Could payWave ruin your home ownership dreams?
Times have changed when it comes to applying for a loan. It’s tough to secure a mortgage and there are a lot of changes going on with the legal bodies that keep a close watch over the finance and banking industry including the revision of the Financial advisers Act in New Zealand and the Royal Commission in Australia. Kiwi’s are reporting that it’s taking months to get approval and that they don’t even know what is required for a successful application anymore.
So what is going on, and what are the top tips to help you navigate the tightened lending criteria and apply for a home loan in 2019?
1. payWave under the microscope
We are seeing much closer scrutiny of home loan applications. It has been going on for a while now and lenders became extremely cautious when it came to assessing applications.
We are seeing lenders decline loans, where they used to be approved, and even scrutinising borrowers’ spending habits to such a degree, they are declining loans based on lifestyle assumptions - like how many times you order takeaway.
Where lenders used to assess a borrower’s capacity to meet a mortgage based on a general household income equation, they are now looking at up to 6 months' worth of bank, transaction and credit card statements, including every single ‘tap and go’ purchase you make. It is a near forensic examination of your spending habits.
Our tip is to change your borrowing mindset. We find that the mindset of a home loan owner is a lot different from someone who is yet to have debt. For instance, a couple who have a home loan might only get UberEats fortnightly compared to a couple without a mortgage who might order-in every other night.
We suggest you start living like you have a home loan now, to reduce the likelihood of the banks scrutinising your spending. What would you give up once you secured a loan?
2. What’s your credit rating?
While lenders have always looked at your credit score, since July 2018, the information they access is far more detailed. They now check what type of credit accounts you have, your credit limit and whether you have been paying loans back on time.
Did you know a $10,000 credit card limit can cost you up to 50K on your borrowing power for a home loan application?
It can be helpful to check your credit rating first, especially where you may have made late payments, or where your rating has slipped, and you need to understand why. In some cases, it might be in error, so you can try to amend or have a note put in your file.
3. Approval time blow-outs
For all these reasons it is taking banks longer to approve loans, much longer. In many cases, gone are the days of 24-hour loan approvals.
It is especially important to have all your documents in order to make the process faster for the banks, but I would also suggest having finance in order and approved before making an offer on a property. I can help you navigate these complexities.
4. Lower borrowing capacity
Increased bank scrutiny and tightened regulations have all contributed to lenders being much more cautious about how much you can borrow, which may mean you can’t borrow as much as you could a year ago.
If you don’t have your finances approved before you start looking for a property, it is worth speaking with a mortgage adviser to get an understanding of the figure you may be eligible for. Your adviser can tell you if you are way out of your depth and put plans in place to help you reach your goals.
If you plan to apply for the upper end of your borrowing capacity, it is essential you have your finances in order and are working with your mortgage adviser to get your pre-approval sorted prior to putting an offer down.
5. What’s your exit strategy?
Lenders are looking more closely at a borrower’s exit strategy, which outlines how a client can continue to pay their home loan once they reach retirement age, without incurring hardship. This used to only happen when an applicant was over 50 but is now required when applicants are 37 or over.
Depending on your age group we will have a conversation about what this means for the life of your loan and work with you to put an exit strategy in place.
6. Interest-only limits
In 2017, NZ banks and lenders were requested by the Reserve Bank to review their interest only terms. Most lenders now allow a maximum of 2 years interest only on your owner occupied home (subject to conditions) and 5 years on your investments loans. This is so Kiwi’s can build more equity in their properties to protect against large market movements like we saw in 2008 when the Global Financial Crisis hit.
Restrictions were also placed on the deposit size or equity you needed to get an investment property loan. This initially was set at 40% deposit but has since been dropped to 30%.
Luckily Loan Market mortgage advisers have access to a panel of over 20 banks and lenders and will be familiar with which ones are more open to interest-only loans and will be able to advocate on your behalf if that is what you are after and if the strategy suits your needs.
They also have access to non-bank lenders who have a different set of rules to the Registered Banks in New Zealand so their in a better position to approve loans with a lower deposit.