You may have heard the news about the new rules for borrowing… because hard as it is to imagine, they are about to get stricter still.
But all is not lost.
If through hard slog, scrimping and saving, you are finally ready to apply for a mortgage, these are the three things you must do to get your loan across the line.
Mortgage move 1: Get super frugal in the three months before you apply
As the name I’ve given it implies, the Netflix test aims to capture your every expense and indulgence.
Applicants are required to supply bank statements for the three months before they apply, and every single line will be scrutinised by a lender (and when open banking comes in February next year, they’ll simply be able to look your statement up).
Your shopping habits. Restaurant penchant. Drinks predilection. Holiday expenditure. And yes, streaming services and delivery frequency.
The new spending probe will assess every bit of your spending and from this, determine whether what’s left is sufficient to service a loan of the size you want.
Don’t miss that the fact this is a three-month expense assessment represents a big danger for anyone who wants to apply for a mortgage in the New Year… on applications made any time before April.
Seasonally inflated expenses will be caught by the test and could count you out. So be Grinch-like this Christmas if you don’t want to be rejected and dejected.
Mortgage move 2: Prepare to be sized up… and dressed down
I believe this is the most invasive element of the new approach: lenders are now at liberty to pass a value judgement on your lifestyle and ‘decide’ what about it means you can’t afford repayments.
You could be refused a loan unless you cut out streaming services (bad news for the likes of Netflix, Stan, Foxtel Now and Disney).
Or cut down your food deliveries (sorry UberEats, Deliveroo and the rest).
But dollar decrees can go way further than this. There’s an example in the guidelines of “Sarah”, who applies for a shorter-than-average 20-year home loan.
“The licensee identifies that Sarah could afford the loan if she moves her children to a public school. When asked, Sarah indicates that a change to her children’s school is not a lifestyle change she is prepared to make,” it says.
The example concludes with “Sarah” deciding to take the loan over a longer 25 years, a move that it must be noted would cost her more interest overall, so she can lower monthly repayments to an amount she can afford along with school fees.
Indeed, as ASIC admits: “There may be some lifestyle changes the consumer would not be prepared to make to afford credit.”
Along with private schooling, the regulator makes special note of extra superannuation contributions, and memberships and subscriptions… and also “Leah”, who’s looking for a small amount credit contract. She agrees straightaway to “cancel her monthly streaming services, which would cover the monthly repayment amount on the proposed loan”.
Then apparently this is now allowed: “The lender requested an email from the subscription service confirming cancellation of the account.”
Other “variable” expenses ASIC lists include entertainment, pay TV, sports activities, telephone and internet costs outside a plan schedule, and gambling accounts.
Maybe consider first how far you’re willing to go to get approved. But there’s one thing you should do immediately.,,
Mortgage move 3: Ditch buy-now-pay-later facilities now
Any capacity to spend beyond your means will reflect badly on you.
And why do you need these services in the first place when, by the fact you have diligently saved a deposit, proves you are a responsible money manager?
The thing is that you’d get back in a heartbeat any buy-now-pay-later accounts you closed.
This same is not true of your credit card limit though, and a lender will factor in repayments sufficient to clear even an unused limit in three years.
So you may also need to reduce your limit to be able to borrow what you want. But be aware that reduction could – especially once you have a mortgage – become permanent.
The only other things you need to know:
ASIC's full update of so-called responsible lending guidance – if you fancy a detailed read – is here.
But the short version is:
It’s no longer OK for banks to use “conservative” benchmarks for your budget, to ‘guestimate’ what may be left for a home loan repayment – they need to use “actual expenses”.
And remember the ‘wagyu and shiraz’ court case brought by Westpac? In that, the judge ruled against ASIC, suggesting historical expenses aren’t relevant because borrowers could curtail their costs after they get loans. No matter: ASIC still wants you to supply evidence before you are approved… and is likely to further update the guidelines after the Federal Court hears the appeal in late February.
With comprehensive credit reporting now fully fledged in Australia, the guidelines also confirm: “The consumer’s credit history and whether, by and large, a consumer has demonstrated a pattern of meeting like or other financial obligations would, no doubt, also be relevant.” Yours needs to be squeaky clean.
Finally, 39 detailed examples show lenders how to act on different applications. Happily, if you’re self-employed or a gigger, you may now find your situation viewed more favourably; ASIC says your income should be taken as the “average amount earned per fortnight over a period of several months”. Older applicants could also stand greater chance of success. And if you’re looking to refinance, so already meeting probably-more-expensive loan repayments, you may no longer need to endure the expense itemising process at all.
In any case, what’s vital now is that you prep before you apply for a home loan. If you’ve any chance of getting approved.
Nicole Pedersen-McKinnon is the author of How to get mortgage-free like me, which includes safety tips for first homebuyers and is available at www.nicolessmartmoney.com. Follow Nicole on Facebook, Twitter, LinkedIn, YouTube and Instagram.
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