The government has recently brought in new CCCFA regulations which are causing quite a stir in the property and debt markets.
Updated CCCFA regulations are now in place to protect vulnerable borrowers and promote responsible lending. It places obligations on lenders to analyse your financial position in rigorous detail to prove you can afford a loan.
Combine this with fewer low deposit loans, rising interest rates, and looming debt to income ratios, it’s now harder than ever to get an approval and more important than ever to know how to get ‘bank fit’.
Presenting yourself to the bank
Getting ‘bank fit’ means getting into the best position to be successful with a loan application for the bank. A major part of this is getting your bank accounts (spending habits) in order. We recommend speaking with a mortgage adviser early so you can be best prepared when it comes time to present yourself to the bank. Banks require the review of 90 days worth of bank statements when making an application, so if you want to increase your borrowing capacity to land that dream home, it might be worth making some sacrifices in the lead up to your application.
Make sure you’ve got a regular savings plan and in an ideal world, set up a bank account so that your savings (+rent) equate to your probable mortgage repayments. This will not only show the bank you can afford the loan, but it’ll also show you what life will be like post settlement.
Banks are now going through your bank statements line by line. They have invested in new software to pick up any regular payments and count them as a fixed expense rather than discretionary spending. Any Netflix, Gym or Herald Premium subscriptions will be counted as fixed commitments and will reduce your borrowing capacity.
In the past, you could go to the bank and say, “I promise to be more careful with my money once I have a mortgage.” Nowadays, the bank will say, “what have you spent during the last three months? This is what we are going to assume you will keep spending”. Anecdotally, I have heard recently of a client who couldn’t gain approval because the bank wouldn’t accept that he would stop buying two flat whites everyday once he got his mortgage. It’s silly, it’s a one size fits all model but it’s the way it is.
If you’re looking to secure a mortgage in Q1 2022, then it will be worth being very careful with your spending over the holiday period. It will be hard for the bank to differentiate between what is one-off Christmas spending and what is part of your normal budget.
If you’re buying a present for someone whilst doing your weekly shop, then ideally you should purchase that separately so you can show the bank that it was a one off and not part of your regular expenses.
Get rid of unnecessary debt
Beware of having things like Afterpay, hire purchase agreements, bank overdrafts and other consumer debt. These can seem innocuous but will hinder your application if the bank classes them as debt commitments when assessing your serviceability.
Having more credit cards than you need will also play a big factor on your borrowing capacity. Credit cards require you to pay a minimum of 3% of the balance off each month. Even if you pay off your credit card every month, the banks will assume worst case scenario and assess your serviceability based on 3% of the total limit. Having two credit cards with limits of $10,000 each will equate to 3% of $20,000 and therefore, a $600 monthly commitment. With bank test rates rising, a $600 monthly commitment could reduce your borrowing capacity by over $100,000.
There are other options out there
If all of this seems a bit doom and gloom, then there are other options to consider. Non-bank lenders don’t face the same restrictions as banks, and can be priced competitively.
It will be interesting to see how these lenders fill the gap for borrowers that are now getting declined. Self-employed, older borrowers and first home buyers will suffer the most, and may need to look elsewhere. Interest rates at non-bank lenders like Resimac and Pepper tend to be about 1% higher than the main banks, so will be worth it for a lot of consumers, but will no doubt cost them in the long run. Want to assess your options? We’d be happy to help- get in touch anytime.
How long will this last?
This is the beginning of a credit crunch. It’s a man-made credit crunch as lenders are not being forced into tightening restrictions due to a high number of defaults or constraints on liquidity, but rather from instruction from the Reserve Bank. If the changes have too drastic an effect on the housing market, then restrictions can always be eased down the track.
Think ahead
If there’s one lesson to take from this, it is the need for preparation. Rocking up to the bank expecting an approval is now extremely difficult. Get in contact with a broker early, they will assess your financial position and give you an indication of where your current borrowing capacity lies, and what you can do to increase it. Then you can start shopping around for properties with a solid indication of where your price point is. Ready to have a chat? Get in touch with us here.
Look out for my next blog where I will talk about how these changes will affect people buying off the plans and the ripple effect it will have on developers.
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