Tougher lending restrictions are being introduced for mortgages from December. Here’s what that means for new borrowers.
With most banks and home loan providers already operating under the new Credit Contracts and Consumer Finance Act (CCCFA), the process around applying for home loans is changing.
The level of evidence required for a home loan is increasing, making the process to apply for a loan more complex and lengthy than ever before.
Beginning December 2021, home loan providers will be required to take a closer look at applications before approving borrowers. This is due to rising concerns that they have been overextending themselves in a bid to secure a home.
Recent data from CoreLogic showed property values across Australia have risen much faster than most everyday Australians’ wages – around 20.3 per cent in the last 12 months, to be exact.
Along with tougher lending restrictions, the Australian Prudential Regulation Authority (APRA) has recommended that banks and home loan providers increase their interest rate ‘buffer’ from 2.5 per cent to 3 per cent. This is on top of their loan serviceability rate.
This means borrowers may face a reduction in their ability to borrow by around 5 per cent.
With this in mind, here are a few things to keep in mind when applying for a home loan.
Start your application as soon as possible
As the changes from the CCCFA come into play, it is anticipated that the home loan application process will become longer than usual for both homebuyers and home loan providers.
With home loan providers now forced to go through each application with a fine-tooth comb, the process will be much more complex. You will need to provide efficient and supportive financial evidence of your ability to repay your loan.
To ensure your application is approved, it pays to have all the required documents available and ready to submit ahead of time.
This helps to alleviate stress. It also provides your home loan provider with a great first impression of the type of borrower you will be.
Reassess your spending habits
Tougher lending restrictions mean that home loan providers will pay even close attention to your spending habits. They will want to see that you aren’t simply living pay check to pay check.
This review process means that you need to prove you have a good financial history. So keep non-essential spending such as fast food to a minimum in the lead up to your application.
Borrowers serious about increasing their borrowing power should review spending habits to see what you can cut back on. Then live within those new boundaries for a few months before submitting your application.
Think about your credit history
Have you been able to keep up with paying your recent bills, loans and expenses? If the answer is ‘no’, you may have to reconsider applying for a loan.
Home loan providers will be looking closely at your credit history to make an informed decision on whether you will be able to meet home loan repayments.
This also includes ensuring that you have no outstanding debts from credit cards or Buy Now, Pay Later platforms (BNPL) like Afterpay. They will also want to see that you have a low debt-to-income ratio.
If your credit score is too low, take steps to sort it out before you make your home loan application.
Have genuine savings to show
To lend money to you, providers will want to know you have enough genuine savings stashed away.
If you aren’t aware of the difference between genuine and non-genuine savings, now is probably a good time to become familiar with the terms.
Genuine savings are just as the name suggests; savings that you have genuinely saved yourself over time.
On the other hand, non-genuine savings are generally ‘once off’ sums of money and don’t necessarily display a strong saving habit.
Non-genuine savings can include monetary gifts, inheritance, tax refund or bonuses from work. They also include less than three months worth of short term savings, so start building savings asap.
It is important to have genuine savings put away to demonstrate that you can save in the long term.
Tougher lending restrictions mean that the home loan application process can seem even more daunting and complex. But something hasn’t changed: you’ll be more successful if you are well prepared. Understand the requirements and set yourself up financially in the months ahead of applying.