Considering that the federal government estimates that 1 million people could be unemployed as the economic effect of the coronavirus sets in, lenders are adopting strict lending policies, especially around income types.
In the current environment, getting approved for a home loan depends on your income type, among other things.
Changes to home loan lending policies due to coronavirus
Unstable income types
The number one concern for lenders is income, i.e. can borrowers make their repayments?
Lenders will be especially tough on borrowers with unstable/unusual income types such as:
- commission income,
- contract income,
- workers on probation,
- overtime income,
- bonus income, and
- casual income.
In particular, borrowers on casual and contract employment have a high risk of losing their income, so they may struggle to get approved for a home loan or be able to refinance.
Lenders have not yet released any changes to their policy for borrowers on probation. However, we expect they may ask questions about your employment stability. It’s likely that you can still get approved.
Please note that if you’re a casual employee wanting a loan then consider the risks, and talk with your employer before proceeding.
You would require a letter from your employer confirming that your income is stable and ongoing.
Or if you expect a reduction in your income (fewer hours), you may be able to use 50% of the reduced income in the borrowing power calculation (serviceability). Some lenders have released policy confirming they will accept the reduced income that you are currently receiving.
Who is not impacted by these changes in income assessment?
Borrowers working in essential services, which include health professionals, emergency service personnel, corrections officers and police are exempt from changes to provisions relating to acceptable income types.
If your income is certain, i.e. if you work for the government, unaffected industries such as IT or a booming industry, then the next few months are likely the best time to invest.
High LVR loans
Property prices across Australia are expected to fall, so the banks are reluctant to take on high loan to value (LVR) loans.
This means home loans with an LVR greater than 90% will be hard to qualify for. Only strong borrowers with stable income and employment history may be considered.
Due to the uncertainty around the rental market in the current crisis, lenders have begun tightening lending policies around rental income.
Short-term accommodation or Airbnb are targeted, especially since Airbnb is declared illegal in NSW, under the new coronavirus regulations.
The hiring of Airbnb properties in NSW has been declared illegal, expect when it’s used for work, to take care of someone or for their education. This is a temporary ban.
So, if you need the rental income to demonstrate loan serviceability, lenders may be more willing to take you on as a borrower if you take out landlords insurance to protect yourself against loss of rent.
High living expenses due to panic buying / setting up a home office
This means you may find it difficult to get approved for the amount you wanted.
A living expenses declaration will need to be provided along with reasons explaining the high living expenses.
Some lenders may have concerns regarding construction loans due to the looming threat of a lockdown.
Lenders don’t want to have a house as security that’s half-built. However, you can still get approved with some of our lenders.
Big home loans
Big home loan amounts, especially if they’re greater than $5 million, will be exceptionally tough to get approved.
Lenders don’t want high exposure to a single property (security) in the current environment.
Anything outside of standard lending policy
Anything outside of standard lending policies will be exceptionally hard to get approved for.
Please carefully review your financial situation and understand how it may change in the next six months before applying for a home loan.
Government’s JobKeeper payment (wage subisidy)
Government assistance for businesses such as the JobKeeper payments or the PAYG tax refund are unlikely to be accepted by lenders as ongoing income as they are not going to be received for the full term of the loan.
In addition to that, the JobKeeper payments require you to have a significant drop in revenue to be eligible (30%), in which case the lender may not want to consider your application.
However, recently some of our lenders have announced that they can accept the lower of what your salary was before or what you are now receiving if your employer has been affected and is receiving JobKeeper payments.
COVID-19 Impact assessment: Key questions asked by lenders
Lenders are asking more questions to ascertain why you want a home loan and prying into your financial situation in light of the adverse economic effect of the coronavirus pandemic.
The key questions lenders are asking are:
- Can you tell me about your job and the impacts of COVID-19?
- Has your employer given you any indication that COVID-19 may result in reduced hours or income?
- Have you reduced the rental income amount on any of your investment properties?
- How have COVID-19 measures impacted your business?
- Can you tell me about any future changes that you are aware of and how they may potentially impact your financial situation?
- After the COVID-19 pandemic, do you believe that you’ll be able to return to your normal employment conditions?
