Could your daily coffee fix be stopping you owning your own home?
The game has changed: Six items banks are keeping a closer eye on when assessing your loan application.
Despite record low interest rates, and the recent loosening of some borrowing regulations, it’s actually becoming harder to secure a loan. Why? Because major lenders are more closely scrutinising how people spend their money. But what exactly are they looking at and what are they looking for? Which questions should you prepare to answer. Is it true that a daily coffee fix could be blocking your loan approval? And is the time your application spends in administration going to cost you a loan approval before auction day?
Not so long ago, lenders were more accepting of borrowers providing a “guesstimate” for living expenses on loan applications. You’d be asked questions like, “How much do you spend on eating out each week?”, “Do you have personal loans or hire purchase repayments to make?”, “How much are your bills each month for internet, electricity, mobile…”.
Lenders would usually take your response at face value and often approve or decline loans on those estimated figures. Those days are long gone, regulators want lenders to have a higher level of scrutiny and improvements in technology have made reviewing income/expenditure statements more efficient . Worried? Perhaps you should be! Bank statements going back three months or longer are being requested. What do yours say about you?
Even the best examples of frugality can be fruitless in some instances with most lenders having a ‘minimum living standard threshold’, which they will apply based on a number of factors, including number of kids, cars and adults being supported in the household. So even if your statements show lower levels of spending they will use their minimum threshold amount, if they show higher levels of spending they will use the actual amount.
It’s not only the home buyers but also investors, those refinancing, those moving between fixed and variable rates, shifting from principal and interest to interest only (or vice versa) being affected. Wherever there’s a “material change” to your financial circumstances, you’ll be likely to exposed these stricter lending practices.
This detailed approach, especially the minimum level a lender will accept for your living expenses is surprising a lot of borrowers, and not in a good way!
So what can you do to be prepared for that level of investigation of your finances?
Here’s a few tips:
- Know your actual income: guessing what you’re earning or rounding it up to make your income appear higher so that you can borrow more won’t fly. True earnings must be evidenced for loan approvals and each lender has a default rate so it's best to be realistic, provide the right evidence, correct explanations for variance which either have or might occur and why, for example a one off vet bill, relocation costs etc. This certainly is more arduous and administrative, so start getting across those figures now, particularly if you have more than once source of income, or if income is sporadic. If you are self employed your past years completed financials are a good starting point and budget for the coming year won’t go stray either particularly if you have contracts to support your budget assumption and can show you are tracking on target year to date.
- Evaluate the cost of everyday: if you’ve ever had a loan before, you’ll be familiar with the past laxity of the “how much do you spend per month on food, electricity, entertainment…” question. Now, they’ll seek evidence. The regulator expects lenders to verify a borrower’s living costs these days via bank accounts and card statements etc. This will shock many borrowers who enjoy a frivolous lifestyle (no judgement, go you), but banks will question line items that you haven’t declared… even if they’re smaller amounts. Explaining your frequent cafe visits when the bank asks “what’s this recurring expense?” and could be awkward when you realise how quickly a few coffees a day adds up.
- How fit are your finances: if you’re paying a monthly, fortnightly, or weekly subscription to a gym or health center, declare these early. Banks are frequently calling items such as this as regularly not identified by borrowers as living expenses.
- Unfashionable fixtures: look back through three months of expenses and truly determine how much you spend on clothes and eating out - the more upfront you are about these numbers, the quicker your loan approval will be. Even better, if these figures amount to a significant proportion of your disposable income, perhaps spend the next two to three months curbing them dramatically to make your application more attractive.
- Put the brakes on: borrowers frequently overlook or forget regular expenses associated with travel, whether it’s buses, cabs, Ubers or parking. Review your bank statements and consolidate these figures for your application, rather than having the lender point out your oversight of a noteworthy expense.
- Time is money: Get mortgage-ready early. Loans can get bogged down in back-and-forths over bank statements, self employed income and incongruous expenses. So sit with a mortgage adviser well before you need the loan, with all of your financial fixtures, and begin the process early. Otherwise you might find yourself as an observer rather than a bidder at the auction of your dream home.
If you’d like more information on any of the above, or think that now might be the time to start preparing your finances for a pre-approval, don’t hesitate to get in touch to discuss your options.