Comprehensive Credit Reporting provides lenders with access to both the positive and negative credit reports of applicants to allow them to make a more balanced assessment of their credit history.
From 1st July 2018, major banks with more than $100 billion in total residential assets and their subsidiaries will be required to supply 50 percent. We certainly experienced an eventful 2018 with the Royal Commission, tightening of credit by all financiers, property values declining and increase in lending interest rates, all in spite of the Reserve bank holding the “cash rate’ at record levels.
The Royal Commission into banking was the highlight of the past year. What can be said of this? We are beginning to see all the lenders’ addressing the issues raised by the Royal Commission, and no doubt in 2019, there will be more changes made by lenders regarding their conduct in the marketplace.
Banks have further tightened their credit processes for lending, especially in the home loan market. Lenders have again raised the bar for borrowers in “Interest Only Loans”. This has been attributed to borrowers who are nearing or who have their recent Interest Only Loans reach the end of interest-only term and now face the prospect of the loans converted to principal and interest repayments.
This change in lenders’ policy has certainly raised concerns with many investors who now may face the dilemma of either having to sell their investment property or face the possible cashflow strains as the loans are being repaid at a shorter loan term.
As we have seen over the past few months, the Reserve Bank has maintained the Cash Rate at a record level of 1.5%, whilst the banks have raised interest rates for investors.
The term “Responsible Lending by the Financiers” is now the new norm. ‘Responsible lending’ has in my view, always been a major factor for any lender in approving finance for any borrower, whether that be for residential, investment or commercial finance. The Banking Royal Commission has prompted closer scrutiny in assessing the borrower’s ability to repay a loan. In particular, more detailed verification is now being made of borrowers’ living expenses.
With this in mind, we as finance brokers are even more diligent as we are required to fully analyse a client’s living expenses to ensure that the expenses are a true indicator of the applicant’s financial position. Some of these living expenses include how much you spend on groceries, petrol, childcare, school and education fees, utility bills, mobile phones, cable television, online subscriptions etc. Most of the applications now have to list and separate these items individually and incorporate them into the application process.
It’s not just a case of the applicant filling in the “boxes”, but the lenders now closely require all these boxes filled in, and painstakingly scrutinizing the applicants’ bank statements to see if there are any discrepancies or things that are not accounted for.
As seen in recent media reports and coverage, lenders are still aggressively marketing home loans at excellent discounted interest rates with Offers of cash-backs for “switching” loans. In many respects, it is still ‘business as usual’ for most scenarios and applications. Competition is still high among the major and mainstream lenders both banks and non-banks. This is not expected to change much especially in light of the current economic climate.
However, borrowers need to be aware that the lending criteria and application approval process has been greatly increased in order to meet the lenders’ stricter guidelines. Also, lenders today utilize their “assessment” criteria for serviceability that is tested between 7.25% and 7.55%. Applicants need to be aware of this before applying.
How to prepare for your application
Here are some steps that we can assist to maximize the success of your application :-
- Prepare a detailed list of current living expenses
- Prepare a budget including a loan repayment plan for interest rate of 7.25%
- Remember to factor in new expenses such as council rates, home and contents insurances, and
allow for costs of any repairs and maintenance
- Have all your credit cards and store accounts up to date. Lenders will look closely at the last 3
months of credit cards and store accounts to ensure that there are no arrears.
- Ensure that all financial accounts i.e. tax returns have been completed and lodged.
- Obtain a Credit Report, or have your finance broker arrange one. This will enable a review of the current position as lenders will also do their own report. Occasionally, a utility provider or telco may have recorded a default. Therefore, it is best to address any potential issues prior to
submitting a loan application.
- Mature aged borrowers have to present a clear exit plan prior to retirement, as lenders will look closely at the loan term and repayments to ensure loan is cleared on or prior to retirement.
I have seen over many years that some borrowers seek finance on their own and “shop around” with the banks. Remember, by doing this, the banks conduct credit checks, recording a “hit” on your credit score. This may have a negative impact as a lender would assume that the borrower may have been refused finance by other lenders.
If you have any concerns or questions about your Credit Score or Record, Paul has key associates that can assist you to find out more and rectify your situation if it is negative. Contact us today