You might not even realise it, but more and more home owners in Australia are trapped in their current mortgage. They are finding out the hard way of their imprisonment only when they try to vary their mortgage, or try to refinance.
You may only find this out when you apply for a loan and are rejected. The Royal Commission into the Banking and Financial Services sector has put the blowtorch to lender’s approval practises. Australian Prudential Regulation authority has acted in reaction to the Royal Commission and as a result are pressuring lenders to use stricter guidelines in the way that they check loan servicing. You may not be approved for the very home loan you have if you were to apply for it in the current climate.
The property market is cyclical in nature. Whilst we have experienced a booming property market over the last few years the current trend is downwards. This is potentially a problem for people trying to refinance a high Lon to Valuation ratio loan of over 90% that they may have been approved for. A valuation will be required in a refinance and, if your house value has dropped a few percentage points, then you may not qualify for the same LVR. Result = Loan Rejected!
The biggest problem that is already causing an impact and causing many loan rejections is how lenders are calculating living expenses. When you applied for your current loan your lender would have likely used a simple benchmark to determine your living expenses. The Household Expenditure Method, or Hem for short, basically calculated an average expected living expense for everyone from a single person (with or without dependent children), married couple or couple with 1 2 or 3 children.
Many lenders are now using exact expenses that you currently incur. You may be asked for personal bank statements by some lenders so an assessor can verify your expenses.That Friday night to watch the footy is now a question for your lender. Why are we saying you can afford a loan if you’re currently spending x dollars down the pub frequently with your mates? Theres over 30 categories of expenses that your friendly assessor can ask, questions that wouldn’t have been asked when you applied for your current loan. Using the same income you had when you obtained your home loan you may now possibly not be able to show you can make the repayments when the new servicing requirements are used instead of HEM. Result = Loan Rejected!
You can’t afford a cheaper loan.
Imagine for a moment, an example of a borrower with high repayments caused by a high interest rate. They want to refinance. They don’t want anymore money than their current loan balance. They just want to take advantage of some of the lower rates in this current market. Their broker makes the application on their behalf or they go direct to their local bank. They are asked to prove serviceability and are asked for all the categories of expenditure that the relevant lender uses. Result, Loan Rejected! To add insult to injury they are effectively told they cannot afford the loan they are applying for even though its less money per month than their current loan. They are Mortgage Prisoners
We have access to non conforming loan products from specialist Lenders. Some of these are using much more conservative serviceability calculators than traditional lenders. And just because they are specialist lenders that does not mean their interest rates are not competitive. All loans we assess we first look at as a Prime loan and then if that does not fit we then assess as specialist. It cost’s nothing to find out how you can refinance or purchase at a rate you can afford.
Look at the long game. Consider cutting back on non essential spending. Particularly when it’s time to refinance. Instead of putting everything through on a debit or credit card, pay for consumer items with cash. A weekly bank withdrawal on a statement is easier explained than many entries on a bank statement for debit or credit purchases.
If you don’t qualify today, don’t despair. There is a tightening of credit in this current climate but it is a competitive market. A good broker who spends time with you to assess your options can assist you develop a strategy. If it means that no application is to be made for you for a period whilst you work on the things that make your application lender friendly then its worth taking some time to do that.
A small interest rate saving over the lifetime of a loan can mean savings of ten’s of thousand’s of dollars over the course of an average home loan.