Seven ridiculous reasons you could be rejected for a home loan
My quest for a new mortgage – to retain my children’s home after sadly separating with their wonderful dad – continues.
I’m almost starting to regret adding my signature to an open letter to the previous Federal government, urging it not to relax responsible lending laws.
Sure, with new-found solidarity with solo parents, applying for a mortgage based on a single income doesn’t help. Or a COVID-affected one.
Here are some of the biggest obstacles I, and throngs of other Aussies frantically chasing cheaper home loans today, face. Some may seem relatively sensible, but others are a bit of a joke.
1. Spending too much
When a lender assesses you for a mortgage, they want to know if you have enough “fat” in your finances to fork out the monthly repayments. A so-called “serviceability test” determines if there is enough space between your income and your expenses. However, the test is not just for now. They also assess you for if official interest rates rise by a further 3%. Until the end of last year, it was only 2.5%. That is on top of a mortgage interest rate that has probably already lifted 2.25 percentage points in the past five months alone, as the Reserve Bank of Australia strikes to combat inflation, and your repayment capacity shrinks.
The Netflix test is the other side of the monthly affordability equation and refers to an examination of your every expense in the three months before applying for a loan. However, if you believe artificially slashing your spending in that period will help, think again.
2. Spending too little
Banks are on to people who dramatically decrease their monthly expenses. Becoming a hermit won’t help. Across usually 12 categories, they check that you are spending a “realistic amount.” If they deem you don’t, they will instead use a standardised measure of your cost-of-living known as the “household expenditure measure”.
3. Earning ‘wrong’ income
The operative word is “earning”: Preferably from someone else’s business, not your own. Most lenders favour earned, employed income. Casual income may not come into the equation until it has been consistent for an entire year. Even then, a month will likely be chopped off annual income on the assumption that you will likely take a holiday for at least that long each year.
Any overtime – unless it is officially recorded on your payslip – will likely also be overlooked.
What about child support from an ex-partner? You need to have a formal agreement and a faultless payment pattern – and not a cent above the required amount counts.
Investment or dividend income is often ignored, too. However, a few lenders consider the lower amount of the past two years’ income.
If you have made a loss inside your own business, it is also lopped off your application total income.
As a separated applicant who earns income through a long-established but COVID-hit small business, I am hit by almost all of the above. And a category that seems so unfair it deserves to be all of its own:
4. Receiving JobKeeper Many people had their earnings cut after being laid-off or had their hours reduced by COVID-19 conditions in the past two years. Some received fortnightly JobKeeper payments to help keep them financially afloat. Well, lenders are disregarding these in income calculations, even though regular income may have, during lockdowns, totally dried up. This policy particularly applies to look-two-years-back, small-business assessments. Any additional small-business pandemic payments are similarly deducted.
5. Holding a credit card
You may say “but my credit card balance is zero.” It matters not.
As of a few years ago, you must have enough spare cash to repay even an unused credit card limit in three years. And that’s after you consider any new home loan repayments. Whatever your credit card limit, it will typically rule out seven-to-eight times that amount of your borrowing capacity.
Be aware that if you cut up your card, though, the same three-years-to-clear rule applies to getting a fresh limit. Indeed, you might never get a credit card back.
6. Asking for too much Now we move from the cushion that counts in your serviceability assessment, to the multiple of what you want to borrow versus your annual salary. Known as your debt-to-income ratio, this borrowing brake has recently been in the spotlight. Although it is often assessed on a bank-by-bank basis, eight, seven or six times your income is now where you could top out for the total amount of the mortgage. This is irrespective of whether a property is worth double your longed-for loan and your equity, therefore, huge.
And speaking of equity, remember that not only are the cheapest rates available if you own outright more than 20 per cent of your property, borrowing more than 80 per cent will trigger expensive lenders’ mortgage insurance. Obtaining a lower mortgage interest rate will take a good while to compensate for this expense.
7. Payslip advice I have even heard of a lender refusing to look at an applicant because it requires – of an employee no less – three months’ of payslips this financial year. So, you can forget about a new mortgage or a refinancing, if this is the case, until at least October.
So, is all now lost when it comes to home loans? It is still possible to get a new loan over the line? Obtaining a loan approval now requires you to be canny. And, with interest rates still rising, probably quick, too.
As a mortgage broker I specialise in vetting your application and presenting to the best fit lender to reduce the chances of you being rejected when applying for a mortgage, don't do it on your own, get in touch today!