With credit tightening, it pays to be on the front foot

WITH LANIE CONQUEST FROM SURF COAST FINANCE

There’s no doubt that we have a housing affordability problem in this country, and with that, we’ve had to extend ourselves to own the home we want.

We also live in a consumption society, have crazy “tap-and-go” habits, and ZipPay at our fingertips. The combination can be lethal.

Though it’s not without profit motivation, arguably banks have historically done their bit to help us break into the housing market – extending loan terms to 30 years and trusting us to manage our debt reduction.

But debt-to-income ratios are at alltime highs, mortgage stress is on the rise and a slap on the wrist courtesy of the Royal Commission now means that a loan application is just that… an application.

The banks are saying “no” more often than ever before. According to Digital Finance Analytics, over 80,000 loans a month are being rejected. Off a normalised base of around 10,000 a month, that’s arguably 70,000 people who would have ordinarily been eligible.

The tide has turned. A mortgage, or even the ability to refinance, can no longer be considered a right. The banks are demanding proof of our credit-worthiness and their forensic investigations will leave no stone unturned in ensuring that the information provided is the truth, the whole truth, and nothing but the truth.

Credit reporting has been used by banks for some time to ensure that an applicant declared all other existing loans. But it was largely limited to showing directorships credit enquiries and defaults. Now, although progressive in its rollout, the reporting shows all debt facilities, their current status and their repayment history. Banks will now want to see six months good conduct on those credit facilities, particularly if those facilities are to be refinanced.

If an existing credit facility is to be maintained, lenders will “buffer” the position. If it’s a term loan, sensitivity analysis will likely assume a much higher future repayment amount for servicing, or in the case of credit cards, all banks will use a standard calculation of 3 per cent of the limit per month as an expense. The bank will then review living expenses in detail to determine if the new loan repayments can be comfortably met. They’ll assume the lower of any incomes (particularly for sole traders or small businesses where income can be volatile), a higher future interest rate, and consider any credit facilities as ongoing commitments in their assessment.

Presentation of the financial or business case has become critical. The more preparation that’s done in the lead up to applying for a loan, the better the case for getting it approved.

In a series of workshops to be held on November 29, Surf Coast Finance will cover everything needed to obtain finance, or refinance, in a post-Royal Commission environment, where the onus is squarely on the borrower to prove their credit worthiness. Phone Lanie Conquest on 0418 938 646 or email [email protected].