06/08/2020

Managing or applying for your first or new home loan can be a daunting task!

As part of our Foundation Client Service, APC can assists clients to obtain a new or first mortgage through its panel of mortgage brokers.

Recent Bank Policy and Process changes, partly in response of the recent Royal Commission into Banking combined with the Banks commitment to responsible lending practices indicates the Banks and lenders have tightened up their Credit Assessment process & Policy when applying for a new loan.

So, its never been more important to prepare your ‘financial world’ for an impending application. We have included some information and handy tips below to consider before a new home loan application.

What information will the bank be after?

The basic premise is that the bank will now ask for more information in order to be satisfied that you have not extended yourself unduly and you are capable of servicing the debt within the agreed loan term as well as continue to meet other ongoing commitments.

With the recent introduction of Complete Credit Reporting, banks are talking to each other behind the scenes.  When an application is raised a comprehensive credit check is completed.  They can now see the following:

  1. Home Loans
  2. Credit Cards
  3. Personal Loans
  4. Leasing and Credit Lines you hold
  5. The limits of the lines
  6. Who the funding is with
  7. Directorships you hold with companies as well

They can’t see what is spent but the reporting advises whether you have been in arrears on your repayments or not and the repayment history – so it’s important to avoid these types of scenarios.

Affordability and Assessment

When banks assess a loan application they will assess it at an Affordability/Assessment Rate.  Depending on the bank this can be between 5.5% – 8%.  They will assess your capacity to repay a loan over a 30 Year period on a principal and interest basis at the Affordability/Assessment Rate.  The bank does this as they want to determine that you can comfortably meet your loan repayments in the event there is any future interest rate increases.

Banks do not assess loans at advertised rates.

What about Credits Cards?

Credit cards are a great way of paying for goods and services but it is important to understand how the banks look at these when they assess credit.  The bank will look at the total limit of all your credit cards (not the balance) and assess a minimum monthly payment of 3.8% of the limit. For example, for a credit card with a $20k limit the bank will assess a repayment of $760 per month, regardless of whether it is used or not.  To give you an idea the $20k credit card servicing requirement is the same as a $110k mortgage!

With new finance services such as AfterPay or ZipPay the banks will take into account customer’s obligations to meet these repayments as these are considered debts by the bank.

How do banks now measure expenses?

There has also been a significant focus on Living Expenses and the verification/validation of these.  HEM (Household Expense Measure) is what the banks use to determine what the minimum monthly household spend is.  This varies slightly across the banks, however is based according on factors such as Income, Number of Applicants and Dependent Children and Marital Status.

The banks have now broken this into 16 Categories falling under the banners such as General Living Expenses and Additional Living Expenses.   HEM is only a guideline and it is expected your bank or mortgage broker will have discussions with you to determine what your monthly expenses are and importantly validate these.  They will use what you advise and what is validated regardless of what HEM is used.

If the quoted expenses are less than the Standard HEM your bank or mortgage broker will need to provide significant evidence of spending habits and spending history to justify the lower expense. Some banks ask these be verified and evidenced against your bank statements and credit card statements.

It is most important to note that in the past, living expenses were all bundled into one large category however this no longer the case.  Any expenses that are listed as Additional Living Expenses are essentially in addition to General Living Expenses (HEM)

Now expenses such as Life Insurance, TPD Insurance, Critical Illness, Private Education, Holiday Home Expenses, Body Corporate Fees are classified as an additional expense and are considered over and above the basic General Living Expenses.

An example of the breakdown of expense categories is as follows:

General Living Expenses

Primary Residence: Gas, Water, Electricity, Rates, Property Maintenance

Phones Internet: Mobile Phones, Landlines, Internet, Foxtel, Netflix, Stan

Recreation: Holidays, Memberships, Dining Out, Cigarettes, Alcohol

Clothing/Personal Care: Clothing, Hair & Beauty

Medical & Health: Doctors, Dentists, Physio, Chiropractors, Medicines

Transport: Car Registration, Fuel, Maintenance, Public Transport

Public Education Costs: School Fees, Uniforms, Books Excursions -Public School

Higher Education Costs: Professional Development, Post Tertiary/Online Courses

Childcare: After School Care, Childcare, baby Sitting

General Insurance:  Income Protection, Home & Contents, Car, Boat, Health

Additional Living Expenses

Strata Fees/Body Corp: For Owner Occupied Premises only

Private School Fees: Private school fees, tuition, Sports fees, Uniforms

Child Support: Financial support paid by one parent to another for care

Maintenance:  Finance required for care of Dependents

Life/Accident/Illness Insurances: Life, TPD, Critical illness Insurance

Investment Property: Rates, Land Tax, Body Corp, Maintenance, Insurance, Utilities

Secondary Residence: Rates, Land Tax, Body Corp, Maintenance, Insurance, Utilities

As always, if you wish to discuss this further with us, please feel free to make contact with any member of the APC Advice Team.