Sarah* is a registered nurse who loves her job and wants to buy her first home. Recently, Nurse bought her dream home. She was looking for a 1-2 bedroom apartment in or around the Melbourne Suburb of Ivanhoe, for between $500,000 and $600,000.
She had a full-time, permanent job (5+ years). As is typical for nurses, her income varied from month to month depending on her shifts (which determines what shift and meal allowances she receives) and the overtime she ends up working. She salary packaged as well.
When Sarah first contacted Hatch, she had two questions: How much could she borrow from a bank? And what size loan could she really afford?
She also didn’t know what assistance was available to her as a first home buyer.
The Challenges:
To help Sarah achieve her goal of buying her first home, we had to address the following challenges:
- Variable Income & Salary Packaging:
As Sarah’s income fluctuated from month to month, it was hard to determine her ongoing income, especially if we want to use the highest possible income figure and maximise her borrowing capacity.
At the same time, Sarah had a very stable work history and there is always work for nurses.
Many lenders recognise nurses as essential workers and treat them favourably. For example, some lenders use 100% of the allowances and overtime they earn (unlike for non-essential workers).
Sarah salary packages, which means she can reduce her taxable income by paying for some items or services, such as rent or mortgage payments from her pre-tax salary. This lowers her tax and increases her disposable income. However, not all lenders take salary packaging into account when assessing income. We had to find lenders that would do so.
So, while Sarah’s base salary was $80,000, we were able to identify lenders that would use a higher figure for the loan application when taking into account her allowances, overtime, salary packaging, and the fact that Nurse bought her dream home.
- Low Deposit:
Sarah’s savings were less than 20% of the targeted purchase price, but in her favour, it was her own savings (not a gift). This showed her ability to manage her money and budget. So Sarah was in a position where she could borrow up to 95% of the purchase price from many lenders.
- Single Borrower:
At Hatch, we often get asked if being a single borrower is a problem. It’s not. For the banks, if the numbers add up, they will lend. It doesn’t matter if it’s a single applicant or a group of five.
- First Home Buyer Assistance
As Sarah is an Australian citizen buying her first home in Victoria and the purchase price was under $600,000, she didn’t have to pay any stamp duty (she will need to move into the property within 12 months and live there for at least 12 months).
Sarah also qualified for the First Home Guarantee scheme. This meant that Sarah could avoid paying Lenders Mortgage Insurance (saving her up to $10,000). This did limit the lenders we could consider (not all lenders participate in the program). But on the upside, it meant the interest rate was lower than it would otherwise have been. With these savings, Nurse bought her dream home.
Loan Affordability
It’s not enough to get lending for a client to achieve their goal. We also want to make sure that the lending is affordable for them both now and into the future, taking into account the possibility of rising interest rates.
In Sarah’s case, she wasn’t tracking her spending and wasn’t sure what loan repayments she could afford. We assisted her to look at this. Based on a Purchase Price of $600,000 her commitment looked like this:
Required loan $545,000
Loan repayments (30 yrs P&I, 6% pa) $3,267 pm
Rates/Body corp $400 pm (est)
Total commitment $3,667 pm
Through our discussions and review of documents we were able to determine that based on her current pattern she could direct $4,350 pm towards the new property:
Current rent paid (that will cease) $1,850 pm
Current Savings pattern ($15,000 over 6 months) $2,500 pm
Total avail to cover loan repayments & property costs* $4,350 pm
* Property costs: rates and body corporate (utility costs assumed to be similar to current
This meant that Sarah could afford the loan repayments and still have some money left over (around $683 pm)
But what if rates went up? Our calculations (below) showed that if rates went up 2% Sarah would be in some difficulty, but she felt that she could cut some discretionary spending or pick up extra shifts cover any deficit.
| $545K loan | Repayment (pm) | Property costs (pm) | Total Cost (pm) | Total Avail (pm) | Surplus/Deficit (pm) |
| 6% | $3,267 | $400 | $3,667 | $4,350 | $683 |
| 7% | $3,626 | $400 | $4,026 | $4,350 | $324 |
| 8% | $3,999 | $400 | $4,399 | $4,350 | -$49 |
At the same time Sarah decided to look for a property at closer to a$550,000 purchase price to keep the loan and repayments as low as possible. Reducing the purchase price (and in turn the loan) by $50,000 would reduce repayments by around $275 pm and give her a bit more breathing space.
Outcome:
We identified 2-3 lenders that would lend her the amount she needed and could offer her a loan under the FHB program and Sarah selected the preferred lender and loan type/structure with our assistance.
A little while later Sarah bought a 1970’s 2 bedroom apartment in Ivanhoe for around $540,000. Buying a 2 bedroom apartment means she can if she wishes rent out the second room. The extra money would help her pay off the loan quicker or keep the loan affordable if rates rise 2% or more.
Note: There are lenders that will waive Lenders Mortgage Insurance for Nurses regardless of if they are first home buyers or not. In this case that option/path was not better than what has been discussed above.
* Names and other key details are altered to protect the privacy of the client.
