by Serina Bird
You’ve scraped together a deposit. You’ve found a house – and your offer has been accepted. You are all set to go.
Or are you?
Increasingly, Australians are finding that their online digital spending habits are making it harder to get a home loan.
Interest rates are at record lows, but that doesn’t mean that loaning hundreds of thousands of dollars on residential property is risk free for financial institutions. In fact, after the banking royal commission, many financial institutions have become especially risk adverse, in part because they are subject to increasingly stringent leading requirements. Globally, economic uncertainty also signals risks to the financial sector. And that means that many institutions are looking more carefully at loan applications. They want to ensure that they are lending responsibly, and that means they want to make sure you have the capacity to pay back the loan.
What a mortgage application process is like
We went through a refinance process that began around six months ago. I have an excellent credit rating, my husband and I had solid public service jobs, we were significantly ahead on our mortgage payments and had a strong record of savings. I also provided a detailed budget and spreadsheet data that pointed out where our income and expenses were going. Oh, and I am also a frugalista so our expenses are quite low.
This is not my first refinance and I’m familiar with the process of applying for a loan. I know the importance of providing accurate and up to date information about my income – and expenses – and I was well prepared. I knew that it’s not so much how much money we had, but the need to demonstrate our capacity and commitment to repay.
With all of this, I was surprised at the rigour of the loan assessment process. Although I included significant data, I had to provide further bank statements and corroborating evidence. On top of that, I had to explain certain areas of expenditure. In short, the loan assessors really drilled down into the data and examined all aspects of our spending. We were put under the microscope, and I felt it was touch and go as to whether they would approve our loan or not.
Digital spending is lit up in bright lights on your banking statements
We aren’t quite dinosaurs, but we haven’t embraced the digital spending revolution the way that younger generations have largely because of our frugal natures. I’ve never ordered Uber Eats (or equivalents), we use Uber (or more often Ola) only occasionally, we don’t use Afterpay and we only use Netflix because we run an AirBnB. Accordingly, our spending is low tech and more cash based than the average Australian spender.
Unlike cash payments, digital spending cannot be fudged. They are recorded on bank, credit card or other statements. They are bold in bright lights, screaming “I spent money on a want rather than a need.” Moves towards open banking, which will make it easier for consumers to switch financial institutions, will also make digital spending more obvious.
How to prepare a winning home loan application
When people ask me how to save for a home deposit, one of the key things I advise them to do is to limit their spending on things like Uber Eats, streaming services and Afterpay services. It’s not that using these things is wrong. It’s just that a loan assessor wants to see that you are being prudent with your money. They want to see that you were serious and committed to saving for a deposit, and they want to know that you will have no problems paying your mortgage. The more that you can do to demonstrate this – including presenting a budget and sticking to it – the stronger your chances of not only qualifying for a mortgage, but being approved by a top tier institution that can offer you a lower interest rate.
Summerland Credit Union has a range of home and investment loan products. Why don’t you apply online or call into a branch to discuss today?
