COMMENT: December or, if you’re particularly organised, November is a time of increased spending for most families as the Christmas madness begins. But those who are looking to apply for a mortgage between January and March 2022 need to think carefully about how they spend over the Christmas break so it doesn’t affect their ability to borrow.
In the past, a rational approach to spending has been applied to mortgage applications. Sure, you spend a lot on takeaways at the moment but that will all change once you own a house. However, with the new responsible-lending requirements having been placed on the banks, this isn’t always the case anymore. What you have spent, on average, in the past 3 months is what the bank largely determines you will spend going forward. This is tough in a normal part of the year but the Christmas period could really torpedo your chances of buying the house you want.
Here are four tips to make sure the Christmas period doesn’t stop you from your homeownership goals.
1. Purchase Christmas presents separately from other everyday shopping
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Occasionally, the bank will allow you to highlight one-off purchases like Christmas presents and exclude them from your “typical” expenses. These aren’t expenses that will occur every month and a good bank will take this into account. But if your Christmas purchases are mixed in with every-day shopping, it’s going to be hard to distinguish what is out of your normal budget and what is a one-off. Think of the stocking-stuffer you purchase on the way through your weekly shopping trip or the extra book you purchase while replacing some school shoes.
2. Try to do one present-buying expedition all in one day
That way you can highlight the spending on your bank statements and explain that it won’t be repeated in a normal month. Additionally, keep the spending reasonable as you still want to show you’re in control of your money, even those one-off purchases. If you are expecting to buy a house soon, this may be the year that your family gets homemade gifts rather than store-bought items.
3. Stay in control of Christmas socialising
Christmas parties are going to particularly affect your bank statements because they look, to the bank assessors, like any other night out. It’s going to be hard to differentiate between a one-off work-do and your standard Friday social drink.
Have a budget for socialising in December and stick to it. If you typically spend $150 per month on drinks and entertainment, make sure that the number of events that you attend doesn’t blow this out. Remember this budget needs to include your trip home in a taxi. Keep some budget aside for this or consider cheaper methods of travel like a ride from a friend or public transport.
4. Separate your expenses for holidays
It’s likely that the entire city of Auckland is going to seek some sort of well-deserved getaway over Christmas but holidays come with increased spending. Like the Christmas presents, try to keep holiday spending as reasonable as you can. Make sure you note what spending is holiday-related and a good bank might be able to be convinced to annualise the expenses if it’s a once a year holiday (i.e. if you spend $600 going away over Christmas, they may break that down to an increase of just $50 per month over 12 months).
To put all this into real numbers, let’s look at how much a small increase in your December spending might affect your mortgage application. Let’s say, you spend an additional $450 in December at social events, going to friend’s BBQs on the weekend and hosting people at your house on Christmas Day. You then spend $450 on presents for your family at big box retailers and supermarkets. The purchases are all mixed in with your normal spending so you can’t distinguish between them and your typical monthly spending.
You’ve therefore increased your December spend by $900 or an average of $300 per month over the past 3 months (remember the banks add up your total spend for the past 3 months and average it).
That additional $300 per month will reduce your mortgage borrowing by around $55,000 to $60,000. If you could have been approved for a house purchase of $900,000, you’re now looking at $840,000 simply because of your spending over the Christmas period. Factor in holiday expenses etc. and you can see how this starts to significantly affect your chances of getting a mortgage in early 2022.
In summary, keep your Christmas spending as light as possible and try to do present buying separate from your normal shopping so you can make the argument it is a one-off expense.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.
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