There has been a lot of media coverage recently on how the banks are now looking at spending and bank statements in more detail when assessing people for a mortgage approval.
Previously you would be asked what you spend and your mortgage adviser and the lender at the bank would check your statements and situation to make sure that what you stated was realistic. The banks all had pre-determined minimums for living costs for a single person, a couple and families with children and so this was the basis (and the minimum) used in any calculations.
The idea of this article is to highlight what the banks are looking at, and how you can adjust things to help your chances of getting a mortgage approval.
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Reviewing Your Bank Statements In Detail
The banks now review your bank statements line by line and this determines your spending (living costs) for a mortgage approval. They are looking in detail at things like spending on food, vehicle expenses including fuel, alcohol, school costs,
One of the problems with this approach is the banks often make assumptions without asking you for an explanation, and often the lender will make the wrong assumptions; hence they can decline a mortgage application based on having the wrong data.
Here are a few recent examples we have seen;
Childcare – the lender saw an amount being paid on bank statements and assumed that this was a regular payment even though it didn’t match what was put in the mortgage application. Once it was explained to the lender that one child had recently started school and therefore the childcare cost had dropped, they adjusted the cost to the new and lower amount and issued a mortgage approval.
Food Expenses – the lender reviewed the bank statements and based on actual expenses for food adjusted the figure; however the situation had changed recently and the food costs should have been at the lower figure that was used in the application. The costs had been higher when the parents were living there and the parents had been paying board to help cover the costs too. Once explained to the lender this was accepted as the parents board payments were on the bank statements until quite recently too which backed up the statement.
Vehicle Expenses – often people with a company vehicle might pay the expenses themselves and claim back from the company, meaning really they have no vehicle expenses. We saw this example where the bank had seen the vehicle expenses on the credit card statements and therefore added them as an expense for the lady; however she had a monthly claim for expenses and was reimbursed for them. Once we pointed this out to the lender those expenses were then removed. Company vehicles and allowances often cause issues and need to be well explained and with marginal applications it may mean looking at another bank. Some banks will make an adjustment to your income of $5,000 (or more) if you have a company vehicle and this can make a huge difference in what you might be able to borrow. Other banks can penalise you by adding a cost adjustment for each vehicle that you have and that has a negative affect.
KiwiSaver – we recently questioned a bank lender on the way that they had calculated income as it seemed wrong and was meaning they were going to decline a mortgage application that looked okay to us. When we saw how the bank was assessing the income we realised that they were using the net income after tax and KiwiSaver had been deducted; however the couple had increased their KiwiSaver contributions to 8% to save hard for the deposit and the way the bank assessed the income (using net figures) was therefore assuming that this was going to continue, when in fact this would reduce to 3% when they purchased a home. After explaining this to the banks lender it was adjusted and an approval was given.
These are just a few of the issues that we are seeing when the lenders decide to review your expenses without knowing or making an effort to find out what they really are. It’s certainly one area where mortgage advisers can help as they know what the banks will see and can question the lenders when things don’t seem right.
How To Tidy Up Your Bank Statements For A Mortgage Approval
We have discussed how the banks are looking at bank statements and illustrated some of the issues that this is now causing, but now we need to have a look at what you can do to ensure that your bank statements don’t stop you getting a mortgage approval.
It’s important to understand that banks will want to review your last 3-months bank statements, but if you want to apply to your existing bank then they have access to view your transactions further back than this. While it might seem obvious to go to your existing bank for a home loan, because they have viability to your transactions this may not be the best option!
As mortgage advisers we can discuss the options with you based on your situation and banking history.
There are a few easy things that you can start doing today.
Review your actual spending – we probably all spend money on things that we don’t really need to, or can find ways to reduce our spending. The first step to do is to actually review what you have been spending, and once you have established this you can then focus on a few things that you can change. Most people that do this will be surprised at what they spend, and can find areas where they can save. An easy way to review your spending is using the budgeting software Pocketsmith where you can upload your bank statements and code the transactions to produce a summary of your spending.
Stop using any buy now pay later options – it’s easy to make purchases using these options (Afterpay, Bundll, Genoapay, Zip, humm, Klarna etc) where you can spread your purchase cost without paying interest; however banks don’t look favorably on this as it is deemed that you are in the habit of buying things before you can afford them. If you are planning to apply for a home loan then you should (a) stop using these and (b) check on any that you have previously used and make sure that the facilities are cancelled. In most cases the providers leave your account open even after you have paid off the item purchased, and the banks will find this when they do a credit check.
