Sometimes debt consolidation can help you when buying your first home.
Not everybody’s situation is perfect for getting a home loan, but it’s often not as bad as people might think.
A few months ago, we had a couple contact us saying they wanted to get a first home but their bank had said NO.
This is their story:
Their landlord had contacted them to say he wanted to sell, and as they were quite settled in the house and saw this as a great opportunity to buy it as their first home. The house was being offered to them at around $700,000, which was at least $20,000 below the market value and the landlord said he was quite keen to have them buy it if they could make it work.
As mentioned, when we first spoke to them just over three months ago, they had already been to their bank and been declined for a home loan, so they were quite deflated. Luckily they were told that they needed to talk to a mortgage advisor and given our experience with first home loans, they approached us.
From the very first conversation, we could see exactly why their bank had turned them down – their spending habits were not great, and they carried quite a bit of debt. They both had been avid users of Afterpay and between them, they had five credit cards and store cards. He had a car loan, as well as a personal loan, and she had a student loan. Overall, the debt was not a huge amount at just under $40,000, but it was spread over a number of different providers, and with a student loan of about $8,000 remaining.
We did the calculations and knew that if we could address their debt, then they had the ability to save quite quickly, too. Then the next step was to get a really good understanding of what debts they had and make sure that we could tidy up their account conduct and spending as well.
We reviewed all of their debt and worked out what they could pay off in the near term (within 3-months) and what was going to be better wrapping up into a debt consolidation loan.
In their case, it was worth adding the student loan within the debt consolidation loan too because it reduced the repayment on that significantly and therefore allowed a bigger mortgage which they needed. (see notes below)
So once we had assessed everything we then had a plan.
We put together the debt consolidation loan to tidy up most of the debts. The aim was to have that in place for a minimum of three months so that we could also tidy up the banking, get a bit of savings, and they were able to then clear the Afterpays and one of the store cards that they had, so that was not included in the debt consolidation. It was important that they had a good relationship with their landlord, who was also the vendor, and he was happy with the longer settlement.
For the next three months, they paid the debt consolidation loan and also put some money into savings. We calculated that the difference between the mortgage that they would be paying and the rent that they were paying was about $150 a week. To prove to themselves and to the future lenders that they could afford that, we started putting $150 a week into a savings account. That was a separate bank account that was set up with the bank they were going to have their home loan with shortly.
We also got them to set up the Budget Buddy app, which was a good way that they could track their income and expenses, but it also has a very neat goal-setting feature in it, which they used to ensure that they were on track to pay off their debts and their savings. The savings was also going to be useful to cover all the legal costs, as without that, the deposit was coming from KiwiSaver, and they didn’t have any other savings.
After the three months, we were then able to get the home loan application completed and a home loan approved for them. By doing the preparation early, it was a strong application, and therefore it was well-priced for them too, with special rates and a cash contribution that went back to them to give them a little bit of money straight away as a backstop.
Sometimes when you have existing debts, you need a mortgage advisor that is prepared to develop a plan that may include debt repayment, debt consolidation, and of course, the ultimate goal of the home loan.
Well, in fact, the ultimate goal comes after that, on paying the home loan off sooner, and that’s where it’s equally important to have a loan that offers the flexibility to allow that and to ensure that you do not get back into debt again.
Considerations with Debts & Debt Consolidation
A couple of important things here to note:
The are two things that concern the banks about existing debt, and it’s not necessarily how much you owe. The first thing that they look at is the repayments, and therefore what money you don’t have to help pay the mortgage. The second thing that they look at is the number of debts and who they’re with, as this is more about the habit that you have rather than their financial impact.
Banks also don’t like buy now, pay later because it’s a habit of spending money before you earn it. Strangely they’re okay with credit cards, even though it’s a similar thing, and we believe the reason they’re okay with that is because banks offer credit cards.
Student loans are interest free, and so it does not typically make sense to refinance this into an interest bearing loan; however sometimes we need to look at the bigger picture and the impact that it can have on the home loan application. The repayments for a student loan are based on your income and in this case the repayments were just over $370 a fortnight which is quite a bit, and so by converting to a personal loan the repayments for that same portion drop to about $80 a fortnight. In this instance that saving of $290 a fortnight was key to them being able to borrow enough for the home that they wanted.
We hope that you found this story inspiring.
It shows that even if you have existing debt there should always be hope of buying your first home. It might take a bit longer to get there, and maybe a debt consolidation loan is the key to getting into a home faster.
Make sure that you speak with a mortgage adviser that can help you with a plan for your existing debt, and the best home loan too.
