Since the middle of 2015 the requirements for lending policy have been continual changing. This is due to several factors and influences from various government requirements of ASIC, APRA and more recently the impact of the Royal Commission. The past six months have seen significant changes in the way lending organisations assess loan applicants.
Following are several items that you may find will impact on your ability to borrow money.
1. Banks “stress test” your repayment capability
Whether you are approved for a loan or not is not just based on current interest rates. Banks will calculate whether they think you can afford the mortgage today, when the rates increase a little and when the rates go up a lot. So even if you can afford the repayments today, you may still be denied your loan application.
2. Living expenses count
Where the banks previously made (rather generous) assumptions on how little you might spend on expenses in order to afford your mortgage (think living at the poverty line), there is now a growing trend towards requiring clients to submit a detailed budget – in fact lenders now require full disclosure of all current and future living costs supported by your bank statements for up to 3 months showing income and expense transactions and if the bank believes the figures you provide are too low they will use their own figures.
While overall this is a good thing as people can’t take out loans that they can’t afford, it does mean that as a result, many people are unable to refinance as their living expenses are deemed to be too high.
In the years to come, it is anticipated that rather than asking you to declare your living expenses, banks will simply take advantage of their data feeds to automatically pre-populate that info from your bank accounts. So, it is important to start getting your spending under control today. Not to mention that this will help you to cope when interest rates inevitably go up!
3. You’ll need to show proof
Whether you’re applying for a new loan or a refinance, you’ll likely need to provide some solid evidence of your expenses and your income. Expect to be asked for:
- Two recent payslips (or your last two tax returns if you’re self-employed)
- Proof of your identity (e.g. Medicare card and drivers license)
- Living Expenses – lenders require full disclosure of all current and future living costs supported by your bank statements for up to 3 months showing income and expense transactions.
- A rates notice (if refinancing) or a Contract of Sale
- Current Loan Balances – some lenders will request latest statements, loan commencement and terms of all commitments even if not refinancing the debt.
- The last six months of bank statements on your mortgage (if refinancing).
- Copies of your credit card and personal loan statements.
- Any salary deductions that are voluntary will need confirmation that they are voluntary by the employer.
- Details of an exit strategy of how loans will be paid out for all lending that is being made for those above 42 years of age.
4. Mortgage brokers can help
Not all banks have the same lending criteria, so using an experienced mortgage broker can save you a lot of hassle, especially when more paperwork and knowledge of the industry is required now than ever before. This approach can also help to protect your credit score as multiple applications and, of course, any declined applications can have an impact on your score so better to get things right the first time.
The key is to be prepared to provide detail – and of course, do your research so you know what you can afford before you apply.