What's All The Fuss Over Lending Criteria?
There has been much media attention this past month around lender servicing criteria becoming even tighter and how some borrowers feel discriminated against, creating more confusion in many instances.
So, how do lenders assess a borrower’s ability to comfortably afford the anticipated repayments on a home and investment loan? Let’s try and clear things up a little!
Starting with an example: If your home loan is $300,000 at an interest rate of 4.80%, then your actual repayments will be approx. $1,574 per month.
When assessing your application and ability to repay the loan without causing financial hardship, the lender will load (increase) the interest rate by at least 2.5%, sometimes even more and assess your ability to repay the loan at this higher interest rate. This is an important part of the assessment exercise and designed to accommodate possible fluctuations in rates, ensuring you are able to meet the minimum repayments for a reasonable period should rates increase over time. This also demonstrates the lender is operating within the responsible lending guidelines set by the relevant authorities.
So, from a lender’s perspective, the application in this example would be assessed at the ability to repay the loan at around 7.30% interest, not at the loan’s actual interest rate and what the actual repayments will be. If your income is sufficient to service your normal living expenses and other financial commitments, plus anticipated loan repayments at the higher rate if the loan repayments were to move upward (in the\is example, around $2,057), then you should get a positive result with your application. From the lender’s viewpoint, if your application passes this part of the assessment test, it provides greater comfort that you will be able to meet the loan repayments at the actual interest rate you are borrowing OR at a higher rate should rates rise in future.
So are the banks discriminating against the borrower? Simply put, No.
They are simply taking responsible steps to protect the borrower and themselves through mitigating the risk of loan delinquency or borrowers falling behind and defaulting on their home loan should rates increase. Contrary to what many people think, the last thing the lenders want is to have to contact borrowers and say ‘You have missed a few payments and your loan is in default……’
And what is the latest on the Reserve Bank? Rates have been kept on hold again as expected this month, so no surprises there.
Thinking of having a home loan health check to see if there is a better deal out there? Please feel free to give me a call on 0438 041 111 for a confidential discussion about your home loan.
As always, enjoy life, work hard, play safe and remember that we are always here to help you
‘Take the Confusion Out of Lending’
Peter Vinci - 0438 041 111