If you’re looking to refinance your home loan this year, the odds are stacked against you. There are a few factors at play making loan approval tricky. Firstly, in the wake of the banking royal commission, banks have cut back on their lending and are subjecting customers to greater levels of scrutiny, affecting new and refinancing borrowers.
For refinancers in particular, low valuations are also a problem. As property prices continue to drop, valuers are getting nervous and valuing properties lower than many homeowners expect. Combined with the high loan amounts many borrowers were saddled with when buying at the top of the market, it’s become increasingly difficult to build enough equity in your property to refinance without paying lenders mortgage insurance again.
In such an unfavourable environment, borrowers will have to go above and beyond to bolster their chances. While it won’t be easy, here’s what you can do to earn points in lenders’ eyes and put you in the best possible position to refinance.
Cut back on expenses
With regulations tightening and borrowers under higher scrutiny, lenders will start digging deep into your spending history, to the point that it might feel a bit like an interrogation. If you’ve spent any money at the casino recently, expect to be questioned about any potential gambling habits.
So in the three months prior to applying to refinance, cut as many unnecessary expenses as you can. If you really want to secure that loan, make lenders feel as comfortable as possible by matching your lifestyle to your budget and limiting any spending that could seem overly frivolous.
Stay on top of your mortgage repayments
You should be on top of your mortgage repayments at all times, but a missed repayment within a year of trying to refinance is going to be a big red flag for a new lender. Avoid falling behind at all costs and avoid using features like a redraw facility. You want the lender to see that you’re managing your current debt without any problems.
And if you’ve got room in your budget, think about setting up a savings plan. The more you’re able to put away on top of your mortgage, the more responsible you look. Convincing lenders that you have backup funds in case rates rise or your income takes a hit is a surefire way to get in their good books.
Reduce credit card limits
Another step you can take is to reduce credit card limits, because this lowers your overall debt capacity. For example, if you’ve got three credit cards with a $5,000 limit on each, that’s $15,000 of potential debt you could need to pay off someday. And to a lender, that's $15,000 of potential debt that might get in the way of you being able to service your home loan.
Managing credit cards well also paints an overall picture of you as a good borrower. You might already be handling your mortgage debt, but to really rid a new lender of any reservations, you’ll need to prove you're responsible enough to handle multiple credit sources.
Make sure you’re secure in your job
Your level of job security will also come into play when applying to refinance. You don’t need to have been in your job for years, but you should be a full-time employee and not currently on probation. That way lenders can be fairly confident that you won’t suddenly be without an income and unable to meet your repayments in the near future.
For the same reason, if you’re looking at refinancing, now is not the time to make any big life changes like starting a family, buying a new car, or even taking a major holiday. You should be working at your full capacity when applying, otherwise you’re likely to hurt your chances.
At the moment, it’s very difficult to get a home loan and most likely will be for the next few months. But by following these steps you can improve your chances of being approved for a new low rate mortgage. And when you’re in a good position, make sure you find the right refinancing home loan for you.