Solid finances relieve tight belt

Darren Pratley. Photo / Supplied

In recent years, many mortgage lenders have been forced from the market and those remaining have had to tighten their credit policies and restrict the volume of lending. This has caused potential homeowners frustration and existing borrowers concern because of the tightening of residential lending.

This cautious approach to new lending has meant a return to more traditional lending parameters, focusing on acceptable security and greater tolerances for affordability and loan servicing. As financial markets begin to recover, there are signs of lending institutions relaxing components of their criteria.

The key is to compare lenders' criteria to see how their credit policy will affect your particular situation.

First-home buyers have been one of the groups most affected by the financial climate. They have found it extremely difficult to source lending without a considerable deposit, strong income and employment stability. Even having parental guarantees has not made this any easier. As a result of the property market's slow improvement and the Government's Welcome Home Loan scheme, we are now seeing selected lenders returning to this higher leveraged option. The key here for first-home buyers is preparation.

You need to have: at least a 5 per cent deposit (more likely 10 per cent); good job stability; and three months' sound banking history.

Lastly, it is about presenting your application to the right lender in the right way as not all lenders will look at your application in the same manner.

Existing home owners who have levels of debt already in place and especially those with fixed rates expiring will have found their interest costs have reduced.

Many borrowers have taken the wise step of maintaining their level of repayment and reducing the term of the loan to pay it off faster.

Those who have found their budgets squeezed because of other financial pressures can enjoy the benefit of reduced mortgage costs to help manage the household budget. In some circumstances, a borrower may now not be able to get approval for lending at the level they currently have. Again, this is because of tightened lending criteria or different personal circumstances. Before you embark on a new project or property purchase it is important to ensure the required borrowing levels are still available.

Residential Investment Property - Many baby boomers have been enticed or encouraged into investing in residential property and have had to manage considerable debts. As financial markets and the property markets have stalled and retracted, many first-time investors have been forced to sell properties as the debt level has become unmanageable. Lenders have now revised their criteria, with many restricting borrowing to a maximum of 70 per cent of the property's value. This has restricted new investors in the marketplace. It is advisable to remember to ensure you find the right investment property at a level of debt that can be managed on your current income levels. Positive cash flow is sought-after by investors and lenders. Make sure you do your numbers and prepare your application comprehensively before approaching lenders.

Construction Loans - Building your dream home requires good management and solid advice.

You will need a considerable deposit to place on the land with cash to start the build process prior to any approved lending being drawn. Careful management is needed as the build progresses to ensure there are always funds available from the lender to complete the project. Ensure you have a strong cash deposit before you make an application for finance. You will also need a fixed-price construction contract in most instances.

As can be seen from the above scenarios, levels of deposit required have increased in almost all situations and a greater emphasis is put on your proven ability to meet repayments. When seeking finance, it is imperative you have done your homework, collected all relevant information and tidied up your personal financial situation to make obtaining the approval easier. This is why many people use a mortgage adviser or broker to prepare an application to the right lender with the right loan structure. By structuring the loan correctly it can save you thousands of dollars in interest. Lastly, when market conditions are changing dramatically it is important to manage your home loan. Reviewing and assessing your loan's effectiveness, at least annually, is a major key to building equity in your family home.

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