What you need to qualify for a mortgage under new industry rules
Duncan Hughes | 20 Feb 2019
Beware too many takeaways, as they could mean your mortgage application is turned down.
A big spending festive season running up credit card bills for gifts, Uber Eats and Uber Rides could jeopardise a home or personal loan under tough new industry lending rules.
Loan applicants are facing unprecedented scrutiny from lenders about their personal circumstances, finances and current, medium and long-term goals.
Deep-dive questions cover personal, household and any investment loans for both new home loan applications and those seeking changes to their mortgage.
Some credit such as “payday loans” (small loans at high interest rates using borrowers’ next pay day as security) are a red flag for lenders looking for evidence a borrower could have difficulty servicing the loan, say mortgage brokers.
Lenders are also scrutinising current and future card spending, personal loans, overdrafts, PayPal and any other lines of credit to detect patterns in behaviour, such as late payment.
Failure to provide full and frank answers will result in loan applications being returned for clarification, which could lead to delays or rejection.
Here are 10 key issues that banks and other lenders want details about.
Borrowers will be asked whether they are buying another property before selling an existing one. The lender will want to know whether it is a primary residence or an investment. Details will also be sought on its prime purpose, such as whether it is a holiday home, first home or you’re downsizing.
Lenders will want to know whether you will be renting until the house is built. Expect questions about the reason for construction, whether the plans have been approved by council, when construction starts and how long it will take.
Expect to provide evidence that you will be remaining in the existing property while renovations take place. Lenders will also want to know why you are renovating.
If you’re borrowing to invest in property or equity investments, you’ll be asked to explain your investment strategy, whether it is long term or security for a margin loan. Expect questions on amount of rental income and whether it will be a source of income or used for loan repayment.
Lenders will want to know whether it is being used to refinance or consolidate debt. Is it for a better rate or to take advantage of a campaign offer? There will be plenty of questions about whether you are with other financial institutions, the structure of existing debt, product type, interest rate and ongoing fees. Are there any early repayment costs, break costs, loan approval fees, discharge of mortgage fees?
Changes to your financial circumstances
Those coming up to retirement will be asked about how they plan to continue financing the loan. Applicants will also be asked whether they plan considering moving to part-time or casual employment.
Future plans about starting a family and/or taking parental leave will be asked. These questions will also cover issues such as whether you are a primary carer, or whether you have any regular medical expenses.
Details will be required on future big spending items, such as private school fees and property renovations.
Applicants will have to disclose what type of product they prefer and why. This covers loans ranging from variable, fixed and lines of credit through to bridging. Principal and interest or interest-only? Popular loan packages will also feature. Expect questions about what features are important to you. This covers issues such as spending, use of offset accounts and credit cards.
Lenders are under regulatory pressure to ensure applicants are aware of the risks for each type of product. For example, variable rates and repayments may increase while the loan is on a variable rate, or not paying off principal may result in more interest being paid over the long term.
This article was originally published by The Australian Financial Review on 19 December 2018. It represents the views of the author only and does not necessarily reflect the views of AMP.