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.”
How to get around the ‘Netflix test’
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 in-depth 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.”
Lending gone mad?
Just how hard is it to get a home loan?
These real-life examples of applicants who have gone through the mortgage broker Mortgage Choice show how closely lenders are looking at your spending behaviour before they hand over any money.
A couple had a mortgage for almost 10 years with the same lender. They had been saving for a few months to pay for a family holiday they had planned, were on time with their loan repayments and both had full-time, stable jobs with good tenure.
The couple paid for their holiday with the savings they had set aside and shortly afterwards approached their broker for a top-up on their home loan for a small renovation.
The lender, which had requested to see four months of the living expenses, questioned the cost of the holiday, even though the couple were able to pay for their trip with their savings.
The lender felt that the customers would be living beyond their means even though they were able to prove that they were disciplined savers and were servicing their loan diligently. The couple then decided to refinance their loan with a new lender, which was able to provide them with the top-up they needed without having to change the loan term – and at a more competitive interest rate.
A couple applied for a home loan and provided a detailed breakdown of their living expenses. The lender came back, seeking justification for a $26 fortnightly expense for their child’s swimming lessons. The lender wanted to know whether the expense had an end date.
The lender’s rationale for this was that $26 a fortnight over a 30-year loan term would amount to more than $20,000.
A couple with a young son were paying for his braces in monthly instalments over a 12-month term.
When the lender went through the application, it asked to see a copy of the contract the couple had signed with the orthodontist.
A customer had a $1000 Ticketek expense on her credit card. She had purchased a number of tickets to a concert for herself and a group of friends, who were going to reimburse her in cash. The lender questioned the application as it was concerned that this expense was a regular occurrence.
A similar case was cited by another broker, which said that its customer had a large expense on his credit card as a result of a night out where he paid for his table’s meals, and his friends paid him back in cash on the same night.