Why did this happen?
Getting a home loan used to be easy but it can now be a frustrating experience.
Primarily it’s because of changes forced onto the banks by our Government.
These changes have been brought in to make sure our financial system remains unquestionably strong, however, there have been unintended consequences.
What has changed?
- You’ll need to provide more documents
- The lender will ask more questions
- Applications take longer to get approved
- Your living expenses will be scrutinised
- Don’t expect the banks to use common sense
- Your borrowing power will be lower
- Investment loans are more expensive
- Interest only loans are on the way out
- Your retirement age may be assessed
- Overseas borrowers will find it harder
You can work with your mortgage broker to adapt to the way banks work in 2018 and still get approved.
If you commit to buying a property before your loan is formally approved then you are taking a significant risk. We recommend that you take a cautious approach especially if you are borrowing over 80% of the property value or are in an unusual situation.
You’ll need to provide more documents
In the past, banks could accept what you tell them on the home loan application form.
Today, they need to verify much more of your situation and the mortgage documents you provide. In particular, they are usually asking for more statements for your cheque account and for all of your debts.
Often this is progressive: they ask for one document and then they ask for another!
This going back and forthis very frustrating for everyone.
Solution: The best way forward is to give the banks what they want. Arguing gets you nowhere. Alternatively, ask your mortgage broker about lenders that require less documents. Check out our home loan application checklist to be prepared.
The lender will ask more questions
Banks are required by the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) to keep records explaining why they assessed your application in a certain way.
Something on your application may seem obvious to us, and often it is to the bank as well, however, they need confirmation in writing from us before they proceed to approve the home loan.
A good example is that they may see a deduction on your payslip for $800 per month and you also have written in your application that you have a car loan with payments of $800 per month.
They’ll question what the deduction is and consequently your mortgage application will be delayed.
Solution: Just answer their questions and your home loan should progress to be assessed. Also, allow more time for them to assess your loan.
Applications take longer to get approved
As a result of the banks asking for more documents and asking more questions, each application takes longer for them to assess and they may go back and forth several times with questions before they approve it.
Lenders that have pricing specials are particularly affected by this as they get inundated with large numbers of applications.
Solution: Get pre-approved before you start looking for a property. If you’ve found a property and now need a home loan in a hurry then don’t apply with the cheapest lender. Instead, apply with a lender that is fast and has a competitive rate.
Your living expenses will be scrutinised
In the past banks, used the Henderson Poverty Index or the Household Expenditure Method (HEM) to work out the living expenses of your family.
Now, they ask you to estimate your living expenses and then take the higher of the HEM or your declared expenses.
If you have a high household income, they’ll scale your living expenses to be appropriate for your income. This greatly reduces your borrowing power compared to a few years ago.
If your declared living expenses are too low, your mortgage broker may get in trouble for not having a meaningful discussion with you about your living expenses.
What if you have high living expenses?
Now is a good time to consider budgeting and changing your lifestyle.
It makes sense to do this several months before you take on a new commitment like a home loan as then you will have a higher borrowing power.
Solution: Some lenders can consider reasonable reductions in your living expenses that you have just made. Talk to your mortgage broker to see if this may work for you.
Don’t expect the banks to use common sense
Most people don’t apply for a home loan very often in their life.
Even if you’re not a first home buyer and you’re you’re upgrading homes or refinancing, it may have been 3 – 10 years since you last applied for a home loan.
The way banks work now is a lot different to most borrowers’ expectations.
Unfortunately, many home buyers are taking risks by signing a Contract of Sale to buy a property without a pre-approval.
If they don’t meet the strict lending criteria of today then they risk losing their deposit.
Banks have been instructed by APRA to be strict with making exceptions to their lending policies.
As a result of this, it is very unlikely they will approve your home loan if you don’t fit their credit criteria. Don’t expect them to use common sense!
Solution: The key is to apply with the right lender. Our mortgage brokers know the policies for each lender and even have access to non-bank lenders which can still use common sense. Non-bank lenders are not affected by restrictions from APRA and, in many cases, have similar interest rates to the banks.