Employment check prior to settlement
Some lenders have started doing employment checks just a day or two prior to your loan settling. This is to make sure that you haven’t lost your job or reduced your hours which could cause you to be unable to pay your loan.
The problem is that if you have committed to buy a property and then you fail the employment check then you may lose your deposit and be unable to complete the purchase. Even if your loan is approved, the approval may be withdrawn!
Typically this check is either:
- Calling you and asking if you are still employed.
- Calling your employer.
- Requiring a recent payslip.
- Asking you to fill in a short form with 2 – 3 questions about your financial circumstances.
We strongly recommend that you check with your employer to confirm your employment stability before buying a property.
How can I get approved?
Since income (employment) is the number one concern for lenders right now, mitigating this should be your main focus.
What this means is if you’re applying for a loan, you should submit more income documents:
- Submit 2-3 years PAYG income summaries, not just two payslips. A letter from your employer may also be required.
- For self-employed borrowers, this means you’d require more documents proving your income, i.e. 2 years or more tax returns, and/or latest BAS statements.
- If you’re using rental history as genuine savings, then a longer 3 years rental history may be required instead of the usual 3-6 months rental history.
Furthermore, banks and lenders also look into the following when you’re applying for a home loan during coronavirus pandemic, specifically whether or not:
- You have a steady job and job security (i.e. working hours are not reduced and the chances of being stood down are low).
- You have a good credit score.
- You have budgeted your finances and have savings.
- You have a good repayment history.
How can I get approved if I have reduced short term income but can afford the loan in the long term?
If you can demonstrate you can afford the loan based on your longer-term income, some of our specialist lenders can consider alternative short-term methods where appropriate to bridge the coming 12 month period.
Some acceptable method that can be considered where appropriate are:
- Interest-only repayment: You’ll need to demonstrate you can meet lower interest-only repayments over the short term, and principal and interest repayment after that.
- Cash holdings: If you have cash holdings (redraw, offset or saving account) to support immediate loan repayments and your living expenses over the immediate period.
- Use of COVID-19 benefit payments: If you’re receiving COVID-19 benefit payments, this income could be used to demonstrate short term serviceability. Lenders will require evidence of your eligibility or receipt of payments.
- Reduced short term living expenses: A reduced short term living expenses is considered a reasonable strategy considering discretionary spendings such as gym memberships, eating out etc. are not likely to be incurred.
- Use of protected benefits such as long service leave or annual leave to support servicing in the short term. This would require confirmation by the employer.
- Equity release: an equity release may be considered to assist with the short-term cash flow, particularly for SME businesses and corporate borrowers.
- Early release of superannuation: The Federal Government has announced that people facing financial stress as a result of the COVID-19 pandemic may be granted early access to their superannuation, up to $10,000 before 1 July 2020, and a further $10,000 from 1 July 2020 if eligible.
Please note that this option will not be suitable for all, i.e. if you’ve lost your job, as opposed to being placed on forced leave or reduced hours.
Some good news
There has been some good news for home loan customers primarily stemming from RBA’s two rate cuts this month:
- The cash rate stands at 0.25% after the RBA cut this month, and lenders are now offering historically low-interest rates on fixed-rate home loans, with one lender offering a rate of 2.09% p.a.
- Some lenders have also dropped variable rates following the rate cuts.
- Borrowing power has increased with some lenders as they have dropped their floor assessment rate in line with the recent rate cuts.
How soon can I get approved?
Some lenders are super fast still (1 day) while many others, e.g. NAB are taking more than 20 business days to assess a loan. Some lenders didn’t have the infrastructure for staff to work from home and many big lenders (and other companies like Telstra) had operations in Manila which have been shut down due to their government putting a lockdown in place.
Home loan pre-approvals aren’t rock-solid, lenders can and will renege on them if they see a risk, so auctions are a bad idea as well.
How can we help?
As award-winning mortgage brokers with access to almost 40 lenders, we understand the changing lending landscape better than most.
In the short term, getting approved is about mitigating the risks to the lender.
We do this by providing extensive notes for a strong case, extra income evidence and by understanding which policies, each lender are flexible on and more importantly, where they’re not.
To find out if you qualify, talk with one of our specialist mortgage brokers by giving us a call on 1300 889 743 or by filling in our online assessment form today.