Freeze your credit card – credit cards can be handy at times and most people have at least one credit card, but do you use it properly and do you need it? The banks will review your credit card use when assessing any finance application and they will look at what you are buying, if you make payments on time, if you withdraw cash and also factor in the card limits not what is actually owing. You therefore need to look at what credit cards you have and see if you can either reduce the credit limits, pay them off and/or cancel the cards. If you are going to keep a credit card (and lot’s of people do) then make sure that it’s paid on time, that you do not make and cash withdrawals and try and get the limit as low as possible. Many people get tempted to buy things knowing that they can pay with a credit card, so if you are one of these people (you will know if you are) then a good idea is to stop carrying your card with you and even freeze it in a block of ice so that you cannot get it easily. If you want to have a credit card for buying online then another option is to set up a separate bank account with a debit card attached, and this way there is no credit limit as you are using your own money.
Change how you pay for subscriptions – the banks will include any regular subscriptions or payments as an ongoing expense, regardless if they actually will continue. Some of these payments can be changed so that at the time of applying for a home loan you can decide if they need to be included as a regular expense or not. Some of the obvious of these payments are things like insurances, gym memberships, streaming services and internet based subscriptions. Of course you should review any of these and decide if you really need (or use) them, and also see what alternative payment options there are. You may be able to pay annually or even quarterly and therefore the payments will not show as regular payments on your bank statements.
This covers a few of the key things that you can start doing today, but of course everyone’s situation will be slightly different; hence there are many different ideas that may suit one person but not another.
Live Like You Have A Home Loan
One of the best ways to prove to yourself and often more importantly the bank is to manage your finances as if you already have a home loan.
Firstly do the calculation to work out what your expected mortgage repayments would be. You can use our simple mortgage calculator and check the latest home loan interest rates to ensure that you have an accurate figure. Once you know what an expected mortgage repayment is you can deduct what you are currently paying in rent and then save the difference. It’s always a good idea to have a savings account with a separate bank, and one of the best accounts is the Rabobank PremiumSaver which has quite a good interest rate without locking your money in.
Just because you can demonstrate that you can afford a mortgage doesn’t automatically mean that the bank will approve your application, but it certainly shows that you are responsible and manage your money well which helps support your application. This is one thing that the non-bank lenders look at too.
A Couple More Things …
If you are planning to get a home loan then you want to make sure that you give yourself the best possible chance, and here are a couple of other things that you should consider.
Your Credit Check – the lenders will do a credit check on you but it’s always a good idea to get a copy of this now. You can get a free copy of your credit report from Centrix and that way can check what it looks like and make sure that there is nothing adverse on it that maybe shouldn’t be there. Your credit score is important and can be negatively impacted by too many credit enquiries, late payments for regular bills like for electricity etc. as well as any late payments on credit cards, store cards or hire purchase. It’s important to make sure that you pay everything on or before the due date.
Earn Extra Income – the focus of looking at bank statements is mostly about your spending, but another way to improve your chances of getting finance approved is to increase your income and it also helps you save for a deposit and pay off any debts that you may have. You may be able to earn extra income by doing more hours in your existing job or by finding a part-time job and this extra income can therefore be used to support a mortgage application. Of course there are other ways to make extra money too such as Uber driving, selling on Trade Me etc and while the extra income helps it might not be able to be used by the banks at least within the first year of starting.
KiwiSaver & Other Saving – too often Kiwis will have their KiwiSaver and savings with their main bank and the most common reasons given for this is that it was easier and you can see all your balances on the banking App. Of course there are more valid reasons that should be considered and the main focus should be on what is best for you. Generally speaking, you should use a specialist investment company to manage your KiwiSaver as they are focused on investments and therefore should be better than a bank at this. When it comes to savings accounts we mentioned Rabobank as one good option to consider.
Buying a home is a big step and most likely your biggest purchase, and for most people the first mortgage will be the biggest financial commitment. You might think that some of the things that we have mentioned seem a little over the top, but it’s honestly worth making an extra effort to make the adjustments now as it can help set you up well for the years ahead.
Of course, as mortgage advisers we are always here to help too.
Plus Some More Resources
Smarter Start – we set up this website for first home buyers and there is plenty of information that will help including a number of blog posts.
Kiwi First Home Buyers Group – we set up this Facebook Group where first home buyers can ask questions and get advice from other first home buyers and other members like mortgage advisers, bankers, solicitors, real estate agents etc.
PocketSmith – this is the budgeting software that we recommend. They have a free version or a paid version depending on how automated you want it to be. You can sign up and use this software to complete an initial assessment and then cancel, or you may wish to keep using it to monitor and manage your spending.