THE Banking Royal Commission has shone a very strong light on some horrendous past and present behaviours by the banks, and customers are already feeling the pinch of tightened controls that are set to continue.
While the intention is to protect customers and the economy, the reality for most people is that there is now a much stronger onus on would-be borrowers to “prove” they can afford a loan, and banks will not bend at all on policies; they can’t, they won’t.
That means more work in the lead up to getting a loan, to research how lenders will treat an individual situation.
It’s the only way of ensuring access to what is needed, at a fair rate, it also means some people will be locked into loans that are expensive, because they no longer meet criteria that would enable them to refinance.
Thinking of getting a loan? Doing some pre-work on these three areas will increase the likelihood of a clean application process.
1. Be ready to prove a fully sustainable source of income
To minimise their risk, many banks will either not consider or discount any income that may not flow through in future.
On a contract? You’ll need to prove that you are able to move from contract to contract easily to maintain your existing income level.
Had a great last 12 months in business? Many banks will take the average of the past two years. Great two years ago and softer last year? Most will take the lower figure.
Airbnb delivering great results? Two years of tax teturn evidence needed.
Child maintenance income not flowing through the Child Support Agency? Most lenders won’t include it.
Where income is unusual but sustainable, finding the right lender who recognises the income properly is absolutely critical.
2. Understand how banks measure expenses
Legally, banks must make a decision on whether a loan is affordable based on a customer’s spending commitments, so they’ll ask, but let’s face it: most people have no idea how much they spend on utilities, let alone groceries or eating out.
So the banks each have their own policies that create a minimum Household Expense Measure that will be applied, regardless of fact.
These policies vary across lenders and family groupings, but they’re not widely disclosed, and are totally non-negotiable.
Small business owners often get caught out with expenses being run through a business so minimum “deemed” expenses get applied to a loan application, and so-called discretionary expenses get added on top, things like school fees, insurances, and recreation activities.
3. Interest Rate Sensitisation
Any home loan with a three in front of it is a great rate at the moment; some are as low as 3.39 per cent. But it’s no secret that they won’t stay there forever, so when the bank does a “serviceability calculation”, they’ll apply a much higher rate to allow for the long-term movement that may occur. These can range from around two per cent higher than actual up to around eight per cent.
And regardless of how religiously a credit card gets paid to avoid interest, 36 per cent of the balance is used to calculate an additional expense, so a $10,000 credit limit will add $3,600pa to the expense line in calculations.
Staying ahead of the game on all of these areas, particularly if there are shades of grey, will provide for a much easier loan process.
The greatest risk today for some people is not necessarily a decline, but rather approval for an substandard offer or insufficient amount.
For more information on financial solutions to suit your individual situation, please contact Lanie from Surfcoast Life & Lending on 0418 938 646.
Advice in this column should be taken as general in nature and might not apply to your personal circumstances.