How does your lender see you? Essential loan preparation for home buyers
In recent years, we’ve seen a number of shifts within the lending environment due to changing APRA regulations, the Banking Royal Commission and the economic impacts of the global pandemic, with banks reassessing and adapting their lending criteria to mitigate risk and meet new lending guidelines.
Whilst lending criteria and policies vary considerably from one lender to another, here are some of the key factors lenders will look at when assessing your eligibility for a home or investment loan.
Credit Score: where do buyers get caught out?
One of the key pillars lenders will consider when assessing your eligibility for a loan is your credit score. Are there any red flags that suggest you may not make your repayments on time? From the lender’s perspective, your credit history will provide a key indicator of the level of risk they are taking in borrowing to you. If you’ve failed to make repayments on time in the past or filed for bankruptcy, the lender may consider you a high risk borrower, and this can strongly impact the rates or products they are willing to offer you (or, in the latter case, your immediate eligibility for a loan).
Since credit reporting rules changed in 2018, this has affected a higher number of borrowers who are unaware of the impact that overdue bills and frequent missed repayments can have on their credit rating. To prevent frustrating delays or lender objections, our mortgage brokers work proactively with our clients to check and address any credit issues prior to the loan application to strengthen their borrowing position.
Income and serviceability: be aware of lender differences
Before issuing a loan, banks will also look at your ability to make repayments on time and in full. For lenders, one of the biggest indicators of this will be your monthly income. As well as aggregating your income sources and assessing the stability of this income, lenders will look at your outgoing expenses such as existing debt repayments (including your total credit card limits, and whether you have drawn on them or not), your new mortgage repayments, child support and all other outgoings to determine your serviceability.
With ongoing changes in the lending environment, many banks are tightening their serviceability metrics by enforcing stricter housing expenditure models and changing debt-to-income ratios. Whilst an investor or home buyer may have once been deemed eligible to service a loan under a given income, this may no longer be the case under the lender’s current criteria. In addition, you also need to be aware that lenders will assess different types of income in different ways depending on their individual policies. For example, whilst some lenders may take overtime work into full consideration when assessing your income, others may only consider a percentage of the money earned through overtime when calculating your serviceability. If you have your own business, you will need to ensure your tax paperwork is completely up to date before applying for a loan. Otherwise, you may risk facing significant delays in your loan assessment.
Every lender has a customised serviceability calculator and so your borrowing capacity can vary widely from one lender to another. Working with a mortgage broker can help you to compare different loan products and lenders in the market to broaden your options and find a solution that better suits your situation.
Equity: what factors can impact your required deposit?
The amount required for a deposit will vary depending on your lender’s individual policies and the nature of your purchase, but many banks are willing to lend up to 90% of a property’s value with Lender’s Mortgage Insurance in place. However, lenders may require higher equity if you are deemed a high- risk borrower.
When determining the required deposit, lenders will also consider the physical state and location of the property being mortgaged. In other words, the lender wants to know that the property would be easy to sell should you default on your loan. If the property is in good condition and located in an inner-city suburb with high demand, the banks will likely be willing to offer a higher loan-to-value ratio (sometimes up to 95%), especially if you have Lender’s Mortgage Insurance in place.
We have, however, seen examples where lenders demand a higher deposit due the property type and location, for example with regional properties, or high-rise apartments. These wider market trends are something you will need to take into account when identifying potential properties to avoid disappointment during the buying process.
Navigating a changing market
Applying for a home or investment loan can be a daunting prospect, especially in a fluctuating lending market with more potential changes on the horizon. With loan criteria and lending policies frequently fluctuating due to industry and broader economic factors, it’s more important than ever to seek the advice of a specialist mortgage broker who has the investment knowledge and expertise to guide you through changes in the lending landscape.
If you are looking to secure finance for a property or would like to discuss how to navigate recent changes in the lending environment, our investment finance specialists will be happy to discuss your financial needs in an obligation-free consultation.