Whilst the Banking Royal Commission has diminished in the new headlines its affects are still being felt in the lending sector. We have had several clients comment over the past 12 months about how difficult it is to borrow money. In actual fact, lending conditions were tightened before the release of the Banking Royal Commission Report and have been getting progressively more difficult over the past few years.
What does this increased scrutiny mean for people applying for new mortgages or refinances? The approval process is taking a lot longer and the banks are asking a lot more questions. Three of the main changes to the assessment process include:
Stress testing of your repayment capability – The banks are looking at your capacity to make repayments both under the current interest rates, plus if the rates were to go up.
Living expenses – The banks are requiring individuals to provide budget information when applying for mortgages. Back in the ‘’old’’ days the banks used an average living costs calculation based on the number of individuals / dependants in the household to ascertain your ability to meet repayments. This meant that those who lived on a ‘’shoe string’’ budget were disadvantaged, but also resulted in a higher borrowing capacity for those who perhaps enjoyed the lavish things in life.
The budget that banks require today needs to be realistic and will be checked against your actual expenditure. The bank will require More Evidence, including:
- At least your last two payslips
- Bank statements for all your credit cards and savings accounts for the past 6 months
- Mortgage statements (if refinancing)
- Personal loan statements
If you use credit services such as ‘’After Pay” expect additional questions. If you have an ATO debt, this can also be a significant hurdle for the banks credit departments. Both types of debt will raise red flags with regards to your ability to manage your cashflow and therefore service a loan.
James Frost (Australia Financial Review) wrote in May 2019 that recent analysis has shown that banks are increasingly asking extra questions outside of their usual lending policy criteria (which are often hard to predict) and will not move forward without the extra information*.
James also commented that 22% of the applications online broker Lendi settled before the Royal Commission, would not meet the new more onerous serviceability requirements currently in place. This may be a significant issue for those looking to refinance an existing mortgage, to take advantage of lower interest rates.
What can you do to increase your chances of being approved?
- Speak to a broker who can assist you with your application and has good knowledge of the approval criteria used by the lenders. If you are not sure which Broker to use, there are plenty of options, contact our office and we can give you a few recommendations.
- Speak to your accountant, especially if you are in business. Your accountant can work with your broker to ensure the information that is sent to the lender presents an accurate view of your current financial position.
- Plan for your borrowing assessment. In the lead up to wanting to borrow or refinance, draw up a budget and live within these constraints, demonstrating to the lender your ability to save or make extra repayments.