How can you make yourself more attractive to a lender in the current mortgage climate?
LENDING conditions have significantly tightened in Australia over the past year. It started with a crackdown by APRA in early 2017 aimed at encouraging more responsible lending but strengthened during 2018 with the Banking Royal Commission, which uncovered misconduct amongst lenders, dominating headlines for much of last year. The result is that lenders are now more conservative in assessing loan applications, and are employing stricter criteria.
It’s harder for borrowers to get a loan in the first place, the amount of money they can borrow has fallen by up to 20% in some cases, loans are being stress tested at 7% or more, and mortgage costs are higher, with rates rising particularly for investors and those paying interest only (IO). Lenders are also far less likely to lend for IO loans and extend IO loan periods. The latest figures show new lending has fallen to the lowest levels in four years, with all finance down more than 7% over the year to September 2018.
These tighter lending conditions can’t last forever, but they’re not likely to ease up anytime soon. It’s positive that the end of the Royal Commission is now in sight, with the final report to be tabled on February 2, but it remains to be seen when lending restrictions will loosen.
Banks do still need to do business and make money, however, so it’s not as though all hope is lost. They’re still lending, just more responsibly, and doing more thorough checks on borrowers before signing off on the paperwork. Borrowers wanting a loan simply need to provide banks with everything they request and demonstrate they are a safe bet.
So how can you make yourself an attractive proposition to a lender?
Since lenders are much more selective on whom they will lend to and how much they will give them, borrowers need to make themselves look as low risk and reliable as possible.
Banks are scrutinising every detail in loan applications, so it’s taking much longer to get approval, with lenders coming back, again and again, to ask for more paperwork to get a more accurate picture of a customer’s financial position, including income, expenses, commitments and capacity to repay.
The last thing you want is to wait more than a month and then find out you’ve been declined for something small. So before making an application, it’s essential to dot your i’s and cross your t’s to maximise your chances of securing a loan.
How do you do that?
Provide documentation upfront
Have all the necessary paperwork ready to go to both show you are responsible and to make the process faster. You’ll need evidence of income, expenses, liabilities and assets. They may come back and ask for more documentation but providing as much as you can upfront will assist in getting your loan approved faster.
Cut back on discretionary spending
Lenders are scrutinising spending more than ever, so potential borrowers need to be watching every cent they’re spending, particularly when paying with a card. Every transaction shows up on your history and banks will go through at least the previous few months of statements with a fine tooth comb to see what your spending patterns are. You need to think ahead, so if you’re planning on having a night out, withdraw cash for beer money rather than using tap and go in the pub, as this is the type of thing banks will be analysing, and it could be a red flag. Consider cutting other unnecessary expenses such as Foxtel, Netflix and eating out, and what some discretionary spending may imply – buying at a pet store may make it look like you have a pet, for example, even if you’re buying a present for someone.
Have a reliable income
Being in your current job for at least six months will help, and evidence that you don’t jump from job to job. Being able to show you have an adequate regular income to easily service your mortgage is crucial.
Have a good savings history
If you have a significant sum of money in the bank and can show regular savings over a sustained period you will be a more attractive proposition to lenders. This will show you can be relied upon to make regular loan repayments.
Aim for a good credit rating
If you google ‘what’s my credit rating’ you’ll find several free websites where you can find out. Your credit report will be crucial to lenders in assessing your loan. It shows how much credit you have, how much is available, your credit applications and your payment history on debts, loans and bills to show whether you have paid on time in the past. Try to clear blemishes on your record if you can, and limit the applications you make for credit, so you only apply for a loan when you have all your ducks in a row. It’s also important to pay down your debts as much as possible, prioritising bad debts (with higher interest rates).
Have a low loan-to-value ratio (LVR)
If you already have a property portfolio, a lower LVR will help you borrow more as lenders don’t want to take on too much risk.
Some things to consider
If you can get a loan, take advantage of it. That doesn’t mean you should rush out and buy any old property before your pre-approval expires, but if you have your eye on a solid, investment grade property, it’s best to act sooner rather than later. Lending conditions are changing all the time, and in a few months, you might be told you can’t borrow any longer, or can’t borrow as much. You may also need to adjust your expectations of what you can buy since banks aren’t lending what they used to.
I’d also suggest you get in contact with a good mortgage broker for the most up to date advice and on how to obtain a suitable finance solution within your budget.