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This podcast is for education and entertainment purposes. It's not financial advice and doesn't take into account your objectives, financial situation or needs. You should consider if the information in this podcast is appropriate for you and contact a professional financial adviser. If you are seeking financial advice. Hello and a very warm welcome to the Teachers Mutual Bank Bringing It Home Podcast series.
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Alan: I am Alan, Chief Sales Officer and next lending manager here at Teachers Mutual Bank. And joining me today and for the whole series is financial wellness coach Betsy Westcott. But she's greatest wish is that every Australian enjoys financial well-being. She believes in the more skill and knowledge we have around money, the better choices we can make to live a happy, independent life.
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Alan: That's why she's dedicated her career to helping people make the most out of their money. Betsy holds qualifications in financial advice, home lending and money coaching. Hello and welcome, Betsy. It's great to have you with us.
Betsy: Hello, Alan. And hello listeners. It's great to be here with you.
Alan: Look now, for the most of us, navigating the home buying process can be a little bit daunting and even more so if it's the first time you've done it in your first home buyer.
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Alan: So we're here to take you through the home buying process step by step from getting your ducks in a row before you apply for a home loan to the loan application process itself. Right through to finding the right property and sale and settlement. But before we get started, we'd like to acknowledge the traditional custodians of country throughout Australia and their connections to land sea and community.
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Alan: We pay our respects to the elders past and present and extend that respect to all Aboriginal and Torres Strait Islander peoples. And for listeners who may not be familiar with teachers Mutual Bank, here's a little bit about who we are. Teachers Mutual Bank was founded by teachers for teachers and their families more than 55 years ago. We started with a small group of teachers in a tennis shed in Hornsby in Sydney with the goal of addressing some of the financial challenges that teachers were facing as a profession at that time.
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Alan: From those very humble beginnings, we have grown to be one of Australia's largest mutual banks. We're really proud of our ongoing commitment to our members as a bank for good, for those who do good. We invest our members money responsibly and ethically, and we're now bank for people, planet and profit. But back to today and your home buying journey.
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Alan: And we're going to kick things off with one of the best things you can do at the start of that journey and that's getting yourself home loan ready. So, Betsy, over to you.
Betsy: Well, what we're going to be covering today, Alan, is why you need to be home loan ready. How do you streamline that home loan application process, which can be quite a process.
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Betsy: But also to give you the best chance of success of actually getting approved, we then going to look at being ready, what it simply means, which is like, you know, getting your ducks in a row, organising paperwork, the documents that you'll need for your home loan application, plus getting your credit score in good shape to improve your buying position, and then also understanding how much you should save for a deposit and what your deposit options actually are.
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Alan: So it's really about getting organised, taking some of the stress out of that process. It's important, especially when you're time poor and maybe have been working irregular hours. So you really need to get yourself organised for that.
Betsy: Absolutely. Alan You know, as a teacher, you're often so busy looking after others, it can be really hard to find the time to prioritise your own financial goals.
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Betsy: So getting your ducks in a row can help make the process as stress free as possible. And if you're a casual teacher working on contract, your income could be a little bit unpredictable too. So it can help to understand what banks are actually looking for and what proof of income you can use before you apply for your home loan.
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Alan: Look, you're absolutely right there, Betsy, but can you can we give our listeners a bit of a rundown on what lenders do actually look for in that home loan application?
Betsy: Yeah, they're looking to assess your overall borrowing risk. You know, do you have the capacity to repay your home loan? Do you have the character that indicates you're going to pay your home loan?
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Betsy: And you know, what have you saved up for that? So what does that look like? It means the amount that you've actually saved for a home loan deposit. So ideally, they're looking to see a deposit of around 20% plus the property costs. But there's definitely ways to manage if you have a deposit of less than 20%, we'll get into the detail on that.
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Betsy: The other thing they want to understand is how much do you want to borrow and how much can you borrow? So they'll look at all your incomings. So like pay other sources of income if you have any rental income, shares, dividends, things like that, then they'll look at what are your outgoings. So every month, what expenses do you have?
