Improve Your Repayment History

I have mentioned several times that you need a good repayment history.

This was especially important for us as we did not have a large deposit saved for our purchase.  If you are applying and you are on the edge of consideration, you have to prepare more carefully.

We were definitely on the 'edge of consideration' because when we first began organising ourselves, we had only one full time worker and one SAHM.  We had a deposit but it was not large, we had 1 personal loan and 1 credit card.

The best way to prepare for a home loan is to actively improve your repayment history in the lead up to submitting your application (At least 3 months in advance but 4-6 months would be excellent!).  By this I mean, make sure that you have an excellent repayment history with not 1 single blip in the months before you submit your application.

You should do this even if you do have a pretty good repayment history, just to make sure it is perfect and cannot hold you back in anyway.

Why will this work?  

1. Because several months of recent repayment history will have an effective impact no matter what your past history.

2. It is highly likely that the bank will not really bother to look back into your financial past beyond 3 - 6 months anyway, especially if your credit report does not list any official defaults.

Our Mortgage broker had advised that it would be best if we were both working to improve our chances.  It was excellent that one of us had permanent, full-time work for several years and that was a main consideration by the bank.  I managed to get full-time work but it was only as a casual, which is not viewed as favourably as a permanent position.  You need to have been working continually for at least 4 months for the bank to include your employment as a positive.  This actually depends on which bank you choose for your home loan, the minimum is 4 months casual work for some but most others prefer 6 months minimum.

As soon as I got a job I decided to improve our repayment history at the same time as I would have to wait 4 - 6 months anyway!

Ironically, our child care costs sky-rocketed so even though I was working, we were not really better off financially and were even a bit worse off on a weekly basis!!!!  When I started work, I had to also pay more in weekly fuel and toll road costs each week.  I also had to update my wardrobe as my SAH clothes were not suitable for a professional workplace.  In the first month of starting work, we actually had to live off our savings more because I had to pay several extra costs in bulk immediately (like new clothes and child care deposits and 2 week advance payments).  I was basically working in order to satisfy the bank requirements and not much else because my wage was not stunning but it all counted in the long term!

I mentioned before about being able to use your rental history to your advantage.  Another thing regarding rent, is that the bank will realise in your assessment, that if a significant portion of your weekly wage is going towards paying your rent, it will be harder for you to save a larger deposit.  This is why they look favourably to you being able to pay all your living expenses and still save something.  Why?  Because, you will effectively be swapping your Rental payments for your Mortgage re-payments.  They know you have that covered but they also want to know that you will have some ready cash available to help you cope with everyday financial issues that crop up and also to enable you to save to pay for improvements/ maintenance for your new home etc.

It all sounds simple and straightforward but what if you do not have a perfect 'repayment' record?  What if you have had your credit card for so long, that you cannot actually remember if you have a good repayment 'history' or not?!

I mentioned previously that you should first check your credit history report to see if there are any defaults listed against your name.  This is a pretty good clue.

A more likely situation for most of us, is that we have not had a default officially listed but sometimes we were a little late with our monthly repayment and got a reminder letter from the bank etc.  Not terrible but still not ideal and may make the bank reconsider or pause, especially if you do not have a big deposit saved.

I found the best way was to set up a direct debit from our savings account to be removed the day after we received our weekly wage.  I was repaying our personal loan at slightly more (extra $15) than the minimum payment each week.

How to manage the credit card and how it would affect our chances for the loan?  This was my biggest concern for our personal repayment history.

I was unsure if I should make a big effort to pay the balance down to nothing before starting on my whole home loan journey.  That would mean sacrificing our savings deposit and starting again from the beginning, it may mean that we miss the current break in the housing market!!  Not good.

My Mortgage broker advised me that if you have a credit card, the bank instantly counts the entire balance limit of your card against you.  It does not matter if you have a zero balance owing, if you potentially have several thousands that you could spend.

He said that this means you are better off having your savings in the bank as a bulk deposit amount, rather than paying off the entire balance on your credit card to zero.  Unless of course, you pay it to zero and then cancel the card entirely.

A better senario is to pay it down a bit so it is not sitting right on the upper limit but there is a bit of leeway.  You should also make sure you pay more than the minimum each month and do not spend more than you repay.

My solution was to pay off a chunk to make sure there was reasonable leeway and to then simply cut up my credit card.  I then set up a weekly direct debit to ensure I paid $100 above the monthly minimum repayment for the credit card.  I had no card so I could not use it and was spending nothing each month.

Using a credit card is a lazy habit, not having one means you have to spend mindfully but you are really no worse off, you just have to plan in advance and be a bit more boring LOL!