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3 new steps to get a home loan approved today

·3-min read
Complication image of arial view of houses with hands holding cash and a couple shaking hands with a real estate agent.
Borrowers now need the capacity to meet repayments at three percentage points higher. (Source: Getty)

Home loan costs are heading higher and so, too, is the qualification criteria.

As concern grows for people who may be over-exposed to interest rate rises, regulators and lenders are banding together to tighten lending standards.

So, if your timing is such that you are now mortgage or refinance ready, what can you do?

Read more from Nicole Pedersen-McKinnon:

Here are the three hurdles you now need to clear to get a home loan over the line, and how to tackle them.

Hurdle 1: The stress test

First up, a lender will test your ability to meet repayments if interest rates were 300 basis points higher.

That’s 12 standard rate increases… so a pretty prudent repayment gauge.

Until October last year, the Australian Prudential Regulation Authority (APRA) required only 250 basis points.

You will need enough fat in your finances – in other words capacity to meet larger repayments – at the interest rate for which you are replying plus three percentage points further.

You can jump on any online mortgage repayment calculator to see the extra you would need to find.

Could you manage?

Hurdle 2: The Netflix test

This one talks to your capacity to cover your monthly mortgage minimum, but also your spending habits… plain and simple.

This one was also what all the hoohah was about in the High Court, in The Australian Securities and Investments Commission’s (ASIC’s) case against Westpac.

Dubbed the ‘wagyu and shiraz’ test case, Westpac’s argument that you can cut back once you have a loan – and don’t have to do so before – was upheld.

In any case, lenders have had no official guidance on the requirements so they will still intensively interrogate your expenses.

Yes, all the way down to your streaming services.

The key to getting a tick on this measure is to get really conservative in your spending for the three months before you apply for a loan. This is the length of time a lender will look back (unless they discover something really potentially financially troublesome like a gambling problem, in which case they’ll delve further).

Naturally, what a lender wants to see is that the difference between your monthly income and your monthly outgoings is sufficient to cover the loan repayment amount above.

Or it could easily be, if you cut slightly back.

Which brings us to hurdle three.

Hurdle 3: Your debt-to-income ratio

This is the new requirement which needs to be on your radar because lenders are getting much stricter in response to regulators’ concerns.

You can think of the debt-to-income ratio as the multiple of your earnings that it is safe to borrow.

And while property prices have forged relentlessly higher – they increased at the fastest pace for 30 years during COVID-craziness – this multiple has forged higher too.

In days past (we’re talking 30 or so years ago) four times a household’s income was considered the sensible loan limit.

Today, the loan limit pushes nine times with some institutions.

But not for long.

From early June, many lenders have indicated that they will cut the allowable debt-to-income ratio.

ANZ will only go to 7.5 times and NAB will lower it to eight instead of nine.

Westpac already sends applications with a debt-to-income ratio of seven or more for special assessment and approval.

So it’s time to get out the calculator and crunch the numbers on what loan size you were targeting and whether that is still realistic.

If not, consider waiting.

Any urgency to get on the property ladder, with interest rates now increasing, has probably eased.

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, Twitter and Instagram.

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