Did you know some banks compete to give certain borrowers a home loan? They offer inducements such as interest rate discounts and waived fees all because these people are ‘ideal borrowers’.
RateCity data indicates that these ideal borrowers receive, on average, 0.55 per cent lower interest rates from lenders than other borrowers. So, what are their secrets?
What is an ideal borrower?
Ideal borrowers are those who present the least amount of risk to lenders in terms of defaulting on their loan. They will have a good credit rating, including a proven track record of paying their bills and credit cards on time. They will also have a deposit of at least 20 per cent and be intending to live in the home they buy.
Becoming an ideal borrower
The trick to getting these discounted home loan rates is to become an ideal borrower.
One of the best ways to position yourself as an ideal borrower is to save as large a deposit as possible. This shows lenders that you are less of a risk as they will have less to recoup if you default on the loan. It also proves that you are the type of borrower who can save a large nest egg.
How Much Can You Borrow?
That said, saving up a 20 per cent deposit is no easy feat, especially if you live in Sydney or Melbourne where this would equate to saving $150,000 to $200,000. Luckily, there are other ways you become an ‘ideal borrower’ and take advantage of lower interest rates.
- Get a guarantor
One way to become a more attractive borrower is to get a guarantor.
If you have the support of someone with equity in their home they can be linked to your home loan and their property will be used as additional security. Lenders tend to only allow immediate family members as guarantors, but this can differ depending on the lender.
The main concern with this type of loan is that if you default on your loan the lender can take action against the borrower and guarantor, and your guarantor will be liable for your home loan.
- Take extra precautions if you’re self-employed
Applying for a home loan can be a daunting process if you’re self-employed. However, if you organise all your financial records before you apply you will be in a much stronger position, particularly when lenders are looking to identify consistency of income. Lenders look for transparency when assessing risk, so make sure you can identify all your business expenses, such as car allowance, deprecation, non-recurring expenses etc.
Are you really self-employed?
It’s also important to clarify whether you are actually self-employed in the bank’s eyes because some lenders consider contractors or sub-contractors as employees.
- Correct your credit history
Your credit score is one of the major deciding factors for lenders when assessing whether you are eligible for a loan, let alone a loan with a discounted interest rate. They will go through your history with a fine-tooth comb looking for any missed or defaulted payments.
The Office of the Australian Information Commissioner (OAIC) recently reported that 30 per cent of Australians have errors on their credit report. It is worth getting a copy of your credit report from Veda and going through it very carefully just in case of mistakes, such as strangers or family members with similar names having their debt incorrectly labelled as yours.