While there are still plenty of great opportunities out there for home buyers and investors, it is timely to share what we are seeing from a lending assessment perspective and how to ensure clients are finance ready.
Daily headlines prevail about the impact on the economy of the housing market slowdown, loan providers are increasing rates due to funding pressures amid talk of RBA rate decreases, we have the royal commission recommendations to play out and an election and potential policy implications of a Labor government that could have far reaching consequences for the economy.
It seems that wherever you look in financial services there is a level of uncertainty.
This backdrop creates headwinds and a challenging decision-making environment for home loan borrowers to navigate – making the jobs and advice of financial advisers and credit advisers more important and more valued than ever.
From a credit perspective – I am asked almost daily by advisers about the current credit environment, access to credit and how we are navigating this tightening environment for clients.
There is no doubt that the credit environment has become more complex. Each week we see changes in provider credit policies, out-of-cycle rate movements, valuations that are coming in softer and overarching all of this is the increased scrutiny and forensics involved in the credit assessment process – with applications taking longer to get approved.
For a broker, a large proportion of our work and time is spent in sourcing the provider/s from our panel who have the suitable credit policy and appetite for the transaction – and complementing this with the appropriate structure and competitive rates for the client.
So, while there are still plenty of great opportunities out there for home buyers and investors, it is timely to share what we are seeing from a lending assessment perspective and how to ensure clients are finance ready. To do this we will take a look at what providers are looking for when assessing applications and some steps clients can take to prepare.
Banks use a credit rating system that includes assessing a client’s credit score when processing a loan application. A client’s credit score is based on how many inquiries they have made with credit providers and how good they are at paying bills on time.
We will check a client’s credit score and if there are mistakes, get them fixed, or if there have been issues with late bill payments in the past, it may be prudent to wait until there is a history of on-time repayments.
From 1 July 2019, Comprehensive Credit Reporting (CCR) comes into place that mandates the reporting of both positive and negative repayment history on credit files. For example, if you pay your debts on time, this positive information will be included on your credit file. If you occasionally make a late payment or miss a payment, this will also affect your credit score.
Whether an applicant is self-employed or PAYG, assessors are looking to see a secure, consistent and stable income stream. Essentially, they want to know the applicant can repay the money they have borrowed.
For the self-employed, having up-to-date tax returns and financials is critical, and will show a track record of generating income.
Providers are looking to see that a client can save money and that their income exceeds their living expenses – again they want to know that the applicant has the ability to repay the loan and create surplus savings. A key part of being finance ready, especially for owner-occupiers requiring a deposit where equity cannot be released, is to be able to show the ability to consistently save and build savings.
Providers and assessors are taking a much more forensic look at living expenses to understand the applicant’s cost of living – both fixed expenses as well as lifestyle. To validate this, they will review up to six months of bank and credit card statements to ensure the applicants fixed expenses are manageable, particularly if circumstances change.
Lenders will consider other liabilities the applicant needs to service. This will include personal loans, asset finance and credit card limits, as well as for example an outstanding HELP debt owing. It may be that some of these debts are consolidated in the finance process, however it is important to understand the impact these have on an application, in particular high credit card limits that may not be necessary.
In summary, all lenders like stability. As a broker, we ensure we discuss with our clients early on what credit assessors are looking for and what it means to be finance ready.
In preparing applications, we ensure that all these criteria, income, expenses, assets and liabilities are packaged up and presented to the credit assessors in a way that takes them through the assessment process as seamlessly as possible. This will enable our clients to be ready to get their approvals and start looking for their home or investment property.
Anthony Landahl, managing director, Equilibria Finance
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