Anyone applying for a home loan these days will find that there are more hurdles to jump than has recently been the case.
So why is it harder to get a home loan? And what can you do to improve your chances of getting a loan?
The Royal Commission
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry that concluded in early 2019 discovered a number of lax lending practices by some of Australia’s biggest lenders. Of particular concern was that some banks failed to verify the living expenses of home loan applicants. In many cases this leads to people receiving loans that they were unable to repay. The Royal Commission also revealed that one of the bank regulators, ASIC, did little to punish misconduct, so there was little incentive for banks to comply with their legal obligations.
In response to the Royal Commission ASIC promised greater scrutiny of lending practices and lenders began to ask for a lot more information when assessing home loan applications. They now require detailed proof of both income and expenditure at a level that many people may find intrusive.
The decline in home prices in Australia’s major cities mean that buyers don’t need to borrow as much for a given property, which should make it easier to get a loan. However, falling prices create a greater risk for the banks, and one way to reduce this risk is to require a higher deposit, extending the time it takes to save that deposit.
Stringent stress testing
Even before the Royal Commission the prudential bank regulator, APRA, introduced a requirement that banks check on their borrowers’ ability to service their loans if there is a significant increase in interest rates. While it might be possible to borrow at an interest rate of less than 4% per annum (pa), the banks need to check that the loan is still affordable at an interest rate of more than 7% pa, thus reducing the amount that can be borrowed.
The main response to this more difficult lending environment is simple, but that doesn’t make it pleasant. Unless you are able to increase your income, you’ll need to save more. Inevitably, that means spending less:
- Keep detailed records of saving and spending. You will be asked for them come loan application time.
- Start early. You are more likely to be successful in your home loan quest if you can show a consistent history of saving and responsible spending spanning years rather than months.
- Shop around. By all means, start with your regular bank, but also check out what the non-bank lenders and mortgage brokers can offer.