THE #1 REASON HOME LOANS WILL BE DECLINED IN 2019 (AND HOW TO GET AROUND IT)
Living expenses, they’ve been the subject of quite a lot of conversation in the banking space lately. Throughout the royal commission lenders were ‘taken to task’ about the way they approved mortgages and the way they calculated whether or not someone could afford the loan they were applying for was front and centre.
What sounds like an easy calculation (how much do you spend and is there enough left over to pay your mortgage) has proven to be the downfall of many application, simply because people don’t understand what metrics banks are actually using.
To begin with, even though home loan rates are at historic lows, this is not the interest rate banks are using to work out your servicing. All banks have a servicing rate built in to their calculators and they could be using anywhere from 7 - 8 % to determine if you can service the loan you are applying for. This is because you should still be able to pay your mortgage even if rates go up. On top of this, if you already have other loans (car, personal, other property etc.) then these loans also have a ‘buffer’ built in. Depending on the lender, this could be as little as 20% added to your payments to calculate servicing, or it could be at the same 7-8% that they are working on for the new loan! This is why there can be such a difference to the amount one bank will lend to another.
Credit cards make a significant difference to the amount they will lend. Even if you pay your credit card off every month most banks will treat it like it’s fully drawn. They then add approximately 3% of the card limit to your expenses EVERY MONTH.
While all of this has been the norm for some time now, due to the recent crackdown on banks they are about to make it much harder to get a loan.
See, banks have pretty much been defaulting to using what’s known as the Household Expenditure Measure (HEM) which is a based on average spending data from the ABS data on family size. There’s a 4 different levels that are calculated and it probably doesn’t surprise you that until now banks have used the basic level. This is because if it looks like there is more money left over after living expenses are accounted for then that means bigger loans the banks can give. Bigger loans = Bigger profits. Sure, if a customer willingly states their expenses are higher than this measure all the lenders would have to use the higher figure however it’s not something they’ve actually checked - until now.
The recent scrutiny placed on the banks means they are all in the firing line and they don’t want any further heat. Making a profit is pointless if they’re just going to lose it again through fines and lawsuits. Just this week I received confirmation of at least one bank that is now comparing actual living expenses to the amount declared by the borrower. It won’t be too long until they are all doing it now.
So where does this leave the person hoping to get a loan. Likely it’ll mean they are offered a much lower loan than what they might’ve been offered just 6 months ago. For many, who have interest only loan
expiring over the next 2 -3 years, it’ll mean they won’t be approved for the same loan size they already have.
What can you do to ensure you are able to get the loan you want? At this stage, it seems as though it’ll be 3 months of bank statements that will be used to verify what you spend each month. So the best strategy to getting the loan you want is to plan ahead. If you know when you will be putting in an application for a loan then you know when 3 months of ‘frugal’ living needs to start. Basically, you want to prove to the lender that you can live on a reasonably basic amount. Don’t forget, they will still be putting in substantial buffers to make sure you can service the loan at a much higher interest rate.
For your own piece of mind, you will also prove to yourself you can survive when interest rates go up.