Seeking approval: what do lenders look at?
In the past few years, we’ve seen a number of shifts within the lending environment due to changing APRA regulations and the recently appointed banking royal commission, with banks reassessing and adapting their lending criteria to mitigate risk and meet new lending guidelines. As a result of this increased scrutiny, investors (both aspiring and existing) are having to be more diligent when it comes to preparing their finances and approaching banks for loan approval.
Whilst lending criteria and policies vary considerably from bank to bank, here are some of the key factors lenders will look at when assessing your eligibility for a home or investment loan.
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).
Income and serviceability
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, your new mortgage repayments, child support and all other outgoings to assess your serviceability. A key thing you also need to be wary of, and something that proves an obstacle to many investors and first-home buyers, is the way that banks assess your credit card debt. Even if you have a proven history of paying off your credit card on time, lenders will still calculate debt based on your credit card limit. If you have a credit card limit of $50,000, they will therefore consider that amount as ‘debt’ and take a 3% monthly liability to mitigate their risk, thereby impacting their assessment of your monthly income. If you have any credit cards that you don’t use, you may want to consider cancelling them to improve your serviceability.
With recent 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 new 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. In these fluctuating conditions, this is where a mortgage broker can really help you compare different loan products and lenders in the market to open up your options and find a solution that suits your situation.
Whilst it hasn’t always been the case, banks in the modern lending environment require borrowers to make a down payment before they issue a loan. As a prospective buyer, you will need to start making provisions for this in advance by building the necessary savings required for a deposit, whether it be in the form of cash savings or equity from an existing property. The amount required for a deposit will vary depending on your lender’s individual policies and the nature of your investment, but many banks are willing to lend up to 95% 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. To find out more about how your investment strategy can impact your required deposit, read our latest blog on the upfront costs of property.
One of the biggest things that lenders will take into account when determining the loan-to-value ratio they are willing to offer a prospective buyer is 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, 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. This can be the case with apartments in high density CBD locations. With the high stream of apartment stock coming to market in Perth’s CBD, lenders often see these dwelling types as less secure due to the higher level of supply, and will therefore ask for the full 20% deposit to mitigate their risk. This will ensure they are covered against greater losses should you default on the loan and the property sell for less than its purchase price. This can also be the case in locations that are heavily dependent on one particular industry, as these areas can be more susceptible to price drops should that industry undergo a downturn. A key example of this would be Karratha, where the property market is heavily dependent on the mining industry. These wider market trends are something you will need to take into account when identifying potential properties, particularly if you are purchasing an asset for investment purposes.
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 tightening and banks now adopting stricter lending policies, 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.