Demystifying the home loan application process

Applying for a home loan can feel like you’re learning a new language, and the process comes with a bunch of terms and concepts that can be confusing. To shed some light on this, we’re going to check out some of the key criteria a lender will look at when you apply for a home loan.  

Income, expenses, assets, and liabilities (aka affordability) 

One of the first things a lender will look at when you apply for a home loan is a holistic view of your finances including how much you earn and how much you spend, to assess whether you can afford the loan you have applied for. A lender will also want to get a picture of the assets you have, such as savings, investments, and KiwiSaver, as well as any liabilities or debts you may have, like Buy Now Pay Later, personal loans, or credit cards.

Getting a handle on your finances ahead of time, by understanding your budget, will ensure you’re well prepared when it comes to applying for a home loan or pre-approval. Using something like a budget planner calculator can help you to analyse your spending, seeing where your money goes and where you could make potential cutbacks to reduce expenses. Some banks offer spending analysis and insights in their apps or internet banking. BNZ customers can use the  Activity tab in the BNZ app, helping you examine your expenses by category. 

Understanding your expenses before applying for a home loan could help prepare you for when you own your home as well. There are many additional costs that come with owning a home, like insurance, rates, and maintenance. You’ll need to factor these into your budget, and doing so ahead of time could make the transition a little easier. 

Loan-to-Valuation Ratio (LVR) 

Getting your deposit sorted is possibly one of the most important steps when preparing to buy a first home for you to live in. Loan-to-valuation measures the loan amount against the property value, so your initial home deposit plays a key role in determining how much your LVR will be. .  

Generally speaking you can work out the LVR by dividing the loan amount by the property value. So, if you had a property worth $600,000, a deposit of $150,000 and had borrowed $450,000: 

LVRs over 80% (or less than 20% deposit) usually come with a Low Equity Premium (LEP), which increases the interest rate. If you fall into this category, it’s a good idea to speak to your mortgage adviser or lender for options available for high LVR lending, which may include shared ownership options. 

A good credit rating 

Your credit rating provides lenders with insight into your history of repaying debt and other financial commitments such as your phone bill. Credit reporting agencies in New Zealand (Equifax, illion, Centrix) collect credit information and use it to calculate your credit rating.  

Maintaining a ‘good’ rating can help to support your application as it shows you’re responsible with debt. Ways to improve or maintain your score include:  

Tip: Having several credit checks on your file in a short span of time could indicate to a lender that you're struggling with your finances. Keep in mind that credit checks can be run when you switch utility companies or mobile phone network providers, as well as applying for credit cards or other lending. 

Debt-to-Income Ratio (DTI) 

Lenders use DTI as one of the ways to measure your ability to make mortgage repayments. Measured as a ratio, it looks at the amount of debt you have compared to your before-tax income.  

Simply put, you can work out your DTI by dividing your current/expected debt by your income. For example, if you had an existing loan of $400,000, no other debts, and an annual income of $80,000, you’d have a DTI of 5.00: 

A lower DTI is likely to be more favourable for your lending application. A higher DTI can indicate to a lender that the borrower has too much debt for the income they earn. 

Now that you understand some of the key criteria that a lender takes into account when processing a home loan application, it may be helpful to run some scenarios using our home loan calculators.  

We’ve got a selection of calculators¹ that can help you work out how much you could borrow, what your repayments may look like, and how soon you could pay off your home loan. 

Get a leg-up with conditional approval 

If you’ve done your budgeting, saved up a minimum 20% deposit and your credit score is in a healthy place, the next best step is getting conditional approval (aka, pre-approval) from a lender if possible.  

Conditional approval means your lending application has been approved subject to certain criteria being met. Usually, a conditional approval is given at the beginning of the home buying process. It lets you know how much you can afford to spend and is usually valid for 90 days, giving you time to search for, and find, a house. It may be valid for longer if you’re looking to build. It's important to remember that there are still conditions you'll need to meet in order to get final approval on your loan, so it's a good idea to make any offer on a property subject to finance.

Also, if you’ve found a place you like, and are ready to apply for a mortgage, having conditional approval may mean you’re able to progress your application faster, as the lender already has the majority of your details. 

Ask the experts 

Having an initial chat with your banker or a mortgage adviser before starting your homeowner journey can make the path to home ownership a lot easier. It provides you an opportunity to ask questions, have an expert examine your financial situation and provide insights into the best way for you to proceed.  

They can help you get financially fit before you apply, so it’s good to get this step in early. Their familiarity with the process means they can help you navigate you through the application process and guide you on what documentation you’ll need from pre-approval right through to drawdown.