The last decade has flipped the world of lending on its head.
In days gone by, banks lined up to give you money; now, they’re so tightly bound by APRA regulations that their initial stance is closer to “no” until you prove yourself worthy of a “yes”.
To make a tough situation even more difficult, lenders are behaving incredibly erratically, changing policies week to week.
While the constant flow of changes is a delight for the media, investors are struggling to understand this new, undulating lending environment.
It’s certainly not as cut-and-dried as it used to be.
These days, what do banks see when they look at your application?
And most importantly: how can you get the green light from your lender?
The first filter is serviceability
The APRA changes were brought in to slow investor activity, but also to protect our economy from another Global Financial Crisis.
Now these changes started in 2014 and even though the screws have been loosened, serviceability is the first filter lenders will use when looking at your application.
Thus, serviceability criteria are stricter than they’ve ever been in history.
Basically, lenders need your finances to hold up in a worst case scenario.
As such, they’ve made changes like these:
- Any existing debt repayments will be assessed at an interest rate of a few percentage points higher than your mortgage loan rate, regardless of the interest rate you’re actually paying. This can be disastrous for investors with a large portfolio.
- Living expense benchmarks have been raised and standardised across lenders. That means that even if you live for free with your parents, you’ll still be assessed as if you were paying rent.
- Lenders have reduced the amount of rental income they will consider as cash flow, some to as little as 65%, and some lenders have limited or removed negative gearing concessions entirely.
- Some lenders won’t offer interest-only loans to investors, which means you need to have the proven cashflow to sustain higher repayments.
Then they look at your existing funds
100% loans live in the history books now.
Most lenders now require at least 80% loan to value ratio.
In short, investors need to have a wad of cash ready to use as a deposit.
And of course, they want to see that you have the income to manage the repayments.
They’ll make sure you have a history of reliability
If you’ve saved your deposit and you’ve proved you have the capacity to meet repayments, you also need to show you have long-term reliability.
How many times in the last two years have you changed jobs?
Can you prove you know how to save?
And the number one question: do you pay your bills on time?
A flawless credit rating is now an essential requirement for loan approval.
While we used to be able to send a polite letter to explain a tardy payment, today’s lenders are far less lenient in overlooking credit blemishes.
Basically, pay your bills on time, and be judicious in applying for loans.
Every rejected application is a black mark on your credit rating.
And, they’ll take a look at the property you want to buy
Banks are further reducing their risk by scrutinising your proposed property in more detail than ever before.
Since your property is their collateral if things should go belly-up, lenders need to know that they can sell quickly at market value and recoup their funds.
To this end, some banks have capped their lending amounts on certain suburbs based on increased probability of default and resale difficulties.
And most banks have blacklisted certain inner-city postcodes where credit risk is deteriorating becuase of the many Lego land high rise apartment towers with their potential structural issues.
On the flip side, a property with excellent potential can boost your application probability.
A final word
There are a lot of boxes to tick to gain loan approval in today’s climate.
What you need most of all is strength in income, cash in the bank and low living expenses.
Reduce your credit card limits, bump up your deposit funds and find properties that fit lenders’ profiles of a risk-adverse investment.
An experienced finance strategist can help you through the process.
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