Ticketek & pets can cost you a loan
It can be tough getting a mortgage these days, so take the knife to those living expenses
Responsible lending or just plain annoying? In a recent home loan application, the lender identified a $59 purchase the applicant had made at a pet store. The lender went back to the broker and questioned why the applicant had made a purchase at a pet store but in their loan application did not reveal they had a pet.
What the lender did not know is that the applicant had purchased a gift at the pet store and did not actually own any pets. The lender then requested a further 60 days' history of that applicant's accounts before approving their home loan.
It's hard to believe but, according to Australia's largest mortgage broker, Mortgage Choice, this is just one of many examples of how hard it is to get a home loan now.
If there is one thing that we have learnt from the royal commission into misconduct in the banking, superannuation and financial services industry it is that banks haven't been too good at assessing our expenses and, if we're to be honest, some of us haven't been that good either.
Now the brutal consequences of poor lending practices are being felt, as more and more households are either at risk of having their home loan application rejected or being held prisoner in their own mortgage as tighter lending restrictions are preventing them from refinancing to a better deal.
“We have seen the lending environment change significantly over the last 12 months, and with the royal commission's final report due in February, it is possible more change is on the horizon,” says Susan Mitchell, chief executive officer of Mortgage Choice. “They are forensically going through living expenses to make sure they are truly reflective of what the bank statements say.”
When it comes to assessing home loans, lenders still look at security and serviceability – so this hasn't changed.
On the security side, the lower your lending valuation ratio (LVR) the better. What you buy and where you buy it matters.
As for serviceability, the stronger the application the better. How much you earn and what you spend are important. While there's nothing new here, what is different is how lenders assess your expenses. In the past they may have relied on either the household expenditure method (HEM) or the Henderson poverty index to guide them on calculating applicants' living expenses. While they haven't ditched these benchmarks, they aren't solely depending on them either.
According to Mortgage Choice, there are as many as 15 living expenses that lenders now closely scrutinise. Items include the usual suspects like groceries, clothing and personal care but new spending tempters such as Uber, Deliveroo, Netflix and Afterpay are also on their hit list. If one of these items pops up in your digital footprint, it could prompt your lender to request a “please explain”.
“Even your dinner choice can have an impact on your future lending potential,” says Craig Gemmill, managing director at Gemmill Homes. “The banks are still lending money but it's much tighter. It's across the board – it's first, second and third home buyers.”
So how do you get around this? According to Mortgage Choice's Mitchell, you
need to act like a lender. “Print out your bank statements for the last three months [some lenders may ask to see up to six months of living expenses] and highlight any expenses you can’t immediately explain,” says Mitchell. “This will give you the opportunity to get financially fit and address any spending behaviours which might decrease your chances of securing a loan.”
To avoid the temptation, it may be worth deleting any convenience apps while you are on this financial detox. Reducing credit card limits and getting rid of store accounts can all help increase your borrowing power.
It may even be worth visiting a mortgage broker to help you find a lender that suits your personal circumstances.
“As credit policies tighten, brokers provide indepth knowledge of complex loan writing requirements,” says Mitchell.
Be sure, though, to do your own research on home loans before seeing any broker or lender. This way you are in the driver’s seat when it comes to making the final decision.
Gemmill says it’s a case of being organised – “go to the bank with as much information as possible” – and minimising your expenses.
“Technology says it all! Every one of your transactions is being tracked and it could come back to haunt you come application time. You may regret the $300 you spent on clothes.”
Finance expert and author of The Great $20 Adventure, Money’s editor Effie Zahos appears regularly on TV and radio. She started her career in banking.
“Every one of your transactions is being tracked and it could come back to haunt you”