How to increase your loan options when refinancing

The lending environment is constantly changing, few years ago changes were being driven by the Royal Commission on Banking finds.  

Now, with pending rate rises, banks are trying to minimise borrowers potentially defaulting on their loans as repayment amounts increase with rates.

As with changes after the royal commission, these default minimisation measures relate to how banks assess your living expenses and focus on catching mortgage borrowers who want to buy a property but also want to have a splurge lifestyle.

Banks being banks, reputational damage is a major concern. So, when it comes to lending policies, it can, at times be void of common sense because of the disconnect between the back-office policy writers and customer facing loan writers.

Demand for more evidence

Over the last couple of years, the regulator of Australia's big banks - APRA - has been putting pressure on lenders to improve their "responsible lending" standards, including how the banks calculate how much a person can "afford" to borrow based on their living expenses.

On top of this, we've had the Financial Services Royal Commission, which has cast a poor light on some of the typically behaviour of the big banks.

The response of the big banks to the pressure from APRA and the fallout from the Royal Commission has been to require even more supporting documentation for loan applications and to increase their scrutiny of living expenses and existing debts.

This increased scrutiny on a borrower's living expenses by the big banks means more paperwork and delays in processing loan applications thanks to a lot more manual handling.

Undeclared expense means longer assessment times

Some of the banks have taken this to the extreme in recent times, however there are still lenders out there who take a more sensible approach to customers expenses.

One thing that won’t change is loan applicants need to provide a specific, itemised and evidenced break-down of their living expenses across different expense categories. Banks may also ask you to provide your last 3 months’ worth of bank statements and credit card statements for expense verification purposes.

They'll then almost forensically examine the transactions on your statements and cross-check back against what you declared on the application.

If you fail to declare an expense appearing on your statement, expect a "please explain...", email wanting details of whether it's a regular cost or discretionary spending, and why wasn't it included in your declaration of your living expenses.

Anytime an assessor wants more information, your application has to re-enter the assessment queue and this can add 2 - 5 additional days to your loan assessment and either cause you to miss your finance date if purchasing or longer than reasonable refinance period.

Beware Buy Now Pay Later users

Anyone with real-world experience in owning property knows that you can and will sacrifice discretionary spending items in your budget in order to more easily afford the repayments on a home loan.

Same applies to magazine subscriptions, gym memberships, Foxtel, Netflix, and even takeaways and dining out.

And yet some lenders treat discretionary spending as if it's some kind of fixed expense that you can't easily stop.

Most lenders assume that borrowers are financially irresponsible and incapable of making sacrifices when needed to manage your personal finances.

Loan assessment interest rates

Under current financial regulations borrowers are tested on their ability to afford a home loan with an added interest rate of 2.5% or higher.

With lenders factoring discretionary spending against applicants borrowing, the danger being as the rates rise, borrowers may be left trapped in uncompetitive home loans as they cannot meet the serviceability test of lenders with better home loan offers.

What can you as a borrower do?

It's time to get back to basics, with some essential budgeting discipline. You can use a budget tool like this to assess your household budget before refinancing or applying for a new loan.

Work out what you can sacrifice to:

1. Make getting a loan easier; and

2. Improve your financial position by reducing expenses that reduce your borrowing capacity

Make sure you stop using Buy Now Pay Later accounts, reduce discretionary spending on frequent takeaways etc at least 3 months ahead of applying for a loan so that they no longer appear on your bank statements or credit card statements.

The power is with you

There are well over 65 home loan lenders in Australia and loansHub has well over half of these on our lending panel.

Be aware that different lenders take different approaches to assessing expenses when calculating how much you may be able to borrow from them.

So, if you just go to one bank, you are missing out on potentially better products with another lender.

Vote with your feet if your existing bank has unreasonable policies!

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This article via Your Investment Property does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.