Predicting The Future of Home Loan Applications
It is likely that the lending criteria for loans will be tightened after an event like COVID-19 and the economic impact this has had on New Zealand. The banks will be more risk-averse.
My predictions are that they will focus on two things:
1) The client’s income going forward (not necessarily historic data).
2) That the client’s declared living and spending costs matches what is on their bank statements
1 | Income
Many jobs and industries will not be affected by COVID-19 and incomes will continue as normal, for example, Teachers, Police and hospital staff. Their applications, for the most part, will be straightforward. However, for most others, the lenders will seek some form of commentary within your loan application about the impact (if any) of COVID-19 on your job and if there are any concerns with your income going forward.
For anyone working for an employer, an email from you covering the above and perhaps supported by a letter from the employer will be valuable. For anyone that is self-employed, the bank will likely require the last 2 years financial accounts (as is normally required) along with a 12-month forecast prepared by your accountant.
The forecasts would be supported by comments by the accountant as to how they are justified, so having reliable contracts and work booked in going forward is valuable.
Post-COVID, the banks will continue to focus on lending under responsible lending guidelines, and they will be looking closely to make sure their decisions on who gets a home loan is a correct one. The banks need to be confident and understand the impacts of COVID-19 on the borrower’s employment or income.
2 | Spending Behaviour
The other area that the banks will be focusing on is your daily spending and making sure that your declared expenses on your application match with what your actual behaviour is through bank statements (i.e. the actual evidence of what you spend your money on).
Over the last two weeks, I have been sharing advice on revisiting your expenses while we are spending far less during lockdown. By engaging an active spreadsheet that you or your household are updating monthly, you will get a clear oversight on this.
It will also help you identify expenses you were spending pre-lockdown and what probably does not need to be spent going forward.
Recently, I had a client declare they spent $600 a month on food and drinks. When the bank statements were reviewed, it was closer to $2,000 a month and that meant that the loan was not approved.
Now is the time to review your spending and saving habits. What overheads and expenses do you have that could be reduced? Can you continue to minimize any additional non-required spending (like you have while you have been in lockdown) to assist you in being able to meet your home loan payments easier, or to help build a larger home loan deposit?
The banks will be looking closely at affordability and ongoing reliability of income, so keep this in mind post-COVID.
A Mortgage Adviser’s job is to ensure this is clear, simplified and a plan is put in place for when we do approach the banks. It is this service that helps many Kiwis get the right loan for their situation. So, reach out if this is of value.
In the third and last part of this mini-series, I go into the above advice in more detail and how you can utilize COVID-19 and the lockdown as a chance to budget and get on top of your finances.