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Betsy: Like bills, groceries, entertainment, spending habits, other loan repayments, including your credit cards or any personal loans, colognes that you might have? And then they'll look at your credit report, which is basically like a report card that summarises your credit history. It can be positive or it might be a little negative. And it kind of provides a rating called a credit score.
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Betsy: Every Aussie adult has one, and getting those in good shape is a really smart move and a really important part of being home loan ready.
Alan: So most of us know what we should be doing more or less of to keep in good physical shape, but we might not be quite as aware of the things we can do to improve our credit health or why it's so important.
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Alan: Part of being home loan ready.
Betsy: Yeah, credit health probably isn't top of mind for all Australians, but it is really important, as you say. So couple of things that you can do to get your credit health in better shape is things like pay down your credit card and any other high interest debt that you have as a priority.
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Betsy: You really want to get that debt paid down. Make your loan and credit card repayments on time Seems obvious, but it's really important. Then lower your credit card limit. So do you really need that $20,000 limit on your credit card or could you actually get by with just a $2,000 limit or a $5,000 limit? If you have any open lines of credit that you don't use or any additional credit cards or store cards that are just sitting there and you're not really using them.
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Betsy: It's important to sort of close those out because it's not only the actual debt that you have and your repayment history, but even those unused credit limit that get taken into account by lenders as a part of your assessment and they can really reduce your borrowing power when you apply for a loan. So it's good idea to just reduce the credit card limit before you apply for the loan.
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Betsy: And then last but not least, actually check out what is your credit score and check actually that it's accurate. All the items that are on your credit report and you can do this through credit reporting agencies. So what you be looking for is any red flags on your credit report that might indicate fraudulent activities that you might not be aware of?
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Betsy: That's a good one to look for.
Alan: Yeah, look, and just for our listeners, we've mentioned credit reports and credit scores a couple of times now. So to find out how you can check your credit score and some tips for getting in better shape, top credit reporting into the search bar on our website, you can get a so for free copy of your credit report once every three months from a reporting agencies like Equifax and Experian, Australia.
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Betsy: And I'm going to jump in and give a little plug to our better Money management series, podcast and webinars, because we covered that, didn't we, Alan? We did a deep dive into credit scores and how to be credit healthy.
Alan: Absolutely. Look, I forgot that. So that's a great reminder. Thank you for that. So maybe let's fast forward a little and hopefully we've got our credit score in better shape.
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Alan: Maybe we've reduced our credit limits like you just mentioned, we've cancelled those unused lines of credit such as credit cards or store cards that really do have an impact. What else can we do to get home loan ready now?
Betsy: Well, one of the best things you can do is get the paperwork together early. So often I've seen throughout my career people come in and apply for loans and there's so much back and forth and all this wasted time because we didn't have the right documents upfront.
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Betsy: So what do you actually need? Well, you're going to need some evidence of your employment and income. So employment contracts, payslips tax returns, any letters from your accountant or even pay statements are really useful things to bring along for temporary or casualty, as many lenders won't let you rely on your employment as proof of income. Some do, and certainly as a bank built by teachers.
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Betsy: For teachers, we understand your industry and the way teaching is run on contracts. So Teachers Mutual Bank accepts just three months of casual employment history with a minimum period of employment of three months. Other credit criteria is obviously going to apply, but this is an option for you and it helps to know what proof of income you can use ahead of time.
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Betsy: Also, something that can be really helpful is to talk to one of our lending specialists. You can talk to them any time, even if you're not ready to buy or borrow just yet. Don't be shy about picking up the phone, asking them questions to give yourself the best shot at success. It's all a part of getting timeline ready, but back to getting our ducks in a row.
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Alan: Betsy, what are some of the other things listeners can stop to get together before they apply?
Betsy: Yeah, okay. So we've covered income. All the things that they're going to be looking for is details about any current debts that you might have. So, for example, credit cards and loan repayment history, any outstanding debt and credit limits the next thing that they'll be looking at is how you spend your money, what's your expenses?
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Betsy: So an accurate estimate of your regular ongoing expenses, including rent, mortgage repayments, utilities, entertainment expenses, perhaps insurances, your car expenses, they all count. And then the third thing that they're going to be looking for is information about assets, what you own. So if you own any property or if you own any vehicles, they'll want to know what's the value of them.
