If you're thinking of securing a new loan or refinancing an old one, then you're in luck.
Because recent policy changes by some lenders could make refinancing or securing a new loan easier, according to new insights from Canstar.
The Reserve Bank’s decision to increase the cash rate for the twelfth time to reach a rate of 4.10% in June will make it harder for borrowers already trapped in mortgage prison to switch lenders while also putting greater strain on new buyers battling with affordability.
The good news is that some lenders are making it easier for borrowers to get their loan approved by lowering the financial stress tests borrowers need to meet, considering all overtime income, excluding some living expenses and waiving notional rent for would-be buyers living rent-free with their parents.
Canstar’s Editor-at-Large and money expert, Effie Zahos says:
“Competition among lenders to offer low rates may be cooling but lending policies are sharpening up.
So, whether you’re looking to refinance or get a new loan, it may now be easier to get your application across the line.
A number of lenders have made changes to their policies that could help some borrowers escape mortgage prison and others gain approval for a loan that had previously hit roadblocks.
These lenders aren’t taking on more risk, they are adapting their policies to accommodate what is an unprecedented time.
In some cases, it could be as simple as recognising the workforce has changed and that overtime income is stable income in some industries that should be fully included when assessing a loan application.
Lenders who are making these types of changes will gain a competitive edge.”
Policy changes helping borrowers to refinance or gain loan approval
1. Lowering of stress test
When assessing loan applications, lenders need to place a serviceability buffer on top of any advertised interest rate.
The Australian Prudential Regulatory Authority (APRA) sets the serviceability buffer and currently, it’s at 3%.
So if you applied for a loan with an advertised rate of 6%, for example, the lender would need to be satisfied you’d still be able to meet the repayments if the rate was 9%.
Zahos further said:
“The serviceability buffer is designed to protect borrowers from rate hikes but, ironically, the very regulation designed to protect consumers is working against them.
It has made it harder for some borrowers to refinance to a lower rate loan resulting in them being stuck in a ‘mortgage prison’.
This has been a big gripe of mine and I’m glad to see some lenders are taking action.”
- Non-bank lender, Resimac, has reduced its serviceability assessment buffer to 00% for all of its products.
- Westpac and its subsidiaries – St George, Bank of Melbourne and BankSA – now allow some borrowers who are refinancing their home loan to be tested under a “modified Serviceability Assessment Rate” if they don’t pass the standard To be eligible, customers need to have a credit score of 650 or more, have a good track record of paying down all existing debts in the past 12 months and the new monthly repayments must be lower than those on their current loan.
2. Treatment of overtime income
Overtime and allowances aren’t always taken into account when lenders assess loan applications.
Zahos explains:
“If you are paid overtime regularly and it’s substantial, lenders will typically only take 80% of your overtime pay into account when assessing your loan application.
Some lenders, however, have recognised that essential workers such as paramedics, police, firefighters and nurses earn a large chunk of their income from overtime, penalties and allowances and will take 100% of their overtime into account.”
- Westpac, Bankwest, Bank of Queensland and Macquarie Bank are some of the lenders that allow emergency services employees to have 100% of their overtime and allowances assessed as part of their home loan The latest lender to jump on board is Ubank.
3. Other assessment changes
- If you are self-employed, you generally need to show two years of tax returns or financial statements but Bankwest is now accepting one year's worth of
- If you have a child/children in private school the fees will be counted as part of your living expenses, which can potentially reduce how much you can If an applicant has sufficient savings to cover private school fees, however, Macquarie Bank allows these to be excluded from their living expenses.
- Generally, for applicants who live rent-free with parents, Macquarie Bank factors in a notional rent of around $650 a month, which severely impacts their borrowing Macquarie Bank will waive that notional rent for singles with no dependants if they supply a letter from their parents confirming they are living there rent-free. This is particularly helpful for borrowers who will remain living at home and rent out the property they buy.
Tips to help get your home loan approved
Here are a few tips to help you boost your chances of getting your loan approved:
- Save as much as you can – the bigger the deposit the
- Clean up your spending in the lead-up to applying for a Stick to a budget and limit any non-essential spending.
- Reduce your outstanding debts as much as possible or consider consolidating personal debts into the home loan that you’re applying
- Cancel any credit cards you don’t use, or at the very least reduce the credit limits, as that can boost your borrowing
- Get a copy of your credit file to make sure there are no black marks you’re not aware of that could hurt your chances of your application being approved
- Find a lender that favours your circumstances. For instance, casual, contract and full-time employment are treated differently by different lenders.
