If you are planning to buy a new home soon and you have a lower than ideal income then you might want to talk about your income with an expert.
Income is a key factor with any lending, and probably more so with first home buyers.
Many first home buyers are pushing to the upper limits to what the banks deem is affordable for them.
When you’re buying your first home you’re often at a period in your life when your income is still expected to increase, and if your deposit or equity is less than the ideal (less than 20% deposit) you may therefore be borrowing more than ideal too. To get the house that you want or something suitable might take a bit of a push or stretch financially.
As mortgage advisors we’re often asked what is the maximum that I can borrow from first home buyers, and that’s because the house that they really want always just seems a little bit out of reach financially.
So it’s important to understand how the banks look at your income.
Knowing how banks look at things mean you can then have a look at your actual income and see if there are improvements that can be made.
How Do Banks Look At Your Income?
Generally speaking a bank will treat your wages and salary as solid income, and they can include 100% of this when doing their calculations on your affordability.
It can differ if you’ve been in the job for a short time (less than 90 days) and especially if there is any clause in your contract along the lines of a probationary period. If you’ve been in a similar role elsewhere and have just started a new job with no probationary period, then in most cases the banks are quite happy to accept your full income after two to three weeks.
There are a lot of jobs that have a component of the overall income that is made up from overtime, penal rates, commissions and bonuses, and the banks have different rules on how these can be applied.
If you’re in a role which offers permanent overtime and penal rates, such as the nurses working in hospitals or police officers then the extra income can generally be included as your normal wages and salary. We just have to be able to prove that the extra income forms part of your standard package and that it is consistent.
If your income includes commissions or bonuses which by there nature are not the same every week or month, then we have to look at a longer term to prove that it is part of your standard package. We can sometimes get away with a letter from the employer to explain how regular these are, but in most cases the banks will want to have a look back over the last two years to ensure that it is truly regular. If there’s a good case to show that it’s something over a lesser time, then that can often be accepted by the banks. What they cannot accept is overtime that is seen as being seasonal, very recent, or not always available.
Commissions are always difficult when they are based purely on your performance, and it makes sense too as you would not want to rely on this income in your own budget. You will know that if your performance drops off, you may not receive any commissions or a lesser amount.
It’s important that we understand how your bonuses and commissions are made up and to demonstrate a history of those.
What About Benefits / Entitlements?
If you get any entitlements, such as working for families, or other benefits, then those can be included as long as they will continue. Where we do see a problem with these benefits is if you are receiving a child support payment, but your child is getting to the age where that child support will be ending. The banks will assess your affordability using the costs that you have for raising that child, but not the income, and so that’s a little bit of a double whammy, and can negatively affect your affordability. If you are getting child support through a private arrangement, the banks will need additional proof of this over the long term to ensure that it is regular and continuing.
Part-Time Work or Side Hustles
A lot of first-time buyers now have a little side hustle, or part-time gig – and that’s a good way of increasing your income.
Extra income helps your borrowing power, and also helps with your deposit and paying off debt.
If your extra income is a part-time job for somebody else where you’re receiving wages then make sure it’s a permanent part-time contract, not a casual contract.
If it is a casual contract, that you can demonstrate consistent hours over a long period of time. It may be that you work in a cafe every Saturday morning, and have done so for three to four months, and therefore generally that would be accepted by the banks. Whereas if you’d only been working a few Saturdays here and there, then the banks would not accept that income if it’s a casual contract.
If you’re doing a part-time role like Uber driving, then that is deemed as self-employed income. With this then the bank’s general rule would be that you need to have two years financials to prove this income or tax returns to prove that.
Often we see people have been doing this for a few months, rather than the full two years. And so once again we look for consistency of income to see whether we can get the lender to accept that as extra income. Many of those roles like Uber driving have a platform where you can download your income and show that it is consistent. And so rather than the banks including 100% of that income, they may be happy to accept 50% on that basis.
It’s become pretty common for people to earn extra income by working part-time.
It’s become pretty common for people to earn extra income online as either a content creator or using affiliate marketing to earn sales commissions. In the past this has been pretty difficult to get the banks to accept. But because it has become so popular, the banks are starting to accept this now. But there are limitations. One bank recently came out with a set of rules for this, and it included that your online or creator income must be equivalent to 10% or more of your total income before they will include it. And that certainly makes a huge difference, as many first-time buyers will have some form of online income, and it’s generally at least 10% of their overall income.
To Summarise …. When You Talk About Your Income
We know that income can be a major hurdle when it comes to buying your first home, but like any challenges the key thing is to understand exactly how the banks will look at your income and any potential extra income that you might have.
And so as mortgage advisers, we often do assessments to work this out for people – to see what you can do with your current income and/or what some small changes might mean. That is, we will have a look at all of your income.
You will either be ready now or from our review we can set a pathway to home ownership for you.
We also can do the calculation off the back of this to show what additional income you would need to be able to show a lender to enable you to borrow the amount that you require. In many cases, it’s a lot less than you think
That’s because the original income has already covered all of your living costs and expenses.
So what we’re talking about is extra income that can be 100% dedicated to paying the mortgage.
When we talk about your income like this and understand what a difference of even an extra $200 per week could make, which is $10,000 a year approximately, then there’s a real motivation to go and find a job that will pay you that extra money – and there’s plenty of jobs out there, even if it’s a mundane job that you don’t really want.