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Betsy: If you have a rental property, any income that it's creating shareholdings you might have and of course bring along your super statement too, because that's another asset.
Alan: Okay, So now we've done a lot of that groundwork. But now for the big question is how much we actually need to save for a deposit.
Betsy: Yeah, I know. Especially with the rate at which property prices rise, it can be really hard to get that 20% deposit together.
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Alan: It seems to just be getting out of reach.
Betsy: Yeah. So it is possible to borrow with as little as five or 10% as a deposit. But banks and financial institutions generally recommend, like we mentioned before, having a deposit at least 20% of the property's purchase price. So let's put that into some realistic numbers. If you're looking to buy, say, a house and it's $800,000, then you need to save 160,000 as your 20% deposit.
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Betsy: Now high property prices as well as the cost of living measures, means, as we said, saving up that 20% deposit can be challenging, especially if you're working casual or part time, not full time hours. But there's always ways you can get into the property market with a lower deposit. You might even be able to borrow with as little as a 5% deposit if you're a first home buyer with the Australian Government Home Guarantees game.
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Betsy: That's a mouthful, isn't it? Or if you're not a first time buyer by paying something called lender's mortgage insurance, it's an acronym you might hear from time to time LMI lender's mortgage insurance. But we'll go into more on that in a moment. Nevertheless, when looking at how much you want to save for deposit, remember, you need to factor in other borrowing and buying expenses, not just the deposit.
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Betsy: And these come on top of the property purchase itself. So things like stamp duty, solicitor fees, the cost of moving and connecting, things like gas and electricity and then don't forget those insurances. So home and contents insurance to protect your new home and belongings, of course, and as well as REITs or strata fees that you could be paying for the first time.
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Betsy: These all add up and you want to be prepared for them.
Alan: Betsy. They look like daunting numbers. So it's I'm thinking around what we get sometimes from members is we see a lot of parents, their parents or guardians wanting to give their kids a helping hand when it comes to getting a deposit together. So can you talk us through what that might look like.
Betsy: Getting your foot into the property market can be really hard.
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Betsy: It's definitely a hot topic around the dinner table with a lot of my friends and especially hard. If you're just starting out in your career or you have limited earnings and you're facing cost of living pressures as well. So ways that parents can help, they might want to give a lump sum gift towards a deposit. You'll need though, a statutory declaration from your parents for it to be accepted as a part of your home deposit in a home loan application.
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Betsy: Another option is a parent or other friend or family member. They can go guarantor on your loan. It means that that person will guarantee your loan repayment by putting their own property up as guarantee. Now, if this is an option for you, your lending specialist will contact the guarantor to discuss their obligations so that they're aware of the details of your loan application and their rights as a guarantor.
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Betsy: They'll also encourage you both to seek independent financial advice before you make any decision about going guarantor on a loan.
Alan: It's great to know that there are more than just one option around that 20% deposit. You mentioned one earlier that could help our listeners get into a home centre. Next, Lenders mortgage Insurance or LMI that you that we talked on earlier.
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Alan: So can you talk our listeners through what the basics are.
Betsy: Yeah, let's break down LMI so lenders mortgage insurance will LMI can be a great way to buy your own home sooner if that that process of saving that 20% deposit feels a little out of reach. So what it is when banks lend more than 80% of a property's purchase price or in other words, you have less than a 20% deposit, it's considered a little bit more high risk as a as a loan transaction.
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Betsy: So lenders, mortgage insurance might apply to your loan. Basically, lenders, mortgage insurance, insurers the bank, not you. I think that's a big one that people misunderstand.
Alan: It's really important to touch on that definition.
Betsy: Yeah. So it ensures the bank in the event you're not able to meet your repayments or default on your loan.
Alan: Now it's an insurance, so it's obviously not free.
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Alan: So how much is lender's mortgage insurance roughly?
Betsy: So it's a one off cost on top of your loan, typically charged at about one and 2% of the loan value. And it really depends on the size of your deposit and how much you borrow. So in essence, the bigger your loan, the higher your lenders mortgage insurance fee will be and vice versa.
