Understand how lenders assess home loan applications

5 min read | 7 Dec 2020

If you’re looking to refinance your loan, you may find yourself in the same boat, despite paying down a home loan already, and showing you can meet the payments for a mortgage.

If you have been looking for property for more than a year, and haven’t sorted your finances yet, you might be surprised to find you can’t borrow as much as you thought you could 12 months ago, as lenders double down and become more cautious and risk-averse about debt and your ability to service a loan.

Tightened affordability rules are leaving borrowers looking to refinance, in debt handcuffs – unable to escape their less than ideal mortgage, because of the very real concern they may not be eligible for an alternative.

Financial fitness is vital – and just like a gym, it’s not about whether you are the biggest and best, but more about being the best you can be.

‘Tightened lending criteria’ is a term being bandied about and also partially blamed for plummeting real estate prices and the slow-down of the housing market.

But rest assured, there are steps you can take to improve your chances of getting a loan. Once you understand the changes to lenders’ assessment processes, you will be in a stronger position to have all the relevant info ready when you apply.

Changes have been made to assessing your ‘debt to income’ (DTI) ratio, which is bank-speak for how much of your income you use to pay existing debt repayments. It is a simple calculation dividing your monthly debt obligations by your gross monthly income, and multiply that number times 100, to get the percentage. In a perfect world, that number will be close to zero, but life isn’t perfect, so aim to have it as low you can. Less than 30% has been recognised by some as desirable. To get that figure down, pay off or reduce credit card limits and personal loans, or better still get rid them altogether to make your DTI look really sexy. It can be a real eye opener when you look across all your debts and the associated limits.

• What should you do? Take a knife to them and reduce any limits that you just don’t need.

Lenders will also look at your living expenses.  This used to be a simple tick-a-box exercise where lenders would take the lowest household expenditure measure (HEM) and not ask too many questions. Now lenders need to understand expenses, identify your basic and your discretionary spending, and even validate the expenses through customers’ statements. In other words, lenders know precisely how much smashed avo on toast you eat!

They can see every tap and go payment you make. They will go through all your bank statements for up to six months.

• What should you do? Think twice before you buy.

Lenders also look at things such as debt buffering (nothing to do with internet download speeds). They run various calculations at higher interest rates to see if you can service the loan if rates went up.

Quite sensible really, when you consider Keating’s “recession we had to have” when interest rates skyrocketed to an eye-watering 17.5% in the 1990s. It seems completely unlikely we will see those crippling highs again, and thank goodness lenders don’t do the calculations to that ridiculous level now, but it is useful to run a few ballpark numbers yourself to check out affordability.

• What should you do? Run a few ballpark numbers yourself to check out affordability.

Another fabulous finance term to describe non-secure income assessment is ‘income shading’, which is how lenders assess extra money like bonuses or commissions. They look at how likely it is you will receive that income and the full value of that isn’t counted in your overall income assessment.

• What should you do? Make sure your income looks ok without your bonus included. That may mean reducing your DTI, and your discretionary spending so you have more available to service your mortgage.

The long and the short of it is that lenders are now scrutinising every last cent, which is making it increasingly difficult to get a loan to the level you require if you aren’t ready for the scrutiny.  The increased focus on every single detail is slowing down the whole application process. While frustrating, it is comforting (sort of)  to know that lenders are thorough when it comes to loan approval.

And while Athena is not a bank, we still need to take care to assess everything thoroughly too. The best thing you can do before applying to refinance, and before any lender runs a fine-toothed comb through your finances, is to brush out any knots first.

Because Athena is not a bank, we can do things a bit differently though, and we offer a completely online platform to assess your loan application. We like to think it is more a streamlined process, even though there’s more hoops to jump through these days.

And if you are concerned or worried about the online process, or even just prefer a human touch, our home loan experts are available seven days a week.