How to Get a Home Loan with Bank's Tightening the Rules - PLAN AHEAD
In recent times there has been a lot of media commentary about how difficult it is now to get a home loan. Yes, it has become more difficult but it is not impossible. The easiest way to make sure your home loan application is approved is plan ahead well in advance, at least 3 months prior to requiring finance.
Over the past few years there have been numerous enquires and examinations of the banking and finance industry including Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Sedgwick Review, Review into Retail Banking Remuneration, Productivity Commission Review, APRA and ASIC Reviews. These numerous reviews have come to various conclusions and made various recommendations. As a result, home loan lenders have been forced to change the way they assess home loan applications. For people seeking a home loan, irrespective of them being a first home buyer, investor, upgrading or refinancing, lenders are requiring far more information and need to meet increased qualifying criteria. Not all lenders have the same qualifying requirements, but there is no doubt they are all taking more aspects of a person’s financial position into account and cross referencing information when assessing a loan application.
Due to all these changes, to be in the best position to obtain finance approval to purchase a property you should start planning at least 3 months prior to you purchasing. The first step in planning to purchase should be consulting with your mortgage broker. Your mortgage broker will assist you in putting a tailored action plan in place. This will put you in the best position possible to obtain the finance you require with the least amount of stress.
To assist you understand some of the complexities in obtaining a home loan, the following is a summary of areas home loan lenders are now paying significant attention to and some ideas on how best to meet these requirements.
It is now mandatory for all home lenders to obtain details of your personal expenses based on your position after you have obtained the finance you are seeking.
Lender’s are required to make “reasonable” enquiries into your budget and this may include:
- Comparing expenses detailed in the budget with bank statements over past 3 months. In particular they are looking for undisclosed commitments (i.e. a loan or credit card payments that have not been disclosed in the application);
- Regular payments such as insurances, Foxtel, petrol & public transport being accurate;
- If you have an investment property, council rates, insurances for all properties, property management fees etc being included;
- Note that some lenders do not allow for discretionary expenses (i.e. Uber Eats, dining out, holiday) not continuing after your purchase even if those expenses will cease when the new property is purchased;
- Budget surplus being similar to amount lender calculates in their assessment calculation;
- Budget surplus being accumulated in savings accounts &/or existing rent payments;
- Zippay, Afterpay etc commitments
Some lender’s idea of “reasonable” enquiries is more like forensic enquires.
To assist in having lender’s agree with your budget it is recommended for at least 3 months prior to making an application for finance you:
- Commence saving in a separate account at least the same amount as your proposed repayments less any rent payments you are currently making and will not continue after you purchase;
- Start living the lifestyle you expect to be living when you purchase your new property (i.e. reduce discretionary spending)
Assessing Loan Affordability
All lenders have their own affordability calculator which in basic terms takes into account your income, current & on going commitments plus proposed loan. Each lender’s calculator is individual to themselves. Therefore, there can be a difference in the amount one lender will lend compared to another. In some instances that difference can be significant.
So that you do not just meet the proposed loan repayment and have no capacity to meet higher repayments if interest rates rise, lenders assess affordability based on future and existing (if applicable) home loans repayments at between 7 – 8%, depending on the lender.
In addition to using an affordability calculator to assess your ability to meet proposed repayments lenders assess other information which may include:
- Regular savings plus rent being paid and not continuing (if applicable) plus higher than required repayments on other loans (if applicable) being equivalent to or more than proposed repayments for at least 3 months prior to the loan application;
- Credit card and any existing loans being paid on time and no over limit balances;
- Your budget surplus being similar to amount lenders calculate in their assessment calculation;
- Your budget surplus being accumulated in savings accounts
It is recommended that for at least 3 months prior to applying for home loan finance you meet with a mortgage broker to determine the level of savings you require to meet lender’s requirements. Additionally, in the months leading up to purchasing a property accumulate as much in savings as possible, that amount being at least the amount of your proposed future repayments.
Prior to 1.1.19 lenders generally allowed 3%pm of total credit card limits as a monthly commitment. The higher the credit card limit(s) the high the amount the lender includes in assessing affordability.
