How Christmas spending could hurt your home loan application

Summer is an exciting time to purchase a home in Australia, but it’s worth keeping in mind that your Christmas spending may impact your chances of home loan approval.

It’s no secret that the holiday season can affect the home buying and selling process, but if you are in the process of applying for a mortgage or gaining pre-approval, it’s important to understand how this time can influence the application process.

Let’s explore how your Christmas spending may impact your home loan application and how you can avoid a holiday home loan hangover.

Lending criteria and your Christmas spending

Every home loan lender, including Reduce Home Loans, has strict eligibility criteria that borrowers must meet in order to gain loan approval. This is encouraged by regulatory bodies, such as APRA and the ACCC, to help prevent borrowers taking on debt they cannot reasonably repay – whether you’re refinancing your investment property or you are a first home buyer looking to buy a new home.

This typically includes being above 18, being an Australian citizen or resident, having a good to excellent credit score and meeting a minimum income and employment requirement.

When you apply for a home loan, lenders will require you to provide income verification documentation, such as a payslip. You will also be required to show lenders how you spend your income and your current financial situation, which is why a lender may request at least three months of bank statements.

Home loan lenders will take stock of these statements, as well as the information you provide on your ongoing expenses (such as rent, utilities etc.) to determine how much you comfortably service in home loan repayments.

What you spend on will typically be categorised, including what you spend on entertainment, such as Christmas presents or after work drinks. A lender may then decide to classify the purchases made under these categories as living expenses, which will subtract from your overall borrowing power.

Lenders will also look at any debts you currently owe, such as an outstanding personal loan repayment or your current credit card limit. It is reasonable for lenders to test your borrowing capacity by factoring in what you could afford in mortgage repayments if your credit card was maxed out to its credit limit.

All of these factors are worth keeping in mind when it comes to your holiday spending if you are intending on applying for a home loan in the next few weeks.

Silly season spending to watch out for

Now that you know how your spending habits and your expenses influence your home loan application and the loan amount you may be approved to borrow, it’s worth taking stock of what common spending behaviours you may face this Christmas.

Credit card debt

Every year, millions of Aussies put their Christmas spending on their credit card. However, not every cardholder has the discipline or budget to repay their balance in full each statement period.

If you only ever make minimum repayments on your credit card balance, you may find that the extra spending you’ve done around the holidays has added up come January. And as mentioned above, any liabilities you have must be declared to your home loan lender so that they can factor this into your borrowing power.

So, if you’re planning on putting your silly season spending on plastic this year, keep in mind that an unpaid credit card balance may reduce the amount a home loan lender allows you to borrow and even result in an application rejection if your debt-to-income ratio is too high.

Buy now, pay later spending

Buy now, pay later (BNPL) platforms have soared in popularity over the last few years, with providers like Afterpay and Klarna helping turn this payment system into a $100 billion industry. And they can be particularly appealing when shopping in the holiday sales, such as Black Friday and Cyber Monday.

When used responsibly, they may be a helpful tool to make purchases, especially come Christmastime. However, you may not be aware that BNPL platforms may have an impact on your chances of home loan approval.

Firstly, while BNPL platforms do not typically charge interest on your ongoing repayments, they may charge late fees as well as account-keeping fees. And if you’re making multiple holiday purchases through BNPL platforms and struggle to meet your repayments, you may quickly begin accruing late payment fees across multiple purchases. This can be particularly impactful if you link your BNPL account to your credit card, not your debit card.

Frequent missed repayments may result in the provider reporting your behaviour to a credit reporting bureau, which will be reflected in your credit history and can hurt your credit rating and your chances of loan approval.

Further, it’s worth keeping in mind that over-reliance on BNPL for purchases may be a reflection of poor money management and spending habits. Lenders may use your BNPL spending as an indication that you are a risky borrower or facing financial hardship. This may hurt your chances of home loan approval or reduce the amount a bank may be prepared to lend you.

How to avoid a holiday home loan hangover

Now you know how your typical holiday spending may influence your home loan application, it may be worth considering how you can avoid hurting your chances of loan approval.

