Strict regulation means lenders must take a number of steps to ensure they lend responsibly. Heidi Armstrong from State Custodians outlines the following:
Borrower identification- Lenders first and foremost need to guard against identity theft. Most lenders shift this onus of responsibility onto the broker who meets with the client face to face.
Credit application history and impairment- Lenders will conduct credit checks on all borrowers and guarantors to confirm identity information, credit application history, existence of defaults, judgments, or bankruptcies; as well as directorships and proprietorships. Any unpaid defaults are generally a no-go zone for mainstream lenders regardless of how compelling the story is as to why the default has been listed.
Undisclosed debts- Lenders will also use a credit check as a means of scrutinising the possibility of undisclosed debts. While lenders rely on borrowers to confirm the status of any past credit applications, the lender may seek confirmation directly with each credit provider noted on the person’s credit file. If undisclosed debts are uncovered, the lender may decline the loan application regardless of whether the applicant could service the loan or not. Non-disclosure of debts (even as an oversight) is not looked on favourably by lenders.
Employment verification- This now goes beyond simply accepting hard copy material such as payslips and group certificates. Many lenders now choose to verify income documentation by telephoning employers, using an independent source such as the white pages to confirm the phone number. As a borrower’s income is such a key factor in determining the capacity to repay a loan and the potential for hardship, lenders will scrutinise the length and type of employment as well as the quality of the information source.
Affordability- Each lender has their own interpretation of affordability and this is built into their serviceability calculators. General serviceability-style calculators are available on the web, however because each lender can have different rules around the treatment of income and debts, these calculators can only be used as a guide. Below are just a few common examples of how different rules may apply between lenders:
Bonus or commission income- This may be accepted by some lenders provided there is evidence of consistency over an acceptable period of time. In contrast, other lenders won’t factor in this income at all
Different treatment of existing investment debt - Some lenders may choose to assess your liability conservatively and assume that you make P&I repayments even if you actually make IO repayments. Alternatively, some lenders may apply a higher benchmark interest rate to existing debt, effectively reducing your disposable income to service any new debt you choose to take on
Family tax income- Whilst generally accepted by most lenders, some may choose to ignore this income altogether if the children are over a certain age. This is because the lender is concerned that this income is likely to stop in the near future.
Self-employed rules- Self-employed home loan applicants will find that lenders vary in their treatment of net profit and what they consider to be acceptable add-backs. Conservative lenders will use either an average of the last two years or the lowest of either year; yet other lenders may be prepared to simply use whatever income is shown in the most recent year – regardless of whether this represents a significant increase over previous years
Negative gearing – This allows for a reduction in tax payable, however not all lenders will factor this into their serviceability calculations
Maintenance income- Some lenders allow maintenance provided it is court ordered. Others will use the income if it can be demonstrated as ongoing and consistent, but some lenders won’t use this income stream at all.
Parental Leave income – Lenders may factor this in provided it covers the full period of leave. In contrast, some lenders will only consider 50% of this income.
The above demonstrates how one lender’s policy can differ significantly to another.
“The effect is that the same applicant with the same situation may have a far greater borrowing capacity with one lender over another,” says Armstrong. “It therefore pays to get the right advice from either a quality broker or from a lender that understands not just its own lending policy, but how it stacks up against others in the market.”
By being a good, honest borrower, you will greatly enhance your chance of getting a loan.
“Disclose everything and anything, otherwise the cost will be too high: your loan will be declined,” Armstrong says.
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