There is no doubt that as a society we are in a unique and unprecedented time – and there is not a business or family or individual that has not been impacted by the COVID-19 pandemic. While a lot of focus has been on businesses surviving and essentially going into hibernation through this time, and the bank relief packages for both mortgage holders and business owners – we are also in an environment of historically low rates where mortgage holders are looking to take advantage of these low rates and home buyers and investors looking for opportunities to take advantage of a housing market that has softened.
And as measures start to ease and individuals and families gain more clarity and certainty about their situation we are seeing a lot of refinancing and restructuring of existing facilities and homebuyers and investors seeking approvals to try and take advantage of the market slowdown.
From a credit perspective, there is no doubt the credit environment has become more complex, with increased scrutiny and changes happening weekly since COVID-19. We are also navigating valuations coming in softer and some providers not lending to some industries such as hospitality and tourism – however the good news is that for those in a position to access credit, providers are still “open for business”, credit can still be accessed and very competitive rates be obtained.
Given all these changes, 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 take a look at five key criteria providers are looking for when assessing applications and some steps clients can take to prepare.
1. Guaranteed and stable income
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.
Through this time, for PAYG applicants’ providers may request a letter from the employer to confirm that income is unchanged or, if it has been impacted, how – additionally, some lenders will accept JobKeeper payments as income.
The use of bonuses and commissions is on an industry by industry basis and dependent on the provider and how reliant the applicant is on these income streams.
For the self-employed, having up-to-date tax returns and financials is critical, and will show a track record of generating income – additionally, providers are now asking for FY20 BAS and financials to understand what impact COVID-19 has had on the business.
2. Living expenses
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 applicant's fixed expenses are manageable, particularly if circumstances change.
3. Other liabilities loans and credit cards
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.
4. Genuine 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 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.
5. Credit history
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 enquiries 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.
In summary, all lenders are wanting to ensure ongoing income streams and 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
APRA-regulated super funds could create better member outcomes by taking the sam...
Australian high-net-worth investors lost more money than their global counterpar...
The negative impact of COVID-related market volatility on clients’ super inves...