HAS COVID RUINED MY CHANCE FOR A HOME LOAN?
If you were pondering in 2020 what your chances of getting a home loan in 2021 were, by now you’re probably just making it up as you go along in terms of future planning!
There’s no denying it’s been an extremely challenging time – the most difficult to be faced by current generations. Every day the game changed, and anxiety increased as everything we depended upon and maybe took for granted was impacted. As if that wasn’t enough, there are also those who’ve lost whatever they had left – not once but twice - in the recent NSW floods. Now as we exist in a new and ever evolving phase of the pandemic, amidst war and climate change, and a looming election - one of the only things we do have control of is our capacity to make plans. In fact, the stasis many experienced through lockdowns and restrictions has been a key motivator to bring big plans forward and make up for lost time.
For some of us, future planning is going to be about how we keep the lights on and the kids fed. For others though, the changed financial environment means reassessing questions we had before, but with a new reality informing the answers. Anyone previously considering applying for a home loan needed to review their annual household income and expenses, to decide how much they could realistically borrow. This needs an even sharper focus today, with thousands of people having lost their jobs and job security being more like a bad lottery prize than that status quo. The questions around how we work, where we work, and why we work have changed and some of us must rewrite the next chapter accordingly.
Are you still going to buy a house?
If you’re still in a position of financial vulnerability, then stop reading now and accept your home buying plans are going to be paused for the time being. If your financial position seems to have stabilised, then revisit your plans with a new perspective and see if your budget, time frames, or plans need to change in any way. If you still feel confident that buying a house is an option for you, focus on making yourself a more viable prospect for a loan than you were before and start crunching new numbers. Study the market day by day and see what’s going on with housing prices in your area. Review your current deposit and decide if it’s better directed to your financial survival this year, or if you can retain it as your house deposit and build on it to get yourself into a stronger proposition when you do eventually apply for a loan.
As was the case previously, a deposit would be between 5% and 20% of the purchase price of a property. However, in the current climate, 20% could be expected to be a secure baseline, with the principal to be borrowed adjusted from your previous projections, to reflect the changing market. The bigger the deposit you have, the less you have to borrow and the less of everything else you’ll need to manage – a smaller loan amount means lower repayments, lower interest charges over the lifetime of the loan and the relief of knowing you have a buffer in times of financial stress (such as the rest of 2022 and whatever fresh hell is still to come). If you don’t have a large deposit already, now might be the perfect time to make some headway, with social distancing and the opportunity to stay at home, still offering the best savings strategy anyone could ask for. Saving for a bigger deposit requires more patience and a greater time commitment to reach your goal, but we’ve all been practising enforced patience already so why not make good use of those newly acquired skills!
How has the game changed for borrowers?
It’s crucial to consider the environment you’ll be borrowing in and work on ways to maximise opportunities and minimise risk wherever possible. More lenders have been accepting 5% deposits in recent years, and incentives like the First Home Loan Deposit Scheme has encouraged many buyers to start out with smaller deposits. Conversely though, the way banks have been viewing loans has changed significantly because of the COVID-19 pandemic. People with share portfolios have needed to revisit their arrangements with banks because banks weren’t viewing them in the same light as before. Same applies to those with unusual employment arrangements which previously may have been assessed on a case-by-case basis but are now being viewed with far more scepticism. Those who are self-employed or work freelance are best placed to provide as much documentation as possible that details the consistency and stability of their income to improve their chances.
There is an upside however and that is that most of the banks have implemented a range of support options for mortgagees. This means that if you do get home loan approval, there are support options in place in the event of yet another dramatic turn in global events. These options include reduction of repayments, pausing instalments, allowing access to offset or redraw accounts, and financial hardship guidance and support services. Sustained low interest rates and a relatively stable housing market are also on your side for now.
Buying a home is likely to be the biggest grandest purchase of your lifetime so it’s important you do your due diligence and make the right decisions – regardless of what’s going on in the world around you. The question around whether to wait or not must be answered based on your own personal circumstances. Understand the market and keep track of what’s going on economically via regular announcements from the Australian Federal Government or the New Zealand Government and the REIA or the REINZ. Do good research around pricing, location, value for money, and the long-term investment potential of the properties you shortlist. If it’s going to be your forever home, you should feel unwavering confidence that it will deliver the lifestyle you imagine for your yourself into the future.