Your borrowing power will be reduced
APRA has been putting restrictions on the way that banks assess your borrowing power for the last two years.
This has had the biggest impact on high income earners, due to changes in the way their living expenses are assessed, and property investors, due to the way interest only and investment loans are assessed and a new ‘debt to income ratio‘ which prevents you from borrowing more than 6x your income.
They’ve been doing this because interest rates are low and if people borrow too much now then they may be unable to make their mortgage repayments later if interest rates rise.
However, there are many people who have a good reason to borrow to their limit and it would not put them at risk of future rate changes.
For example, a property investor may plan to sell one of their properties if interest rates increase significantly.
Solution: If you do need to borrow the maximum amount possible then we may use a multi-lender strategy or apply with non-bank lenders that are not affected by APRA restrictions. We believe in responsible lending and will not assist you to borrow more than you can afford.
Investment loans are more expensive
In recent years, APRA put a cap on the growth of investment lending for the banks.
As a result, the banks are discounting rates for home loans and putting up the prices on investment loans.
You may find some banks make it hard to get approved for an investment loan or stop doing investment loans altogether.
In these cases, it’s best to apply with another bank or non-bank lender.
The investment cap is being replaced by a debit to income ratio cap which is designed to limit lending to highly-geared investors while leaving home owners and investors with minimal gearing untouched.
Solution: This is something that one of our mortgage brokers can assist you with so complete our free assessment form and let us know about your situation. We have access to lenders that have lower investment loan rates than the major banks.
Interest only loans are on the way out
Interest only loans actually cost more in interest over the term and can lead to borrowers not paying off their property before retirement.
APRA requires the banks to limit interest only lending and, as a result, the banks have put strict qualifying criteria in place and increased interest rates. In a recent speech by the Reserve Bank of Australia (RBA) too raised concerns about interest only loans.
Interest only loans are unsuitable for most home buyers but may be suitable for investors depending on their strategy.
Solution: We strongly recommend that you consider paying principal and interest (P&I) instead of choosing an interest only loan. It is quite possible that within a year or two, interest only loans could be banned altogether.
Your retirement age may be assessed
Only a few years ago, the banks would approve a 30-year loan to a 60-year old!
Now, they consider your retirement age and whether you can repay the loan before retirement.
Again, this comes from the guidelines set out in the National Consumer Credit Protection Act 2009 (NCCP act), which is managed by ASIC, and in the responsible lending changes instigated by APRA.
Solution: We recommend that you discuss your home loan plans with your mortgage broker and work out how you are going to pay off your loan before you retire, or pay it out from superannuation fund or by downsizing. Some non-bank lenders are more likely to accept a borrower closer to their retirement age.
Overseas borrowers will find it harder
In February 2016, several instances of fraud were uncovered which eventually led to the banks discovering billions of dollars of fraudulent loans for borrowers with false income documents.
As a result of this, many lenders stopped lending to Australians living overseas, put significant restrictions on their expat lending policies, or asked for many additional documents to verify your income.
This has adversely affected the more than one million Australians living overseas who often want to buy or refinance a property back in Australia.
Foreign citizens are often unable to get a mortgage in Australia at all, or they’re required to pay a significantly higher interest rate than Australian citizens.
Solution: We’re specialists in lending to Australians living overseas and can help you to apply with a lender that takes a common sense approach.
How can a mortgage broker help?
The regulators have affected almost every stage of the application and approval process.
This has drastically slowed up the process for the banks.
Where mortgage brokers really shine is the ability to speak with the key decision makers to speed things up whenever things are slowing down.
We also know exactly what the banks are looking for in an application so we always ask for all of your documents upfront to avoid delays.
Where appropriate, we can help you to apply with a non-bank lender that is not affected by APRA’s restrictions.
Please call us on 1300 889 743 for a free, no obligation assessment or, alternatively, fill in our easy online enquiry form.