WITH lenders tightening their policies in 2018 potential homebuyers are finding it more difficult to secure finance.
Resolve Finance managing director Don Crellin, said while the changes were commonly portrayed negatively, the reasons for them were prudent.
“It’s helping improve financial literacy for people, particularly first-home buyers, taking on a new home loan,” he said.
“In many ways it is helping people better understand and acknowledge where their money is being spent and why.”
The change having the greatest impact on potential borrowers is the increased focus on their discretionary living expenses.
“Lenders are no longer simply taking a borrower’s declaration of what they are spending on discretionary items, they are now looking at this in a more forensic way and requesting evidence,” Mr Crellin said.
“Any material differences between what you are currently spending and your disclosure will need to be thoroughly explained.”
When considering a loan lenders will look at a range of factors including, savings, expenses, potential debt and employment.
Mr Crellin said understanding what they were looking for can help borrowers prepare and boost their chances of securing a loan.
He offered the following tips:
Your savings history tells a lender a lot more than you have the funds available to enable settlement to happen.
They will be looking for a regular pattern of savings.
This may be regular deposits into a separate account demonstrating a regularly increasing balance or into your everyday account, but it needs to be showing an increasing balance over time – it’s about demonstrating that over and above your normal expenditure you have the capacity to put away a little more.
As a rule of thumb, think about what the repayments would be on the home loan that you will eventually be applying for – ideally, lenders want to see that you have demonstrated the ability to make this payment.
Look at all of your expenses (rent, personal loans/credit card payments and your discretionary expenditure) and see what gap you have when thinking about the size of the home loan you will be applying for – can you demonstrate by your savings that you have the ability to meet this gap?
Top tip: It is often better to have a separate, dedicated savings account for your home deposit. It will help keep you focussed on achieving your goal while at the same time making it easier for the bank to see your demonstrated ability to put those extra dollars away.
Know your expenses
Banks are looking at expenditure, no matter what it may be.
Discretionary expenditure items include entertainment (fast foods, restaurants, hobbies), travel (holidays), clothing (how much, how often) and food (this can vary dramatically depending upon lifestyle).
All expenses will be assessed even down to items such as Netflix, Foxtel and Spotify.
Top tip: Well before applying for a home loan take three months of your bank statements and look through them line by line. Critically look at each expenditure item and ask yourself:
– Is this something that we absolutely need? If not, cancel it.
– Is this something where we can reduce the level of expenditure or plan to do so once we are in our new home? If so, reduce it.
Be aware of potential debt
When applying for a home loan lenders will assess any credit cards that you have on the basis that they are fully drawn and you are paying the minimum monthly payment.
While lenders vary slightly on how they calculate the monthly repayment commitment, on average most will apply a percentage in the range of 3 per cent, so on a credit card with a limit of $10,000 the monthly commitment will be $300.
The important point to note is that a credit card is always calculated on the basis of the card being drawn to its maximum limit and not the current balance or the fact that you might pay the balance off in full each month.
After pay/zip pay etc. are all taken into account with the credit assessment.
Top tip: Ensure that you tightly manage any credit card debt that you have. Reduce the card limit and keep it to what is absolutely necessary and don’t take on multiple credit cards.
Under new laws, the way lenders assess credit cards is changing.
When applying for a credit card a lender now has to demonstrate that the limit can be fully paid off within a period of three years.
I expect that due to this change, lenders will progressively tighten their policy around assessing credit card debt when it comes time to assess eligibility for a home loan.
Understand the role your employment situation plays
One of the key pieces of any credit assessment is the ability to repay a loan.
This comes from regular income that’s received and lenders look very closely at employment details such as the type of employment, the industry, how long you have been there, if you are currently on probation and if you have only been with the current employer for a short time were previous jobs in a similar line of work.
Most lenders treat permanent employment in a similar way; it generally comes down to how long you have been with the employer and there are some restrictions if you are still on probation.
When it comes to casual employment lenders are looking for security of employment and this generally comes down to how long you have been with the current employer.
Top tip: If you are at the lower end of the time scale with your current employer, for example less than 12 months, you will need to demonstrate a level of continuity with prior employers, ideally in the same line of work.
All lenders differ in their requirements but broadly speaking, a lender will look more closely and have tighter restrictions when it comes to casual employment.
Mr Crellin said while first-home buyers particularly needed to understand the assessment process to boost their chances when applying for a loan, trade-up buyers and refinancers were also affected by the more stringent loan criteria.
“For trade-up buyers and refinancers, their track record of repaying their current home loan is a critical part of the assessment,” he said.
“Ensure that all of your repayments are on time and if at all possible be paying more than your current scheduled repayment – with home loan rates remaining at historical lows now is a great time to be doing this.
“They also need to be careful and have a thorough understanding of their discretionary expenditure as they too can be caught out when applying for a home loan.”
Top tip: Lenders no longer have ‘similar’ credit policies and their policies change frequently. It’s now much more difficult to navigate who may be the most appropriate lender to meet your home purchasing or re-financing needs. The use of a reputable mortgage broker is now more important than ever.