You might’ve heard that Australian banks have been getting stricter when it comes to lending.
The Australian Prudential Regulation Authority (APRA) recently released further measures to encourage banks to tighten their lending policies.
Following the announcement, the Commonwealth Bank introduced new serviceability tests, including a 30% service loading for new customers with existing loans from other lenders. NAB has also changed its loan-to-value (LVR) ratios for interest-only loans.
What does this mean for new borrowers? It means that your borrowing power has been reduced.
The major banks appear to be making it tougher for borrowers who want to borrow more than 90% so you may need to wait until you’ve saved up that 20% home deposit.
According to research from ME Bank, the question ‘How much can I borrow?’ was searched on Google more than 25,000 times in the past 12 months in Australia.
With lending rules only getting stricter, it’s important to try to maximise your borrowing power before you head to the bank.
Consider your source of income
Banks treat commissions-based or bonus-based work less favourably than they do full-time work says ME’s head of home loans, Patrick Nolan. You could attempt to look for full-time work, but if that’s not for you, you could increase your borrowing capacity by borrowing with another person (that you trust) with a more stable income.
Assess your spending
Make a list of your household expenses. Your living costs will be heavily scrutinised by the banks so you have to have your spending under control. If you find yourself often drifting into the red, it’s worth considering what you can afford to cut back.
Reduce your limit
“Lenders put more importance on the limit of your credit card rather than the outstanding balance because the limit is what you could potentially find yourself owing,” says Nolan. It’s worthwhile contacting your bank to get your limit reduced.
Pay-down your debts
“If there’s money owing on a car loan or personal loan pay it down to boost your borrowing limit,” says Nolan. “Lenders like to know you can comfortably handle all your financial commitments and if you have a clean slate your loan application is more likely to get a ‘thumbs up’.”