Lenders - Likes and Dislikes
Lenders who provide “consumer” credit in Australia have a legal obligation to make sufficient enquiries into a prospective borrower’s financial circumstances to avoid placing that borrower under financial stress both at the time the loan is taken out and into the foreseeable future.
These provisions, which come under the National Consumer Credit Protection Act (NCCP) also extend to mortgage and finance brokers and penalties for non-compliance with the NCCP can be huge.
For this reason, and to avoid unnecessary bad debts lenders (and brokers)
adopt a range of measures to ensure that they remain
compliant while providing high
standards of service.
At times, a lender’s and/or broker’s request for some pieces of information may seem unnecessarily onerous, picky or even invasive. However, when viewed through the lens of ‘legal responsibility’; not to mention customer care, the requests take on a different complexion. They are designed to protect both consumer and credit provider.
Against that background, let’s now look at what it is that lenders look for and some of the things that may place an application at risk of being declined.
What do they like?
This part is quite easy. Lenders are looking for stability and a demonstrable ability (and willingness) to repay the debt. The types of things that satisfy both ability and willingness include:
Stable employment history
This does not mean you can’t change your job but too many changes over a short period can be problematic. Typically, the lender will be looking at a 2 – 3-year history.Incomplete Employment Probation may also become an issue although this differs based on the loan to value ratio (LVR) and between lenders.
Type of employment
Lenders take into consideration the risk factors associated with casual, short-term contract employment and self-employment. If you fall into one of these categories, you’ll likely be asked for some additional information such as tax returns or letters from employers indicating that the employment will be ongoing.
Stable address history
While not necessarily a deal stopper, too many addresses over a 2 – 3-year period can have a negative impact on the application. Your broker should ask for details of reasons behind the changes to try and mitigate any negative impact.
- and your ability to meet your deposit and costs associated with the purchase. Check out our previous article covering acceptable savings here.
Other loans and credit cards
Again, this is covered in detail here but this is also where the “willingness to repay” comes in. They’ll be looking to ensure that you’ve had a good repayment history. This history is generally a good indication of future conduct so make sure you keep all those accounts up to date.
Make sure that you disclose all commitments on your application. You’ll often be asked for your banking statements; especially the account your pay goes into. Any regular payments not disclosed in the application will likely show up here. You’ll also be asked for a break-down of your living expenses.
This is a calculation taking into consideration all your living expenses, other loan payments, credit card payments (based on total limit) and other commitments against your available income. The amount left over will need to meet the repayments on the proposed loan at an inflated interest rate (this can be 3 – 4% more than the rate being quoted for your intended loan). This ‘stressed’ repayment differs between lenders.
What they don’t like
Really, this is anything that may reflect negatively on your application and is largely the opposite of the above. The list below is not exhaustive but gives a fair idea of what to avoid.
Failing to disclose existing commitments usually gets found out and looks like you are trying to fool the lender into approving more than they otherwise would. Avoid the temptation to do this.
Poor credit performance
Credit bureau reports showing any adverse history including judgements, bankruptcies etc. can be an indication of future performance. If you have had any of these, talk openly to your broker. We understand some of the reasons for these issues and may still be able to work with specialist lenders who specialise in this type of lending.
Make sure that your application is within your means to support after allowing for interest rate increases
Poor employment history or unexplained gaps in employment
Stability of employment is important in assessing your ability to repay your current and proposed commitments. Again, talk openly to your broker who can often come up with positive solutions.
Adverse credit or employment history does not necessarily mean you can’t get a loan. There are several lenders who recognise that life doesn’t always go
to plan and that unforeseen events can disrupt your
repayment and employment history.
We can help navigate this area of lending and often come up with a solution.
Finally, lenders and brokers will also ask you if you are aware of any circumstances that may impact on your ability to repayment the loan. Factors to consider here, amongst others, are employment contracts coming to an end, pregnancy (one less income and one more dependant). If yes, you’ll also be asked how you plan to meet repayments during that period. For example, there may be paid maternity leave that is sufficient to maintain serviceability.
If you would like help to start planning for your home loan application register here and we’ll come to you and start getting you set-up.
To book an appointment, find out more information, or to receive a FREE copy of our First Home Buyers’ Guide, please register your interest below.