Want a mortgage? How to get the best treatment from banks

In this high price, low interest rate environment, the hardest part of the first home process for most is the deposit. A 20 per cent deposit can look monstrous, especially if you’re in an expensive area like Auckland or Wellington.

Banks do actually have some discretion to give mortgage approval with a 10 per cent deposit — they just aren’t able to give that to many people, because of rules designed to guard our financial stability.

So if you can show that you’re a safe financial pair of hands, they’re more likely to let you into that exclusive club. Whether you’re hoping for that, or if you’re still resigned to a 20 per cent deposit, here are the things you should do to get the best treatment from your bank.

If you have too many debts, the banks will see that higher cost of living as a barrier between you and paying off your mortgage.

The trick is, you don’t even have to be using the debt. A cleared credit card can be just as much of a problem.

The banks will often assess true debt, and your “debt potential” as if they were the same.

So having a credit card with a high limit, even if you pay it off every month, means the bank will assess you as if you were already in debt for that amount. To be fair to them, they’re just trying to reduce risk.

One solution is to reduce your credit card limits, close down any “buy now pay later” accounts, and pay off car loans.

If you have a salary that can go up and down, you’ll need to show the bank a track record of what that averages out to. This can apply to selfemployed people, freelancers, those who work on commission, or those who get regular bonuses.

The general rule of thumb is that you need two years of salary history to show the bank. But if you have recently changed jobs within the same industry, the bank will often be willing to take your previous history.

Many first home buyers now get a leg up from their parents, if they’re able to do so. But the bank will still want to see you’ve saved at least 5 per cent of the deposit yourself. Again, this is about showing you’ve got the financial discipline and ability to keep paying that mortgage.

The 5 per cent can come from your Kiwisaver, savings, or other investments you might have.

The banks are sometimes like your parents — overly concerned about day-to-day “fritter” spending. They’ve become more sensitive in recent years to things like regular Uber Eats, coffees, or time at the bar.

They’ll want to see three months of your spending history when you apply for the mortgage, and will check for this type of spending.

So put yourself into money lockdown for a few months, but keep a skeleton key in your back pocket so that you don’t go insane.

You can always choose to take out your spending money for the week in cash, as that won’t leave as much of a paper trail. If the bank asks, just tell them it’s a budgeting tactic; you read that using cash means you’re less likely to spend, and that’s how you’re staying focused. This is also true, so it could help you boost your savings even more.

Banks test whether you can afford to pay the mortgage back, not just now, but for the next 30 years.

That means they take into account that interest rates will eventually go back up, meaning your mortgage will cost you more.

Rather than testing whether you can pay a mortgage at 2.29 per cent interest rates, banks will often test at around 6.5 per cent.

One solution is to use an online mortgage calculator to see how much a first home in your area would cost you weekly at that 6.5 per cent rate. Then make sure that between your rent and savings, you’re hitting that amount each week. This is concrete proof to the bank that you can get through their affordability test.

The Herald’s Cooking the Books personal finance podcast is here to get you the tips you need to weather the financial storm. Hosted by Frances Cook, with a new expert on each episode. This column is general information, not individual financial advice.