Getting approved for a home loan is hard. Ask anyone who’s tried it in the past few years.
The Government wanted to relax what are known as ‘responsible lending’ laws to stimulate the economy and get money flowing when COVID hit, but they didn’t get the leniency across the line.
When Westpac won the so-called ‘Wagyu and Shiraz’ Federal Court case, against the corporate regulator, it confirmed that what you spend before you get a loan might be more than when you tighten your belt once you’ve secured a loan.
But banks still have no official guidance on what that means for their approval process.
So instead, applications are getting knocked back left, right and centre.
Indeed, it’s really only the savvy – and the ‘assisted’ – who are getting approved for a mortgage.
So, Yahoo Finance asked those doing the assisting – usually secretive mortgage brokers – for their insider hacks for a home loan.
Home loan hack 1: Cut your credit card
Rule changes several years ago mean any credit card limit you have, even if it is unused, puts a severe ‘limit’ on what you can borrow. In fact, it rules out sufficient income from every pay, to repay the entirety in three years.
Mortgage insiders say this can mean it wipes six or seven times the limit off the actual amount you can borrow… so a $10,000 unused credit card limit might ‘upset’ your loan by up to $70,000.
To get the amount you want, reducing your card capacity – or even ditching the debt facility altogether – is often the only option.
Just be aware that the same three-years-to-clear calculation now applies to your income when applying for a new, or simply larger, card facility. You may never get any lowered limit back.
Home loan hack 2: Slash your spend
So, the Wagyu and Shiraz case, from just above, theoretically gave scope for lenders to be a little ‘lax’ about examining your expenses.
They had been administering, what is called in the borrowing biz, the Netflix test and going through your every indulgence and expense for the past three months.
Now, they might instead just assume you spend a typical amount using a ‘Household Expenditure Measure’ and add any extras you might have in your life – such as risk insurances and body corporate fees – go on top of this.
The three months before you apply for a loan is still critical, in any case.
So, pull in your belt. Just in case.
The inside word is that only if they find something really serious in your spending – like a gambling habit – will they go further back than three months.
But, just between you and me, several brokers whispered: “Palm cash for pub crawls.”
Home loan hack 3: Get employed
Now, this might seem logical but I am specifically talking to people who are either self-employed or hoping to get a loan when they principally have income from investments, perhaps because they are older.
Employment income is viewed far more favourably.
If you are self-employed, it may even be worth working for someone else in the lead-up to applying. If it is work in the industry in which you already participate, three months might be enough. Otherwise, closer to six months is probably necessary.
And this will need to be permanent part-time at least. If it’s casual, there’s probably no chance unless you’ve been in that role for six months.
From your business, a lender will want to see your last two years of tax returns.
Similarly, home loan experts say there are specific lenders that will look at investment income when calculating your serviceability and they will usually look at the past two years of dividend income. But you’ll likely pay a higher interest rate.
And if you have fewer than 25 years until retirement, you may well find a lender sets your loan term at that number of years. Brace for it.
Home loan hack 4: Think like a bank manager
All banks add a 3-percentage-point serviceability buffer to the interest rate. This stress tests your income for whether it could stretch to, yep, 12 rate rises.
So, although your repayments may seem affordable now, it’s worth crunching the numbers to see what they would be on a rate 3 percentage points higher than the actual rate.
Any mortgage repayment calculator will show you.
The back-of-the-envelope borrowing ‘brake’? STOP if the amount of your income that a repayment would suck up is more than one-third of it. Committing more than that is the definition of mortgage stress. Don’t do it, even if a lender will advance you more.
Home loan hack 5: Love the loan you are in
Very strange advice, I know.
But the application criteria are so stringent right now, and it can be so hard to pass it, that the only option might be to negotiate a better deal with your existing lender.
And you may be surprised by how much you can save, if you know the two tricks.
- Go armed with the best rate – today you can get a quality loan (from what is called an authorised deposit-taking institution) for as little as 1.85 per cent.
- Don’t let on that your financial situation may not see you approved for it. WHY would you?