What is the bank looking for these days?

Australian home loan money

What does the bank look at?

Whether it’s your first or your fifth home loan, what the banks are evaluating when approving loans today can seem like a moving target.  We break down what lenders are looking for at the moment and how you can help get that tick of approval.

Your Income

What you earn directly relates to how much you can borrow and your ability to ‘service the loan’. Your base salary is assessed at 100% of what you earn, meaning if you are paid a salary of $60k per year then all of that is used in the calculation. Overtime allowances or similar allowances included in your employment package are assessed at 60-80%, rather than the full 100%.

If you are casually employed you need to show 3-6 months of consistent casual employment, meaning the same employer and the same consistent earnings over that time. The actual number of months depends on the lender you are applying with.

Some lenders are looking at whether your employment has been affected or is likely to be affected by Covid-19 at the moment, taking into consideration industries that are experiencing bigger impacts than others.

Finally, they will look at whether you are self employed or on standard PAYG income. If you are on PAYG then two payslips are generally enough information with occasionally a letter of confirmation from your employer.  If you are self employed providing two years’ tax returns and company financials are needed.

Your Deposit

Lenders are still lending up to 95% of the loan with Lenders Mortgage Insurance (LMI) applicable to loans over 80% of the value of the property.  How much deposit you have saved will determine what you need to show to your lender.

If you have savings in the bank, the lender will need evidence from bank statements showing your savings.

If you will have to pay LMI, you will need to show at least three months of either saving or holding the deposit that you have.  

If your deposit is a gift or contribution from someone such as a parent or partner, you will need a signed statutory declaration from them confirming it is a non-repayable gift.

Don’t forget, if you do have less than 20% deposit and do need to pay LMI, your application also needs to be approved by the insurer providing the LMI.

Your Credit History

The way lenders investigate and evaluate your credit history is now much more in depth that in the past. Previously, lenders just looked at things that were ‘good and bad’, meaning enquiries on your credit file and listed defaults on your credit file.  Now they can see every bit of credit you have, and every payment you make. 

This includes things like Afterpay, ZipPay, and interest-free payment plans.

Lenders evaluate based on the credit limits on all credit, not what is owing.  A $10k card limit only owing $200 will be considered a $10k debt.

The history on loans and credit cards that have been paid out in the past six months also now get looked at, meaning if you have recently paid out a credit card you were behind payments on that will now show on your credit history.

It is important to declare all credit you hold in your application with the lender. They can now see it all whether you declare it or not and if you don’t tell them everything upfront in your application it can have implications on the approval of your loan. 

Most importantly, pay everything on time and in full.  Limit the amount of credit you have and stay up to date with all your payments.

Your Living Expenses

The way lenders evaluate living expenses is based on the Household Expenditure Measure (HEM) table.  This table determines what the average household expenditure should be for each personal situation (single, couple, number of dependents, etc).  

The lender will look at your monthly spending based on bank statements you need to provide, to see if it is within the HEM threshold for your situation.  If it is outside the level for HEM, they will evaluate your ability to pay the loan based on your expenditure. If it is within the threshold, they evaluate your ability based on the HEM amount for expenses.

The evaluation is generally based on three months of spending, and takes into consideration everything you spend money on.  For example, a married couple with two kids attending Geelong Grammar will have additional education expenses factored into their living expenses, and these payment will contribute to their evaluation.

If you find yourself outside the HEM threshold, consider reducing your spending on expenses such as gambling and non-essential items such as Netflix or Foxtel.  Consider pre-paying monthly items such as school fees or insurances – not to hide them but to try and get your monthly spending under the HEM threshold for the period being evaluated.

The HEM threshold applies even if you have no existing debt or mortgages.  You may be in the strongest financial position you have ever had, with significant savings and no debt.  The evaluation of expenses can trip many people up. Banks assess using a buffer of an additional 2.5% on their current rate as their assessment interest rate, so they are looking at your capacity to pay a higher monthly mortgage payment than the one you are applying for today.

Talking to a mortgage broker prior to applying for your loan can really help in this area.

Your Employment and Residence Stability

The last area the lenders take into consideration is how stable you are.  They are looking for continuous employment in the same occupation for at least twelve months (not necessarily with the same employer) and prefer you to be past your probation period.  

They are also looking for you to show a consistent residence over a twelve month period.  Consistency is key for lenders.  They need to know you can maintain the essentials of life, month in month out.

While there are a lot of things taken into consideration when applying for a mortgage, it doesn’t need to be complicated or overwhelming.  Working with a mortgage broker to make sure you are in the best position possible to be approved before applying for a loan will mean that you get the best loan for your situation, and can be confident in your ability to service the loan whatever comes your way.

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