How income and expenses affect your home-loan application
When applying for a home loan, reviewing your finances is one of the first things you have to check off your to-do list. It is crucial that you get an awareness of your financial health to gauge your odds of getting approved for a mortgage.
Being organized is a must when doing a financial check — you cannot just blindly guess how much you are spending monthly and how much of your income goes to your savings. For you to successfully navigate and have a grasp on your finances, you need to be able to put them on paper and analyse them. This is where Your Mortgage's Income and Expenditure Worksheet comes in.
Filling out the Income and Expenditure Worksheet
Your Mortgage's Income and Expenditure Worksheet is a tool that can help you picture where your money goes — it lays out every inflow and outflow of cash from your budget in an easy-to-understand table.
Using this tool is very straightforward: it just needs you to input the details of your income and expenses. If you have a working spouse, you will also need to supply his or her income.
The tool breaks down income into several streams: employment, savings account and term deposits, investments, and others. On the expenditures side, this calculator comprehensively separates monthly cash outflows into several categories:
- Essentials — This category includes day-to-day expenses for food, clothing, rent, electricity, phone, and gas.
- Medical — All healthcare-related costs should be indicated here (medical fees, dental health, medicines, etc.)
- Debts — In this category, you should note all credit card repayments and other personal loan commitments you currently have.
- Transport — This category is for all the transport-related costs, including those for petrol, car-loan repayments, maintenance, and public transport.
- Insurance — Covered in this expenditure category are all the insurance policies you have under your name — home and contents, medical, life, car, and others.
- Other costs — This part of the tool allows you to input other monthly expenses you might have, including those for childcare, leisure activities, internet access, subscriptions, and gym membership.
After filling out the form, the tool will calculate your total income per month as well as your expenses for each expenditure category. It will then give you an idea of how much you are spending monthly and if you are on a budget surplus or deficit.
Making changes to your expenses: A little goes a long way
You might ask, "What's the big deal with income and expenses, anyway?" If you are applying for a home loan, your income and expenses will definitely play a critical role; lenders use these two factors in determining your borrowing power and capacity.
Would receiving a huge monthly pay cheque increase your borrowing power? Not necessarily, especially if your expenses are close to the brim. When looking at your borrowing power, lenders look how much you can save monthly and if there is still room in your budget to service a home-loan. If your expenses equal or even exceed your income, do not expect to get your application approved.
Lenders employ different strategies to ascertain your borrowing power. The good thing is, once they see that adding monthly repayments would not harm your budget and would leave an adequate portion for essential needs and savings, they will likely give you the green-light.
It is better, of course, if you make little adjustments so that your lenders can see that you have a bigger buffer. Adjusting on the income side might be difficult, since you might have to add investments and part-time jobs. Changing your spending habits, however, is easier to manage, especially if you have an exhaustive list of all your expenses.
This is where Your Mortgage's Income and Expenditure Worksheet could be useful — it will help you view your financial health with a broader lens, enabling you to work out where you can spend less to save more. With the tool's feature of segmenting expenses into categories, you can conveniently adjust your budget without drowning in too many numbers.
The most practical way to reduce the outgoings is to settle your loans first, especially the personal ones like those charged on your credit card. Paying off your credit card bills and other personal loans would give you a clean slate when you apply for a home loan. This way, there is a higher possibility for you to borrow more as your capacity increases. Your Mortgage previously released a guide tackling how credit cards could affect your home loan application.
You can also cut some of your monthly expenses — perhaps you can withdraw your gym membership and invest in a home-workout system instead. If you rarely watch television, maybe it would be better to cancel your cable subscription. It could be also helpful if you limit dining out and food deliveries.
Understanding how income might affect home-loan application
Your Mortgage's Income Tax Calculator gives you an idea about how much income tax you were charged or will be charged over a certain fiscal year. It also computes how much of your income you can actually take home after taxes.
This tool takes into consideration your employment income as well as your other taxable income. With this, you can go back over the last three years to estimate how much income tax you would have paid in the 2016-2017 or 2017-2018 tax years — handy if you've misplaced any of your receipts or want to double-check previous earnings.
Unlike other tax calculators available online, Your Mortgage's Income Tax Calculator already factors in the Medicare levy payable. This allows the tool to provide you with the estimated amount you would be able to take home after tax and healthcare deductions. It can even provide you with weekly, fortnightly, monthly, and annual income.
What to expect with the new tax scheme?
If there is one thing your lender wanted to be sure about, it would be the stability of your income. This typically depends on the type of job you have. Banks would likely prefer a stable income over a big pay cheque. Many high-income earners might even find themselves with limited options because they could have more financial commitments than average earners.
Besides your income, your bank might also consider your bonuses and incentives like your annuity income, commission, packaged salaries, and stipends. These things could boost your borrowing power, allowing you to access better home-loan deals.
The key consideration lenders look for here is your risk to their system — if you have a stable job, you have higher chances of being able to service a home loan. Therefore, banks would be more willing to lend you. On the other hand, if the nature of your work is casual or part-time, lenders might tag you as a high-risk borrower. In this case, your lender could reduce your borrowing power or could even reject your home-loan application.
Knowing how much you can borrow
As mentioned earlier, different lenders have their own strategies in assessing your borrowing power. However, there are ways for you to get a rough estimate of how much you can borrow. Your Mortgage has a separate tool for this — the How Much Can I Borrow? Calculator can assist you in determining how much your lenders might let you borrow based on your overall income and expenses.
This tool also allows you to determine how much you can borrow at a specific interest rate and loan term. It is useful to understand that the mortgage rate affects your borrowing capacity — the lower the cost of the loan is, the higher the amount that you can borrow. The length of the loan term is also as important. A longer loan term would increase the amount of interest you have to pay for the life of the loan while a shorter mortgage term would allow you to incur less interest.
Seeking help from a financial expert
The income and expenditure worksheet and the how much can I borrow? calculator can help you understand if you are truly ready to apply for a home loan. In some cases, however, you need the help of someone who has the right knowledge to make sense of all the numbers.
Reaching out to financial experts would be a practical move for first-home buyers who might be struggling to crunch all the numbers by themselves. These experts can help you understand your overall financial health and would be able to give you several options so that you can increase your chances of getting approved.
Get help in organizing your income and expenses by asking an expert today.