Banks in Australia have revised and tightened their lending criteria in response to the COVID-19 economic downturn.
They are getting stricter in their assessment to reduce the risks of borrowers defaulting on their home loans.
Why is it harder to get approved for a home loan?
Getting approved for a home loan during COVID-19 is not impossible, but it can be harder due to stricter lending criteria that banks have imposed:
- The big four banks will automatically flag applicants working in an industry that is severely affected by COVID-19. These include industries such as hospitality, aviation, tourism, etc.
- Banks will take extra steps to check that your role or income have not been affected by the pandemic i.e. asking for a letter of employment, payslips, tax returns, etc.
- Even if you’re not employed in a COVID-19 affected industry, expect extra requirements. Most banks are completing some form of employment verification before settlement.
- Self-employed borrowers will require up to date BAS and trading statements. Before the pandemic hit, they could provide two years’ history.
- Most banks are shading unusual income like overtime, bonus, and commissions to 60% or lower.
- For self-employed borrowers, lenders might allow you to borrow up to 80% of the property value. Higher loan to value ratio (LVR) loans are considered on a case by case basis.
- Expect delays in application processing as some banks have offshore processing.
- Rental income from an investment property, especially for short term accommodation (Airbnb) might not be accepted as the rental market is being severely impacted by the pandemic.
- Some lenders have stopped providing LMI waiver for certain professionals.
What will banks ask you?
Banks and lenders are taking a deeper look into your finances and your ability to pay.
They are asking questions regarding the potential risks on your finances due to COVID-19.
- How will you meet your repayment obligations?
- What’s the impact of COVID-19 on your job and income?
- Has your employer informed you that your job and income are secure?
- What are your working hours like?
- Will you be able to pay for emergency expenses without deferring on your home loan?
- Are you buying an investment property or owner-occupied property?
- Are you too reliant on other income sources like overtime, bonus, JobKeeper, etc?
- What do your recent bank statements reveal? (They might question large withdrawals or deposits)
Will lending criteria still be strict post pandemic?
Depending on the economic situation at the time, lenders are constantly reviewing their credit policy.
- As we start to see the economy improve (such as decreasing unemployment), lenders might be more willing to accept unusual income (bonus, commission, overtime).
- Post COVID-19, lenders might accept 80% of unusual income types, instead of shading it to 60% or below.
- Lenders might start accepting rental income once the rental market improves post pandemic.
- At the moment, most lenders have capped their loan to value ratios (LVR) at 95%. We could see them offer LVRs at 98%.
- LMI waiver for professionals may return.
How to increase your chances of home loan approval?
Since employment and income are the main concerns, mitigating these should be your main focus.
- If you’re a PAYG borrower, submit 2 – 3 years history of income summaries.
- Provide evidence that your job and income is secure. Ask for a letter from your employer.
- If you’re a self-employed borrower, provide more updated documents that prove your income and that your business was not severely affected by COVID-19.
- If you’re using rent as genuine savings, provide a longer rental ledger history of up to 3 years.
- Maintain a good credit score.
- If you have loan commitments on cars, personal loans or even credit cards, maintain a good repayment history.
- If you have taken out a large withdrawal, provide a good reason for it. For instance, due to COVID-19, you were working from home and needed to buy equipment for a home office.
Home loan interest rates are still low, and buying gives you the security of your own home instead of uncertainty about when landlords might hike the rent or evict you.
Our mortgage brokers will put in the leg work to understand and explain your situation to improve your chances of mortgage approval. Call us on 1300 889 743 or fill in our free assessment form.