  1. Pay off your debts – Any outstanding debts you have come application time will be a mark against you and the amount you may be approved to borrow. Whether this means a maxed-out credit card or your HECS/HELP debt, it may be worth paying off your debts before you apply.
  2. Make a budget and stick to it – Consider setting up a budget to help you ensure all your Christmas purchases are not only paid on time, but that you can reasonably afford these purchases. This can be crucial if you’re using a credit card or BNPL platforms. You may even want to consider a strict spending limit with your family and friends if you are exchanging presents to help boost your home loan borrowing power. Reduce Home Loans Budget Calculator can help you to set a holiday budget you can actually stick to.
  3. Pay your bills on time – As mentioned above, your credit score is a significant factor that determines your chance of approval. If you’re frequently missing bill payments or BNPL repayments, the provider may report this to a credit bureau, which can hurt your credit score. It may be worth prioritising paying your bills over your typical holiday spending this December to avoid impacting your chances of mortgage approval.
  4. Reduce frivolous spending – If you’re leaning a little too heavily on UberEats, BNPL platforms, dinners out and other types of entertainment spending, your home loan lender may reduce the amount you otherwise could have been approved to borrow. Consider reducing your reliance on this type of spending by at least three months before applying for a mortgage. If you can’t avoid this come Christmastime (and we don’t blame you!) you may want to consider waiting a little longer to apply.

 

Any statement/s are general in nature and do not take into account your financial personal situation, objectives or needs. You should consider whether any statement/s is suitable for you and your personal circumstances. Before making any financial decision, consider your circumstances and the product disclosure statement.

(29)    For the Rate Cutter Variable where the borrower pays $1170 upfront fees then a corresponding loyalty discount of 0.10% p.a. off the Rate Cutter Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(27)    For the Investor Rate Slasher Cash Back Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Investor Rate Slasher Cash Back Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(26)    For the Low Rider Cash Back Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Low Rider Cash Back Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(25)    For the Economizer Cash Back Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.08% p.a. off the Economizer Cash Back Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(24)    For the Super Saver Cash Back Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.10% p.a. off the Super Saver Cash Back Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(23)    For the Super Saver Variable where the borrower pays an upfront fee of $1170 then a corresponding loyalty discount of 0.15% p.a. off the Super Saver Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(22)    For the Economizer Variable where the borrower pays an upfront fee of $1,170 then a corresponding loyalty discount of 0.11% p.a. off the Economizer Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(21)    For the Investor Cash Back Hero Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.08% p.a. off the Cash Back Hero Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(18)    For the Home Owners Dream 1 year fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Home Owners Dream reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(20)    For the Cash Back Hero Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.08% p.a. off the Cash Back Hero Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(14)   For the Investor Rate Slasher where the borrower pays an upfront fee of $1,170 then a corresponding loyalty discount of 0.09% p.a. off the Investor Rate Slasher rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(12)   For the Investor Rate Lovers Interest Only where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.07% p.a. off the Investor Rate Lovers Interest Only rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(11)   For the Wealth Maximizer 3 year fixed Principal & Interest where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Wealth Maximizer reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(10)    For the Wealth Maximizer 2 year fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Wealth Maximizer reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(9)    For the Home Owners Dream 3 year fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Home Owners Dream reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(8)    For the Home Owners Dream 2 year fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Home Owners Dream reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(7)    For the Investor Rate Slasher where the borrower pays an upfront fee of $1,170 then a corresponding loyalty discount of 0.09% p.a. off the Investor Rate Slasher rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(6)    For the Investor Rate Buster Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.08% p.a. off the Investor Rate Buster Variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(5)    For the Rate Buster Variable where the borrower pays an upfront fee of $150 then a corresponding loyalty discount of 0.05% p.a. off the Rate Buster Variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(4)For the Rate Slasher Variable where the borrower pays an upfront fee of $1,170 then a corresponding loyalty discount of 0.08% p.a. off the Rate Slasher Variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate. The loan setup fees are not refundable.

(3) For the Investor Rate Lovers Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Investor Rate Lovers Variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(2)For the Rate Lovers Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Rate Lovers Variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(1) For the Low Rider Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Low Rider Variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate. The loan setup fees are not refundable.

(28) For the Rate Crusher 1 Year Fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.05% p.a. off the Rate Crusher reverted variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate. The loan setup fees are not refundable.

(19) For the 1 Year Fixed Wealth Maximizer where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the 1 Year Fixed Wealth Maximizer reverted variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate. The loan setup fees are not refundable.