This month we’ve seen the first interest-rate cut by the Reserve Bank of Australia since August, 2016. That's good news for many would-be-house purchasers and existing mortgage holders.
Finance is also becoming easier to obtain after a period of regulatory tightness after the Australian Prudential Regulation Authority urged the major banks to ease their mortgage assessment criteria by removing guidance that customers should be able to repay a loan if their interest rate increased to at least 7 per cent.
Borrowers may no longer be able to refinance or increase their borrowing capacity, even though their financial position may not have changed.Credit:
It now suggests that lenders make serviceability calculations using a 2.5 per cent rate buffer above the listed advertised rate.
Keegan Rezek, senior mortgage broker at The Lending Alliance, says the most common concern he is seeing in the market is people’s ability to borrow the loan amount they require.
A loan taken out 2-3 years ago was based upon different metrics and lender requirements, he says.
Following changes in requirements, many people can no longer refinance or increase their borrowing capacity – even though their financial position might not have changed.
For many, this means they cannot switch to another lender at a reduced interest rate.
So, while advisors are exhorting the benefits of seeking out the best mortgage rate available, the reality is that many of the banks won’t necessarily play ball.
However, rather than deciding it’s all too hard and paying a premium rate, here are some tips to help you in your assessment of a new or refinanced loan.
Proof of expenses
Many banks now require you to produce three months’ worth of bank statements, to prove spending levels and your ability to repay a loan.
According to Rezek, while this is the case for banks with new lending, it’s not the case for all lending. Some lenders may only require the most recent and, sometimes, no bank statements at all.
The type of transaction you are taking – refinance vs new purchase vs debt consolidation – plays a part in determining what information is required, he says.
How do you know what will be required in your circumstance?
Before applying, talk to a mortgage broker or your banker, who can advise what will be needed for your particular circumstance.
Wind down your credit cards
While you might have a zero credit card balance, simply holding a credit card can impede your ability to borrow.
Rezek explains that a lender will generally multiply your credit card balance by five and use this amount to calculate your liability and reduce your total borrowing.
So, if you could afford to borrow $500,000 but you had a credit card with a $20,000 limit, then you your borrowing capacity would be reduced to $400,000.
The solution? Either reduce your credit-card limit or close it down completely.
Choose your bank
Banks are a business and they might not advertise it but they have a preferred customer type.
Rezek says there are banks that are “friendlier when it comes to lending to small-business owners."
Having said that, most lenders will want the applicant to have had their Australian Business Number active for a minimum of two years.
The main concern is income verification and, for those who are self-employed, this generally comes down to their personal tax return.
Where tax returns are not yet available, there is an option to apply for a low-documentation loan, where income verification comes from an accountant in the form of an “Accountant Declaration”.
Understand the need for profits if you’re in business
While business owners might hate paying tax, if they are not showing profitability and/or wages paid, it’s going to be difficult to convince a bank that you can service a loan.
Rezek advises that banks will ultimately look at both the “business” and the “individual” as a combined package.
As long as they have an overall positive profit picture, that’s the first step to being considered an appropriate candidate for lending.
Is income or assets more important?
When it comes to borrowing, Rezek says it always comes back to how much money someone is earning.
Income is more important than assets, as it determines the person’s ability to service the debt.
If you are a regular salary or wage earner then life should be simpler, he says, with a wider gamut of lenders offering competitive interest rates.
Melissa Browne is chief executive of A&TA and The Money Barre and author of Unf*ck your Finances
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