In response to growing credit quality risks, banks have made some pretty big changes to the way they assess mortgage applicants. Some have begun asking for larger deposits. Others have ruled out lending to casual workers. All are exercising a lot more caution when dealing with those from vulnerable industries.
So while interest rates are at record lows and property prices are beginning to dip, for many the path to home ownership now contains more obstacles than ever. Below, we look at some of the main ways banks and lenders have tightened their lending practices, and what you’ll need to do to get your application over the line.
Stricter income tests
Some lenders have revised their attitude towards non-base income types such as bonuses, commissions and overtime pay. Previously, lenders would count these forms of income in full when assessing your loan application. Nowadays, they can count as little as 50% (though this doesn’t apply to borrowers in essential service industries).
Self-employed borrowers will also have their work cut out for them. Lenders will want to see an up-to-date picture of your finances, so your 2019 tax return won’t cut it. Ideally, you should provide tax returns dating back at least two years, along with your latest BAS statements.
Since March, a number of lenders have also introduced new credit controls, such as reducing debt-to-income (DTI) thresholds on loans. For example, ANZ recently informed brokers it may be turning down loans with a DTI ratio of above seven, that is, more than seven times a borrower’s annual income.
Caution around high-risk industries
If you work in a hard-hit industry such as tourism, hospitality or retail, lenders might immediately flag you as high risk. While you might not have your application refused outright, be prepared to field a number of questions about your job and current financial position.
More than anything, lenders will want to know how your job has been impacted by COVID-19 and whether your income has suffered as a result. If your income and working hours haven’t been reduced - and you can confidently say your job isn’t at risk of disappearing any time soon - you’ll have an easier time than those whose jobs have experienced disruptions.
It’s also worth mentioning that many lenders mortgage insurance (LMI) providers have withdrawn cover for borrowers in vulnerable industries. LMI is mandatory on loans greater than 80% of a property’s value, so if you’re planning to buy a home without the usual 20% deposit handy, you might be out of luck.
More comprehensive employment checks
Even if your job has been unaffected by the pandemic, don’t expect to get approved for a home loan right away. Lenders will still want to verify all your employment details, and might go so far as to call your employer to ask for a statement of your current earnings.
That cautiousness will extend all the way through to settlement, with many lenders contacting borrowers just before the funding date to confirm that their employment and income haven’t changed at all since they applied.
Discounted income on investment properties
When issuing loans in normal circumstances, lenders would include around 80% of rent from investment properties in their income assessments. But with vacancies on the rise and rents steadily dropping, lenders no longer view rent as such a stable form of income.
Nowadays, it’s not unusual to have a discount of as much as 50% applied to your rental income. That means if you’re buying a property to rent out for $400 per week, your lender will only consider $200 of that when determining your ability to service a loan.
What should you be doing now?
For would-be borrowers, these changes mean it’s going to be a lot tougher to get approved for a loan. That said, there are still plenty of things Australians with sights on the property market can do to get in lenders’ good books.
One positive outcome of lockdown is that it’s forced many to cut back their spending. While lenders put more stock in job security and income now, being able to show you’re disciplined in your spending habits can work to your advantage too. And considering property prices won’t likely be going up any time soon, home buyers will have plenty of time to build up a sizable deposit, further boosting their chances.
Your credit score will also come under scrutiny, so avoid applying for any new credit cards or personal loans and focus on paying off any existing debts you might have. Even once your home loan search begins, try to avoid making inquiries with too many lenders. Instead, do your research upfront and narrow down your options to just a few.
At the end of the day, banks are still keen to lend, there are just more risks they have to account for. Limits like the ones listed above may seem excessive, but they’re in place to make sure loans are only granted to those who can comfortably pay them off.
If your job is secure and you can prove to your lender you’re not a credit risk, you shouldn’t have too much difficulty getting your application over the line (though there might be the occasional stumbling block). For a look at the home loan options currently available, head over to our home loans comparison page, or browse the selection below.
Home loan comparisons on Mozo - last updated January 16, 2021
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