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Betsy: But the good news is you've got a couple of options around how you pay for it. You can pay for it outright and upfront, or you can add it to the cost of your total principal loan amount, which means you will pay interest on it and it will be added as a part of your loan. Now, how do you decide whether it's right for you?
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Betsy: You really need to weigh up the cost versus the benefit of the lender's mortgage insurance. Lender's mortgage insurance can add to your loan, but it can also be a really great way to get your foot in the door sooner, especially when property prices rise faster than you can save. It's important to weigh up the cost of lender's mortgage insurance against the potential increase in value of the property.
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Betsy: You purchased over the period of time it takes for you to save that extra 10 to 15% deposit. So that's how I'd be thinking about it.
Alan: Thanks, Betsy. That's really important stuff because I think there's a lot of unknown and people aren't aware around what lenders mortgage insurance actually is and what it does and how it helps them.
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Alan: So there are more resources on our website about LMI for our listeners to dive into. And that brings us to another term. Listeners might have come across when they're getting home loan ready.
Betsy: Yes, LVR. We're going to bust all the jargon today, aren't we? Alan.
Alan: acronyms, it's a lot of them around.
Betsy: Yeah. So LVR or loan to value ratio, it's a key criteria that lenders consider when assessing your loan application.
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Betsy: And it essentially shows the ratio of the size of your loan to the value of your property, but they express it as a percentage. So it's based on your deposit amount. So say I was going to buy a house for $1 million and I had a huge deposit of $400,000 and I was borrowing $600,000. My loan to value ratio would be 60%, for example.
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Alan: Good saving.
Betsy: Yeah, great savings. Well done me lenders commonly use Elvia to assess the risk of the line. So the higher a loan to value ratio, the higher the risk of the loan to the lender.
Alan: The LVR can also affect the interest rate. Isn't that right?
Betsy: That's right. So depending on the lender having a low, LVR may help you to borrow more at lower rates with lower loan repayments.
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Betsy: So that's definitely something to ask your lending specialist about too. Now quick reminder, it's very important to include the calculations of home loan repayments as part of your research, so including understanding what repayments might be. It's certainly one thing for a lender to tell you how much they think you can borrow, but it's actually really important that you are going to be able to make those repayments and that you're really comfortable with those amounts.
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Alan: You just touched on calculations. Look, there's a whole bunch of calculators and tools on our website that can help you find out exactly how much you can borrow, what your loan repayments could be based on your deposit. So make sure that listeners use those because it allows they can go onto their website and do it themselves. So that's really simple.
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Alan: And that brings us to the point and Betsy already, can we wrap things up with your top tips for listeners when it comes to getting home loan ready?
Betsy: Yeah, So we've already touched on getting your paperwork ready, touching base with a lending specialist for some good help, guidance and advice understanding the terms and jargons and doing those calculations to understand what your loan repayments might be.
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Betsy: But in addition to that, a couple of tips I would add in is start a budget and have a really good understanding of what your expenses are. If you have any debts, try to clear them and pay them down and make sure you're paying your bills on time and then do some market research as well. Maybe attend some open homes, get an idea of what's available, and then, of course, use those tools and home loan calculators on the website to understand what's your borrowing capacity and what are those repayments likely to be.
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Betsy: I also recommend downloading your copy of It's My Home and First Time Buyer's Guide from the website too. They're both really great resources to help you in your home buying journey and a great companion, a companion and guide. In addition to this podcast.
Alan: Look, they do bring some great insight in and help our listeners. But once again, Betsy, thank you so much for your great tips and thanks so much for joining us today.
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Betsy: Thank you.
Alan: And thank you. Our listeners, for joining us too. We hope you enjoyed our very first episode of Bringing It Home podcast on what it means to be loan ready. Make sure you tune into episode two and Betsy takes us through the government help and grants and offer for first time buyers. That's a bit of a minefield, so we'll look forward to that.
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Alan: And remember, if you have any questions about the home buying process or anything we've talked about today or you want to speak to one of our lending specialists, please give us a call or make a booking on our website to speak with a lending specialist at a time and a place that suits you, including after hours at your place of work, at home or on a video call.
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Alan: I look forward to catching up with you next time.
END OF EPISODE
