The borrower’s guide to banks

Getting a home loan has become a bit more challenging lately.

In the past 12 months, lenders have tightened their lending criteria and made the borrowing process more difficult.

Lenders are now looking at a borrower’s actual living expenses, rather than relying on an index such as the Household Expenditure Measure, or some other formula assessment of a borrower’s expenses.

Most lenders now may require a mortgage applicant for 3-months of their bank statements and credit cards to calculate their living expenses.

What this means is that some borrowers will not be able to borrow as much as they would like. The key here is to know what lenders look for when approving a loan.

Preparation is key

If you are looking to borrow money for a bank, start by tidying up your finances before applying for a home loan.

Put your financial position in the best possible light. This will make it easier to obtain a home loan.

One of the areas lenders look at today is your living expenses. Most lenders nowadays require applicants to provide them with 3-months of bank statements. Credit assessors will then make an assessment as to what the applicant’s living expenses are.

My tip to my clients is to work out what your minimum, non-discretionary expenses are, and try to keep to a budget for at least 3 months. You want to be able to provide evidence of your living expenses over that 3-month period to the bank.

This will also ensure that you qualify for the widest range of lenders, allowing you to access the most competitive products on the market.

Lenders will stress tests your mortgage

Lenders usually assess a borrower’s credit limit by using an assessment rate. This is the rate that is higher than the actual loan repayment rate. For instance, if the actual interest rate for your home loan is around 4.00%, the bank may use a rate of 8.00% as the assessment rate to “stress test” your loan repayments.

In this example, the bank will see if you can repay your home loan at the assessment rate of 8.00%, rather than the actual rate. Your loan repayments are stress tested at this higher rate – which means that you may not qualify for the loan, even if you think you can afford it.

Note also that different banks will have their own assessment rate and criteria. Which means that if you do not qualify with one lender, you may qualify with another – but the interest rate may not be as competitive.

Exit strategy

Lenders are also requesting an exit strategy from borrowers. What this means is if you are going to borrow a 30-year mortgage, and you expect to retire before the expiry of the mortgage, what will your exit be? ie. How do you intend to pay off your mortgage before retirement age?

Most banks are now requesting an explanation as to how you will repay the mortgage before retirement.

Some lenders may restrict the term of the loan , or reduce the loan limit because of this.

Too much credit

The other issue lenders are scrutinising now is how much credit do you have access to.

This includes credit cards, and as they are looking at how much access you have, this means the credit limits rather than the balances.

To ensure that you have the maximum borrowing capacity for a home loan, consider cancelling the credit faciities you do not use. This includes credit cards and store cards.

Better still, having no credit cards will ensure that you maximise your borrowing capacity.

Credit criteria

Other criteria the banks will make an assessment on include gaps in employment, credit defaults on a utility bill, or large, unexplained purchases.

A credit assessor may have concerns with any of these issues, and the important thing here is to have an explanation that will address their concerns.

To get yourself in the best position to refinance or get a home loan, contact us to help us guide you through the process.