It’s harder than ever for Aussies to qualify for a home loan, thanks to new stringent requirements from lenders. Whether you’re in the market for a new home loan or looking to refinance your mortgage, you’re likely to be affected by these new credit rules.
Why are lenders tightening credit rules?
To put it bluntly, lenders have lent out too much money, which puts them at risk. To mitigate this risk, lenders are making it tougher to get a loan. This means they’ll issue fewer loans, which means a more stable business model for lenders.
It also means that lenders are taking a microscope to their own lending processes, to make sure they are efficient and practical. Ultimately this is a positive move for both lenders and borrowers, though it also means slower processing times and increased rejections.
While this may sound like a situation where consumers are being punished for banks’ reckless behaviour, the truth is that these credit rules are probably overdue. It also comes at a time when supply is starting to exceed demand in the housing market. This leads to falling property prices and hesitant investors, who aren’t motivated to purchase a property that could soon see a reduction in value.
New Credit Rules: What to Expect
Applying for a home loan used to be a simple matter of completing paperwork. If your income was satisfactory, you were in.
These days, lenders are looking at much more than your payslip. They’re also scrutinising your spending habits and testing your ability to repay your loan. How does this work? Let’s go into more detail.
The Mortgage Stress Test
‘Mortgage stress’ is a term used to describe the conditions where you’re struggling to pay off the mortgage. It typically affects people whose home loan repayments exceed 30% of their pre-tax income. When a borrower is under mortgage stress, it increases risk for the lender because a borrower is more likely to default on their loan.
To avoid mortgage stress, lenders implement a mortgage stress test. They’ll apply a hypothetical rate raise on your mortgage to test your ability to make repayments under stress. While mortgage stress tests are nothing new, tightened lending criteria means that this test has become more difficult.
Lenders will test you against a hypothetical interest rate that will be higher than previous years, to make sure that you can handle a worst-case repayment scenario.
Lenders are also looking closely at your spending habits, to ascertain how you handle your money. You may be asked to provide bank statements from at least the last three months. They’ll analyse your transactions to determine how trustworthy you are as a borrower.
Someone with erratic spending habits will raise red flags with a lender, and could make it tougher to be approved for a loan. If you regularly spend beyond your means, accrue debt, or have expensive hobbies, a lender might deny your application.
You may also be asked to provide these details for all applicants, regardless of who is primarily responsible for servicing the loan.
Here are a few things lenders might look for when assessing your bank statements:
- Gambling expenses
- Credit card debt
- Personal loans
- Travel costs
- Spending for socialising, restaurants, and bars
These things on their own aren’t necessarily indicators of poor spending habits; the key is that you’re living within your means and showing that you’re a reliable borrower.
How Tightened Lending Criteria Affects You
Tightened lending criteria is likely to affect most borrowers. Some borrowers may find it more difficult to get a home loan, while others will simply experience longer processing times.
This also means that the home loan application process is less transparent than before. With different lenders requiring different documentation, even seasoned homeowners may find themselves in new, confusing territory.
New buyers and those looking to refinance will both face challenges, though a strong repayment history will work in your favour. Navigate the changing lending environment by using a mortgage broker, who can help you through the unfamiliar process.
Having a broker on your side can put you in a better position to nail your home loan application the first time around. Mortgage professionals like the ones at Rate Comparison can assess your personal financial situation to advise you on the best course of action.
Working with a broker won’t cost you anything, and there’s a good chance it can save you money. Lenders may have made it harder to get a loan, but that doesn’t mean you have to give up on your goals of home ownership.
Contact Rate Comparison today to connect with a mortgage broker who can help you get started, and you’ll be on the path to a better home loan.