Summary
Highlights
Most home buyers focus on saving a large deposit, but lenders prioritize other factors. The video emphasizes that 'the more boring you are, the more chances you have of getting a loan.' Banks are aware applicants often understate their spending, hence they conduct their own assessments.
Banks use a Household Expenditure Measure (HEM) to gauge average spending based on income and postcode. Lenders often find that 85% of applicants spend above their declared HEM, leading them to scrutinize bank statements. Discretionary spending (gambling, excessive eating out, food delivery apps, buy-now-pay-later services, frequent large cash withdrawals, and numerous subscriptions) can significantly impact borrowing capacity if it exceeds the HEM or is deemed excessive. Even everyday purchases like baby supplies can trigger lender inquiries.
Credit behavior, including missed payments on cards (like Latitude cards) or excessive loan inquiries, significantly impacts credit scores. A single missed payment reported to credit bureaus can severely lower a credit score, making it difficult to meet the minimum 600 score required by most lenders. Multiple loan applications are perceived as desperation, negatively impacting the application. Credit scores can improve over time by making timely payments and avoiding new inquiries.
Unused credit card limits reduce borrowing capacity because lenders calculate potential repayments based on the full limit, not the current balance. Closing unnecessary credit cards or reducing their limits is recommended. Buy now, pay later services are increasingly reported to credit files as inquiries, and are viewed even more negatively than credit cards due to their typical use for non-essential purchases.
Lenders prefer applicants who demonstrate financial stability, including consistent savings, stable employment, and a history of responsible financial behavior. This 'boring' profile indicates a lower risk. Banks typically review financial behavior over a three-month period.
Beyond a deposit, banks heavily scrutinize spending habits, existing liabilities, credit behavior, and overall financial stability. It is crucial to plan early, understand your borrowing capacity, and speak with a mortgage broker before applying for a home loan to avoid disappointment. Brokers can provide guidance on improving financial health and credit scores.
Liabilities such as credit card limits (even if unused), car loans, and dependents (like children) increase an individual's HEM, directly affecting borrowing capacity. The video highlights that a $50,000 car loan could have a greater impact on borrowing capacity than adding a child.