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Cashflow 101

So, you’re thinking of applying for a home loan. Let’s run through some information that you should know as you embark on this journey with us.



At this point, you should be starting to evaluate your income and outgoing expenses. We have more information on this in blog posts such as “Financial Planners” and “New Year Goal Review”. In these, we outline ways to help with saving money, alongside SMART goal structure and evaluation of your financial position.


Saving

Let’s start with saving, one of the primary focuses in your financial journey should be to save as much as you can, without forfeiting the necessities. This will also become easier once you evaluate your expenditure, going through categorically and seeing if you are spending more on items than you should be. For example, a big culprit of this is usually subscriptions. We all know sometimes subscriptions creep up on you and suddenly you are paying for 5 streaming services but only really using 2 or 3. To combat this, ensure that when you are going through your expenses that you look at your needs vs wants. You may want the option of that extra streaming service, but do you really watch any shows on that platform? Remember it is not permanent and you can always start it up again if another show comes out of your liking.


As you set out on this process you should be setting goals, not just any random goals, set SMART goals, we speak more on this in our “New year goal review” post. Setting up concise short and long-term goals will ensure you are looking at expenditure objectively, and you are setting yourself up for success in the progression of your financial position, to save as much money as you can for your deposit. Depending on your circumstances and eligible schemes, you should be saving up to 20% for you deposit amount.


Your Mortgage Broker

Ok, let’s move on to working with your mortgage broker.


How does your broker assess the living expenditure you send through?


To get an accurate picture of your current financial position your broker will assess the last 3 months / 90 days of your everyday transactions. They logically assess these, so don’t worry about your once off payments of holidays or car rego, as these may not impact your borrowing capacity. Your broker will look through and categorise every transaction into 10 different key areas:


1. Utilities and Rates for Owner Occupied Properties and/or Investment Properties

2. Telephone, Internet, and Streaming Services

3. Groceries

4. Recreational and Entertainment

5. Clothing and Personal Care

6. Medical and Health

7. Transport

8. Education

9. Childcare

10. Insurance


These categories show a total figure of your monthly expenditure for your broker to assess and possibly refine some areas to increase your borrowing capacity and serviceability. Don’t worry, this refinement, if needed, will not put you into an uncomfortable way of daily living, your broker will only refine expenses to realistically fit your familial and financial position.


What is your broker looking out for? Red flagged expenses.


Red flags your broker will look out for in your accounts are things such as ZIP/ Afterpay, expensive habits, overdraws/dishonours, and possibly excessive recreational payments. These flagged items may affect your borrowing capacity and risk tolerance as a client.


A strategy our brokers here at The Newstead Group recommend you implement into your spending practices is to treat a balance of approx. $200 as $0. Now this amount may change depending on your position and need for a repayment buffer, however, what won’t change is your ability to always make your repayments with this strategy implemented. This strategy ensures you will always have a sort of “rainy day fund” in your general spending account. So should any extenuating circumstances arise that cause you to spend more than usual before meeting your repayments, you are not overdrawing your account or creating dishonours on your repayments. This will also mitigate your potential of being considered a higher risk client as your past repayments such as After pay, rent, etc, continue to be met on time. Having this stop gap ensures lenders can trust you can meet your repayments and you are able to live comfortably knowing all your repayments are met.


Credit Cards

Your credit card is a liability, not an asset. Yes, you read that right, your credit card is categorised as a liability. While it can be a good thing to show your repayment potential, credit cards are a liability. A good habit can be to assess if you really need two credit cards, or even one credit card: perhaps trim down that spending by converting to a savings account and spending on your own terms.


How exactly is a credit card a liability you may ask, we’re going to tell you.


- Each credit card transaction creates a new loan from the credit card issuer. Eventually the loan needs to be repaid with a financial asset – money. However, the ability to repay your credit card debt is something lenders will look at favourably as you are considered less of a “risk”.


- If you have an outstanding credit card limit, whether it be $20,000 Amex card, a $1,000 bank overdraft or a $2,000 travel card you’ve never used – it will count as an ongoing liability and will impact the amount you are able to borrow for your home loan.


Well, what do you do? Don’t worry, this is where your broker will step in, you don’t necessarily always need to close everything down immediately. Sometimes, we will drop the credit limits or close off other unnecessary facilities first. However, if certain things need to be closed, your broker will communicate this to you and the reasons why.


Student Debt

How does your student debt affect your borrowing capacity? When applying for your home loan it is important to understand your student debt is categorised in a similar way to any other forms of debt you may have such as car loans, personal loans and as discussed, your credit card. This is because your student loan debt impacts your overall financial situation and therefore your ability to service a home loan. HECS repayments are dictated by your annual income figure, not your actual balance.


Another way HECS can impact your home loan application is when calculating your debt-to-income (DTI) ratio. Your DTI is as it says your total debts/ liabilities divided by your gross income. This is used by lenders to understand the full scope of your debts. This may impact your servicing with a particular lender as some lenders have strict DTI limits when it comes to home loan applications.


How can you combat this? Your broker will be able to guide you through this more in-depth however we can give you some hints as to strategies to implement to ensure your HECS debt has less of a defining factor in your borrowing capacity.


Strata

If purchasing an apartment, villa or flat, your strata fees will be considered by the lender as these costs can restrict your borrowing capacity. Strata/ body corporate fees vary significantly from property-to-property, dependant on location, complex size, and amenities available. These costs cover maintenance and repairs of common areas within the complex, as well as limited insurance for the complex and other key aspects.


When organising a pre-approval, we take into consideration and sometimes over-estimate what the quarterly strata costs may be based on the goal property. If a contract of sale is available, we refer to the disclosure statement to review historic and projected strata costs for that specific property and can apply a more accurate figure.


Assessment Rates

How do we ensure you are borrowing enough but not more than you can handle? Simple, at this stage your broker is required to assess your loan at 3% higher than the current interest rate. So not only will your broker logically assess your living expenditure, but they will also assess possible loan increases in interest rates over the term of your loan. This ensures that you will be able to realistically meet your repayments to the best of your ability, even if rates did increase with no change to your financial position.


Now you’ve come to the end, knowing all this information should be set up for success. If ever in doubt about your circumstances, financial position, loan process, don’t be afraid to contact your mortgage broker here at The Newstead Group. We will be sure to answer any and all of your questions as soon as we can.

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