Our world is changing at a rapid rate and as part of those changes, banks are changing their lending policies to keep up. Before recent world events, it was kept fairly simple, with the “The 5 C’s of credit”.
- CAPACITY – Does the applicant have the ability to repay the loan
- CAPITAL – Assets you own, and how much capital do you have wrapped up in those assets (also known as your equity position)
- CONDITIONS – What terms are you requesting with the loan e.g. how long is the loan, what features have you asked for, what are you buying, how much is it worth etc.
- CHARACTER – Does the applicant have good credit history. Have they defaulted on loans in the past or been bankrupt.
- COLLATERAL – What is the borrower offering as collateral to secure the loan e.g. property, vehicles etc.
Given recent domestic and global events such as the global financial crisis, the banking royal commission and COVID-19, regulators have implemented stronger measures to help strengthen the economy and consumer’s protection.
We deal with around 45 banks, every day I would receive no less than 3 emails advising that a bank has had a policy change. It would literally take a week or so think of all of the things you might be tripped up by, but in no particular order, here’s a few of the most common things you need to consider when applying for any type of loan:
- How much can I afford to repay each week – Every bank has their own calculator which determines how much they’re prepared to lend you. Regardless of how much you can borrow, compared to things like the current rent you’re paying, are the new repayments actually affordable for you?
- What does my credit history look like – You may have defaulted on a loan previously, or missed repayments. This doesn’t mean that you won’t qualify for a loan. It does mean that you may not qualify for the sharpest deal in the market, but you may still qualify. You’re best bet is being open and honest about these events. I often say to my clients, I can find a solution, but I need full disclosure about what happened and why.
- Deposit – Banks prefer that you save your own deposit, but it’s not mandatory. Particular banks will allow you to use gifts from family members, inheritance, cash bonuses from work etc. This does take a little more planning, so make sure you contact us a little further in advance so that we can set you on the right path for success.
- Property you’re buying – A bank’s primary consideration is “how much risk are we exposed to”. That includes your own personal circumstances, but also the property you’re buying. Some of the things that will devalue a property in a bank’s view are, Is the property near large power lines, a cemetery or busy road? What condition is the property in? Is the property in a remote area? Connected to mains power and town water?
- Employment – For PAYG applicants, banks are looking at things like, how long have you been in the same job, what is your employment basis e.g. fulltime, part-time or casual, your income, consistency of your income, are you still on probation (we can work around this also).
For self-employed, banks dig a little deeper and want to see a minimum of 2-years of financials. Don’t panic! EVERY self-employed person I have ever spoken to has their accountant “minimize” their income so they can reduce their tax bill, there are still options available for you too!
- Future Plans – Whilst I don’t always consider this to be their business, you will still be required to demonstrate that you’re currently financially stable meeting all of your commitments, you have thought ahead and have a plan for a debt free future, and most importantly, that you have a plan to pay out this loan before you retire.
- Exit Strategy – This one has been a major focus since the royal commission. An exit strategy is your ability to demonstrate, how you intend to payout this loan by the age of retirement. Whilst it sounds complex, it’s actually quite simple. Bank’s don’t like to see you using Superannuation as an exit strategy, because those funds should be reserved for living expenses during retirement. But you can use things such as selling assets, selling the current property and downsizing for retirement, sale of a business/company.
- Tax Debts – We see a lot of self-employed people getting themselves behind on paying their tax debts, and this is a big no no for banks. Not to say that it can’t be overcome, but in a bank’s view, a tax debt only comes about due to poor planning by the business owner.
- Statements – Most banks these days will want to see a statement for your everyday account, where your pay is banked, and where all of your bills are paid from. They’re seeking to verify how much it costs you to live each week. This will be broken down into categories such as food, transport, insurances, discretionary spending, communications, Schooling expenses, gambling, utilities etc. Depending on the bank, you may also be required to provide statements for any current debts you have.
- Dependants and Child Support Payments – A dependant is someone who is under the age of 18, and that you are considered legally responsible for. For children in your care, you can expect this will add around an extra $300 per month to you living expenses. For children not in your care, this is currently treated a little unfairly. You currently have to include children as dependants, but you will also have to disclose how much you pay an ex-partner for child support, and that also is factored into your standard living expenses.
- Property Ownership (who’s on title) – If you’re seeking to apply for a mortgage, you need to have what’s known as a “financial interest” in that transaction. A financial interest means that you are receiving a financial benefit from being an applicant on the mortgage e.g. you and your life partner want to buy a property, but you only want your partner’s name on the title of ownership because you work as a doctor and are concerned you may be sued in the future. You are still receiving a financial benefit being on the mortgage, because it is your family home and you are legally married. People on title don’t have to be on the mortgage and vice versa.
- Missed payments and defaults – This is a subject for a whole other blog, see website to find it 😉 There is a general rule of thumb, that if you have missed a repayment, but made it up within 7-days of their due date, it will be overlooked, accidents happen. If it’s anything more than that, here’s the short of it:
NOTE: You’ll know if a company/bank/individual has listed a default against you. There is a strict paperwork process that has to be followed in order to list a default on your file. In some cases, they might not pursue this for years.
- The bigger the debt you defaulted on, the less attractive, higher the interest
- The more recent the default is, is less attractive, the higher the interest
- If the debt is not paid, it will need to be paid, the higher the interest
- The higher the percentage you borrow, the higher the interest
Often it comes down to a question of, in some cases, we’re able to find a solution for you, but are you prepared to pay the interest rate? For someone with clean credit, in the current environment a record low rate somewhere around 2.60%. Someone who has defaulted big time within the last 5-years or gone bankrupt, can expect an interest rate somewhere between 8.00%-10.99% p.a.