Want a home loan? Be a model spender for three months before you apply

It’s important to understand the game has changed when it comes to borrowing.

It’s changed for everyone from first home buyers to investors refinancing fixed interest loans or home owners swapping banks for lower rates.

It used to be an easy process to move from principal and interest to interest-only or vice versa, or to change from a fixed rate to a variable rate loan. However, the regulator now expects banks and other lending institutions to undertake a serviceability assessment whenever there are material changes to the current or originally approved loan conditions.

Responsible lending practices are forcing borrowers to justify their spending.

Photo: James Davies

While these serviceability assessments were brought in months ago, mortgage brokers are only now understanding the impact the changes are having on clients. For anyone looking to change their lending or enter a new borrowing arrangement, it’s important to understand what you need to do today to ensure you’re in the best position to obtain or change your arrangements.

One example is living expenses. Last year it might have been perfectly adequate to estimate income and expenses, for the purposes of assessing an applicant’s capacity to repay. The higher of the household expenditure method (HEM) or customer-declared living expenses was accepted in serviceability assessment.

There are now 12 categories of living expenses that borrowers must provide a detailed response on. According to Betty Preshaw, principal of Mojo Mortgages, a rough estimate of living expenses is not acceptable.

That’s because lenders are expected to be extra vigilant when it comes to verifying borrower’s living expenses. Expenses declared are being verified with a mandatory three months of the lender’s most recent bank transaction account and credit card statements.

Preshaw said if there were items in the statements that did not support declared living expenses, borrowers would be questioned and would need to provide justification. She has experienced this already with some of her mortgage-broking clients.

One of Preshaw’s recent clients, Jessica, earns about $90,000 a year. She is single, has no dependents and lives in a three-bedroom apartment in Sydney's eastern suburbs. Granted, Jessica's declared living expenses are not marginal but Preshaw said the bank had been relentless in validating her living expense declaration.

After providing three months’ worth of bank and credit card statements, the bank came back querying several items. One was a $467 per month payment to a course provider. The transaction was a final payment of an evening course Jessica had completed in May 2018. She had to obtain confirmation the course was paid in full, even though the cost did not appear on bank statements in later months. Jessica also declared clothing expenses of $200 per month, yet because a $500 debit from David Jones appeared on her credit card, she had to provide sufficient justification to prove that it was a one-off transaction. Parking and fitness taken out of her pay pre-tax meant Jessica’s employer was asked to confirm these were discretionary expenses that could be stopped if required.

If you know banks will be looking at three months’ worth of transactions, then start looking at your spending now.

The proposed loan amount in this scenario was $380,000 at a 29 per cent loan-to-value ratio. Preshaw said historically this loan would have been approved within 48 hours with this particular lender but it’s been 10 days and it’s still not approved.

Delays like this can be countered if borrowers understand the regulations and how they’re going to affect them when it comes to applying or refinancing.

If you know banks will be looking at three months’ worth of transactions, then start looking at your spending and make conscious choices about whether your purchases will affect your ability to secure a loan. If they will, then consider either deferring your spending or choosing to go without. It will make it so much easier to apply for the loan, knowing you have a spending history that the banks will be happy with rather than having to justify individual purchases that don’t match up with what you’re declaring as your spending pattern.

Besides, if it forces you to evaluate your spending and become a more mindful and conscious spender then surely that’s a benefit.

If you’re even considering a rate change, a loan swap, comparing banks, buying an investment property or purchasing your own home it’s important to understand we’re in new era of responsible lending. More than ever, it means working with your broker, perhaps months beforehand, to understand the changes and to ensure that not only your income and assets, but your spending, aligns with the criteria required for you to obtain funding.

Melissa Browne is CEO of A&TA and financial planning firm The Money Barre. Her latest book Unf*ck your Finances is instore now.

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