Your home loan got rejected…now what?

Sitting in a ‘cosy’ apartment, paying half your wage to a landlord and watching your friends become homeowners can be very frustrating. We see it time after time. You crunch the numbers and figure out you can get a home loan at an interest rate of around 3.7% per annum.

After sifting through the auction results and doing your sums you calculate that you’ll need a loan of $400,000 to buy a desirable property close(ish) to work.

You plug the numbers into the Wealth Portal mortgage calculator and it tells you that, including fees, your repayments will be $2,056 per month for the next 25 years. You’ve worked out your monthly budget and reckon you can manage those repayments and still have a bit left over.

Now you have your eye on a home within your price range. You apply to your bank to borrow $400,000, but when the answer comes back it’s “no”. Now what!?

Don’t blame the bank

As much as bank bashing is akin to a national sport, your bank would probably be quite happy to lend you the amount you asked for. However, in early 2017, banks and other lenders received a letter from the Australian Prudential Regulation Authority (APRA).

APRA is the government body charged with making sure that banks behave responsibly, and though it may not feel like it with the revelations from the Royal Commission into Banking, it does have your best interests at heart.

What is responsible lending & why does it matter?

In brief, it means looking into a borrower’s financial situation, verifying the information and making an assessment as to whether or not the credit contract is suitable. The lender should also consider the ability of the borrower to maintain loan payments if there is an increase in interest rates, as this is a common pathway into mortgage stress – the situation where loan repayments take up too large a fraction of household income.

In a lot of cases, stress on borrowers could have been avoided if lenders had stuck to their responsible lending obligations. Essentially, the regulator is concerned that, with interest rates lower than they’ve ever been, we’ve gone on a bit of a debt binge. As interest rates rise, a lot of Australian households are going to have real trouble meeting their home loan repayments.

The upshot is that, amongst a number of requirements, APRA has instructed lenders to apply an interest rate buffer when assessing loan applications. Specifically, this means that your bank is required to check your ability to meet your loan repayments at “the higher of either at least 2 per cent above the loan product rate and a minimum assessment interest rate of at least 7 per cent.”

In the case above, that means testing your mortgage application at an annual rate of 7%. This would push your monthly repayments to $2,837, an extra $781 to find each and every month.

Are there options?

Of course you’ll be disappointed that regulators are leaning on your bank to reduce the amount they will lend to you, but mortgage stress is a real and growing problem. It really is better to be prudent about debt. That is where we can help.

So what can you do?

Start with a realistic review of your finances. A financial planner can help you with this but some initial actions include:

• • Get rid of unnecessary credit cards, as the entire limit, not just the card balance, is counted towards your total debt burden.

• • Pay off any personal loans as quickly as possible.

• • Go back to your budget and see what expenses you can cull without being too austere. TheWealth Portalis designed to help you identify easy wins, and keep you on track.

• Can you save a bigger deposit, reducing the amount you need to borrow?

Be ready for the inquisition into your financial situation by the lender

You’ll need documentation to prove the following; amount and source of your income, employment, fixed and variable expenses, age and number of dependents, details of your assets, information on foreseeable changes such as retirement.

If you are using the loan to buy an investment property make sure you disclose this. You will likely face a higher interest rate, but don’t be tempted to deceive the lender. They are adept at detecting so-called ‘occupancy fraud’. You may also need to come up with a bigger deposit on an investment property purchase. This will decrease the sum you can borrow, limiting the price range in which you can buy.

Age needn’t be a barrier to taking out a home loan. However, anyone borrowing with a likelihood of retiring before the loan is paid off needs to have an exit strategy. This could be paying off the loan with superannuation, downshifting to a cheaper home, or even taking out a reverse mortgage.

Tighter adherence to responsible lending practices could likely lead to a reduction in the amount that people can borrow. However, this reduction in the amount of money flowing into the housing market should dampen down growth in house prices. Overall, more responsible lending may not have a major impact on housing affordability, but preferably see a reduction in the number of households experiencing mortgage stress.

What next?

Armed with advice and updated figures, take another look at the market. The Enrizen private client team can help answer the right questions and help you prepare the right documentation, stress test your proposed mortgage to see if you can cope with significantly higher interest rates.

Remember, this article covers general options for general scenarios. If a new loan or refinancing an existing one is on your radar ask for tailored advice that accounts for your specific circumstance, contact our experts Frank and Sarah.