How to maximise your chances of mortgage approval

The CCCFA (Credit Contracts and Consumer Finance Act) only came into force in December, and the credit crunch is already starting to bite.

The legislation aims to protect vulnerable borrowers from loan sharks and requires lenders to scrutinise applicants’ financial history more closely. However, many home loan seekers have found themselves rejected by the banks. The latest data shows the proportion of successful home loan applications has dropped from 36% to 30%. According to media reports, grounds for refusal include too much spending on takeaways and Christmas shopping.

The good news is that you can take action to improve your prospects even in a tightened lending environment. Here are some tips to give you the best chance of approval.

1. Reduce your spending now

Lenders will ask to see your latest three months of bank statements. Tighten your belt in the run-up to applying for a home loan. There's not much you can do about the holiday spending that's already happened. However, your daily barista coffees and weekly UberEats may be seen as unnecessary expenditure. Before you splash the cash, ask yourself whether you really need that item.

And why not use one of the many online tools available to work out a personal budget. These ensure you build an awareness of your spending and go a long way to helping you understand your borrowing capacity and what you can afford to repay. Only about 10% of people have a budget.

2. Pay your bills promptly

Lenders will also check your credit history. Maximise your credit score by making prompt, regular payments on utilities, credit cards, personal loans and rent. Ideally, you should clear outstanding debts before applying for a mortgage. Be sure to cancel any credit or store cards you no longer use and consider reducing your balance limits. You can check your credit report for free at Credit Simple or Equifax.

3. Save, save, save

The bigger your deposit, the less risky you are for lenders. Tighter loan-to-value rules mean only 10% of new lending can go to low-deposit owner-occupiers (those with an LVR above 80%). Ideally, your deposit should be a minimum 20% of the property’s value. A healthy deposit and a strong track record of regular savings get a big tick from lenders.

4. Sort out your paperwork pronto

Make sure you don’t stumble at the last hurdle. Get together all the supporting paperwork beforehand for a smoother, faster application process. Alongside bank statements for current and savings accounts, lenders also need proof of ID and income. Employees should have three most recent payslips. And the self-employed will need accountant-prepared financials.

Expert help from your Loan Market adviser

It may be a rockier road than it used to be, but it's not all doom and gloom. You can take action to get on the right footing, so contact your adviser as soon as you begin considering a mortgage application. We are here to offer expert guidance on personal finance and account conduct to ensure the best possible outcome for you. Let’s get started!