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With property prices in Sydney and the rest of New South Wales falling, the banks copping it at the Royal Commission, and historically low interest rates starting to rise, lenders are putting the brakes on lending.
Lenders are concerned about incurring further reputational damage for approving loans that could quickly move into default, especially if interest rates start to rise. Lenders are also concerned that the property bubble may be starting to burst. In a rising property market, lenders can improve ‘iffy’ loans because if there is a default, the property can be sold at a profit and the bank will get its money back. But when the property market is in decline, if there is a default, the bank may not get all of its money back.
The above conditions are leading to lenders scrutinising loan applications closer than ever. Lending insiders suggest that approximately 25% of loans that were approved last year would be getting knocked back now.
With this in mind, there are a few useful tips to consider when making a loan application:
View your credit history
- It is very important to have a good credit history. More information is now available to potential lenders about borrowing candidates and lenders are able to obtain a better picture. If there are defaults, like the odd missed mobile phone payment, it would be a good idea to check that this has not impacted on your credit rating. You should obtain a copy of your credit history before applying for a loan. Making a loan application when there is a negative mark will likely lead to rejection and may make it harder to get a loan in the future.
Avoid job jumping
- Lenders want borrowers to have stable employment, because paying off a loan depends on having access to regular income. Red flags for lenders include a borrower changing jobs less than 6 months before applying for a loan or a jumpy employment history where people frequently move jobs every few years.
Avoid spontaneous spending
- Lenders are going through borrower’s bank statements with a fine tooth comb. They are looking closely to see where the money is going. Lenders want to see disposable income saved rather than excessive retail spending or out of budget impulse purchases. If you are looking to apply for a home loan, it would be a good idea to delay buying that pair of shoes or those golf clubs.
Avoid exaggerating on your application
- It is tempting to give a positive picture of our financial situation. However, the non-disclosure of liabilities or spending habits can lead to rejection if the lender finds out the position is not true. Given that lenders have access to more data than ever, there is every chance that the financier will find out if you tell the odd ‘porky’. What’s more, if the lender feels that you are not being up front with them, your application will go straight into the rejected pile no matter how good your financial position is. Once one lender rejects your application, it generally makes it harder to get approved by another lender.
Speak to a mortgage broker
Applying for a home loan is not something you do everyday. Get some help. Go and see a mortgage broker and get some advice. They tend to have a better picture of which loans will get approved by which lender. They may also be able to negotiate a better interest rate. But with any mortgage broker, make sure you ask how much you will have to pay for their service and whether they receive any commissions depending on the lender you go with.