From 1.1.19, lenders have been regulated to increase the allowance for credit card payments to the equivalent of repaying the total limits over 3 years at the actual interest rate of the credit card(s). To meet this requirement some lenders have increased the monthly commitment to 3.8% of total limits, for others it is the repayment of total limits at 22.5%pa over 3 years.
What this means to you is lenders are allocating a larger amount of income to the repayment of credit card facility(ies). For a person with a $10,000 credit card limit, this increases the minimum credit card commitment by $80pm, a $20,000 limit, $160pm. The $160pm additional commitment to paying a credit card equates to approximately $25,000 less you can borrow for a home loan. Whilst this may not seem significant, if you are looking to borrow to the maximum of your affordability it will have an impact.
Additionally, several lenders are asking for copies of credit card statements for last 3 months. When review the statements they are looking at amount of approved credit limits, any over limit or late payments charges and the actual expenses incurred on the credit card (these are compared to the personal budget you have provided).
We recommend you consider what credit cards and credit card limits you really need and cancel and/or reduce limits to level that is required. Please note that whilst it is easy to reduce or cancel a credit card, increasing the limit back again may be more difficult than it was in the past, so think carefully about what credit card limits you need now and in the future. It is worth discussing this with your mortgage broker prior to taking any action on your current credit cards.
When assessing an application for a new purchase, nearly all lenders will want to see statements for at least the last 3 months of any existing loans including home loan, car loan & personal loan. They look to see exactly what the repayments are, if payments have been made on time, current balance, remaining loan term and interest rate.
If you are looking to refinance or consolidate debts lenders generally require loan statements for last 6 months. This is to confirm you have met all repayments when due. Main stream lenders do not want to approve finance for someone who has a poor repayment history, irrespective of the reason.
The easiest way to meet this requirement is to make sure you pay at least the minimum repayment amount when due on all your loans.
If you have a poor repayment record and can not wait 6 months to establish a good record, there are lenders available who can assist. The downside of these lenders are that they do generally charge higher interest rates and fees than the main stream lenders. They are there for a purpose and can be used like a hospital. Go to them to consolidate your finances for a year or 2, establish a good repayment history then refinance to a main stream lender at a lower interest rate.
Comprehensive Credit Reporting
All lenders subscribe to at least one credit reporting agency, the main two being Equifax (formerly Veda and prior to that Credit Reporting Association of Australia (CRAA) and Dun & Bradstreet. One of the first things a lender does when they receive a loan application is to review your credit file. Historically the report detailed who in the last 5 years had made enquiries about you for the purposes of obtaining credit, if you are a director of a company and details of any registered defaults, recovery action, bankruptcies etc. The reports have not provided any details on your repayment history nor details of actual loans outstanding.
By 1.1.20 the big four banks are required to provide to credit reporting agencies details of all loan accounts, including credit cards, opened and/or closed in last 2 years, the date default notices were paid and whether repayments were made on time. The lenders will pay particular notice to the payment history which is recorded on a monthly basis for the last 2 years. Lenders look adversely at applicants with a poor repayment history and also any loans that have not been disclosed in the application.
The big four banks have been progressively making this information available to credit reporting agencies since 2014. Smaller lenders are progressively making this information available and whilst they have not been given a time line by when they have to make this information available for all their loans they are constantly providing more information. There will be a time by when all lenders in Australia have to provide this information.
Prior to making an application for finance we recommend:
- You obtain a free copy of their credit file by logging onto “www.mycreditfile.com.au”. Bring the credit file to the meeting with your mortgage broker so any aspects in your credit file can be addressed upfront;
- Do not submit either online or via banks multiple loan applications. All applications will generate a credit enquiry, this will effect your credit score and too many enquiries in a short period of time may result in many lenders declining your application without even looking at it;
- Sign up to alerts on Equifax’s website so you alerted to any unauthorized access to your credit file;
- Beware of free credit score websites some of which are now advertising on TV. These sites are generally not used by the major lenders and therefore the information they have access to is very limited and of questionable quality.
If you would like to discuss further or commence planning for your home loan, do not hesitate to contact Scott Shanks, Senior Mortgage Broker, Loan Market on 0416 802 123 or via email, email@example.com