantor. A guarantor is when someone agrees to “guarantee” that if you fail to repay your loan, they will repay it – so it’s a big ask.
Applying to the Bank of Mum and Dad, or getting a guarantor from another source, can pay off in a big way if they say yes, because it can decrease the risk you pose to the lender.
Before you crack the big question, make sure that your lender of choice allows guarantor home loans, as you can’t get a guarantor single income home loan everywhere.
Lenders always judge home loan applications on a case-by-case basis, but the tips above should put you in better standing when it comes to applying for a single income home loan.
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