Since 14 December 2017, The Royal Commission into misconduct in the banking, superannuation and financial services industry has brought about sweeping changes when applying for a home loan.
In essence the government has an initiated an investigation into how reputable banks and financials services providers have been operating.
As a result of this investigation there have been 3 major changes to how banks assess your home loan application.
1. Requesting a detailed budget
So they can understand your living expenses, banks now require a detailed budget from you outlining how much you spend on the following
- Groceries and clothing
- Entertainment and holidays
- Utilities (such as electricity, rates, gas and water)
- School and education
- Medical
- Travel
- Insurance and more
The banks will review what you spend every month, to calculate if you can afford the loan you are applying for.
They work your repayments out at based on an interest rate of 7.15% or more (whilst your actual home loan rate may be closer to 4%) to ensure if interest rates do increase, you can afford the repayments.
2. Reviewing your everyday spending account
Banks are now taking the time to review your everyday spending account. Banks will often request a copy of the last 3 months statements of your spending account, to check
- If you what you provided as your budget is realistic
- You don’t have any other debts that haven’t been declared in your application
- That you have been paying your bills on time and haven’t overdrawn on your accounts
If you can have your everyday account in order and matching your budget in the last 3 months prior to approval, it will greatly enhance your chances of approval.
3. Understand how you will pay out your loan if your 45 years or over
Given most home loans are over 30 years, banks will often want to understand how you are going to pay off your home loan if you’re 45 years of age and applying for a 30 year loan.
To satisfy this requirement and show you won’t be in financial hardship when you retire from work, the bank may rely on
- Your superannuation balance when you come to retirement (looking at what your balance is now and estimating what it will be when you retire)
- Your option to downsize – sell your current home and purchase a smaller and more affordable home, thereby clearing your mortgage and potentially having some funds left over
- Sale of other investments (such as shares or an investment property) to clear your home loan debt as you get closer to retirement
- Apply for a reduced loan term
With all these changes, its best to speak to a broker well before you intend to purchase.
By addressing these issues you will:
- Increase your chances of approval
- Allow you to better prepared and that way make any necessary changes to ensure you are approved
- Allow you to obtain pre approval earlier in the buyer process and allow you to negotiate a short time for finance approval which can often assist when negotiating on a property and competing with other buyers
We hope this has been of assistance. If we can assist at all in the future, please contact us on 07 3268 7493. There are home loan rates from as low as 3.59% currently, if you’d like your home loan reviewed.
