The road to owning your own home used to be a relatively straightforward one.
Squirrel away a few pennies, find a house that you love, go cap in hand to the bank and walk away with a mortgage (well maybe there was a little more to it, but you get the gist …)
As long as you had steady employment and a decent deposit, securing a loan for a home within a reasonable price range was a fairly simple process.
But during the past few years a few new twists and turns have popped up on the road to home ownership.
During the second half of 2017 news surfaced that the banking regulator (the Australian Prudential Regulation Authority) had refined the criteria used to assess a borrower’s suitability to take out a mortgage.
Put in place as a means of ensuring more responsible lending practices, this reportedly included recommending that banks use a more cautious approach when assessing a customer’s ability to service, or pay back, the requested loan.
Where once upon a time it was often accepted practice to provide a rough estimate of your monthly expenses, tougher lending conditions mean that banks are no longer taking applicants on their word.
In my experience banks have been requesting 3-6 months of bank account and credit card statements to check that your actual expenses match up with your loan application.
In more recent months financial commentators have also begun speculating how the current Royal Commission into the banking sector might affect mortgage lending criteria.
With banks and other lenders already starting to change the way they assess serviceability, some are even suggesting that in certain cases borrowing capacity may drop by up to 40 per cent.
This could occur if banks start using a higher than previous Home Expenditure Measure (HEM) benchmark, a figure that represents an average level of household expenditure based on a variety of factors. Lenders must make allowances for the cost of living when determining how much an applicant can afford to borrow, with higher living expenses potentially translating into a lower maximum loan.
Sarah Mitchell from Smartline Personal Mortgage Advisers says tighter lending conditions are the new reality.
“Credit standards have been tightening since late 2014 off the back of APRA recommendations that came into force to curb risky lending practices,” she said.
“While credit availability may be starting to stabilise, borrower capacity has already fallen by around 13 percent for owner occupiers and around 22 percent for investors since 2015.
“Lenders are now requiring customers to provide a lot more documentation to support their application, particularly around living expenses.
“Lenders are constantly reviewing polices around what is acceptable income and how they assess lending capacity and this rigour is expected to continue.”
But while the changes may sound a little doom and gloom for new borrowers, don’t despair – according to Sarah there are a couple of practical things that you can do when considering buying a new home or refinancing your current mortgage.
– Watch what you’re spending
With credit card and bank statements now playing such a crucial role in the assessment process, saving for a deposit isn’t the only time you need to pump the brakes on discretionary purchases.
If you’re trying to stick to a budget to create leaner looking transaction records, make sure you also keep an eye on your use of cashless payment options, which Sarah points out can quickly add up without you even realising it.
“With technology having an increasing impact on how we navigate the world today, I find that clients are spending more than they mean to, and more than they used to,” she said.
“Pay Wave, Apple Pay, Google Pay and even Fitbit Pay makes it so easy to spend money – without even seeing cash – so people are thinking less about how much money they are spending.
“A client recently was very surprised about how much they were actually spending when we looked at their bank statements – it was much more than they realised. Their expenditure had a negative impact on their income, and as a result on their borrowing capacity.”
– Know your limit
Before you start searching for your dream home online, take the time to sit down with a bank or mortgage broker and work out just how much you can spend to make that dream become a reality.
Getting a pre-approval early in the process will help you set your expectations at a more realistic level – and may even help get you over the line once browsing becomes buying.
“I would highly recommend getting a pre-approval in place once you start seriously looking for a property,” Sarah said.
“This ensures you can be fully aware of your borrowing capacity and your maximum possible purchase price.
“Pre-approvals also save a significant amount of time as lender turnaround times for a new loan can vary substantially, with some taking as long as 10 working days to provide an outcome.”
While tighter lending criteria might sound like a nightmare, the great Australia dream of owning your own home can remain within reach, you might just have to watch your step to ensure you don’t trip up on the way to the front door.
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