There is one constant in the ever-changing world of banking: the confusion as to what people can and can’t afford. Lance explores the murky waters of why some banks say yes and some say no.
I often find myself sitting with people who believed they were in no position to purchase but could and, conversely, people who believed they could but, at that time, could not. Beyond this, they may have been sabotaging their plans by putting together a strategy that was actually taking them even further away from their house-buying goal.
To help clear up some of the confusion, there are really only three things a bank is interested in:
1. Deposit (or equity)
A scenario I have come across often is when people have strong income, some debt, but a low deposit. They believe their biggest hurdle is the debt, so set about reducing this. The truth is, while they have some debt, their earnings are at a level that the debt is easily managed, even with a mortgage. They need to increase their deposit, but unfortunately all their extra cash is being channelled inefficiently towards debt repayment and, so, unnecessarily delaying their timeframe for purchase.
To all those colour-coded Excel spread sheet lovers …
There can be times when people have been up all hours looking at properties or going to open homes for months when, unfortunately, they had no ability to purchase at their target price point. This can be frustrating as numbers can be based on correct “true-to-life” calculations. However, banks have their own rules of basic math.
When a bank calculates what we can afford to borrow, they use a far higher interest rate (to mitigate fluctuations), and they have a minimum average spend for cost of living for each scenario presented e.g. two adults, one child vs. one adult, no children etc. Furthermore, because each bank perceives risks in different ways, they each calculate a household’s scenario differently. They’ll give greater or less importance to things like the number of vehicles you own and whether child support is organised formally through the IRD, as well as a few other quirks.
“If I could turn back time.” — Cher
Time is our gift to you. Tell us your scenario, what you are hoping to do, and when you are hoping to do it. Let us sit down and come up with a clear strategy based on what you are truly able to do.
If it is not today, let us help you journey towards that “yes” sooner rather than later. Let’s unpack your plans beyond this next purchase and consider the ramifications of each step. Let’s reduce the uncertainty.
Lance Shearman is a Registered Financial Adviser with Velocity Financial. No investment decision should be taken based on the information in this blog alone. A disclosure statement is available free of charge upon request.