Tens of thousands of dollars have been cut from home loan lending by major banks. This move, say the lenders, reflects tougher lending standards as Australian property prices fall and ensures that they minimalize their risk.
According to data, lenders have slashed around $80,000 of borrowing power from a couple with a combined income of $120,000. Whereas 12-months ago this couple could have borrowed far more for an investment.
Tighter lending policy is not only affecting investors, but it’s also having an impact on owner-occupiers. The same couple who are earning a combined income of $120,000 have had $65,000 slashed from their borrowing power, compared to 12-months ago.
This sharp decline in customer borrowing power’ depicts just how much lenders have tightened-up their standards since new regulations to lower lender risk were enforced. The impact of tighter regulations has been witnessed across Australia as property prices plummet and the market has slowed considerably. Auction rates in Sydney and Melbourne have dropped to their lowest in 3-years.
CoreLogic RPData estimates that Sydney market prices have fallen by 1.2% during December. Nationally, however, prices have not fallen since 2012. Growth rates, nationwide, have slowed to 7.8% in 2015, down from 8.5% in 2014.
Major lenders say that the reduction in borrowing power is mainly attributed to the fact that lenders now test borrower’s financial coping skills at higher interest rates. This is despite interest rates falling in 2015.
In order for borrowers to qualify for high borrowing amounts, they’ll need to be able to service a 7.5 to 8% interest rate. This then gives a lender assurance that a borrower can cope with their home loan long-term.
In addition, lenders have increased the amount that borrowers need to live on. Some lenders are also looking critically at borrowers spending patterns and financial circumstances in greater detail to determine their level of risk.
In a recent test of borrowing power, by a mortgage brokerage, a single borrower with an annual income of $60,000, and a $5,000 credit card limit was able to borrow approximately $277,000 from the strictest lender and up to $372,000 from a more lenient lender. This, says the brokerage, depicts the range that lenders can interpret borrowing power over. Therefore, it does pay to shop around. Just because one lender says you cannot borrow x’ amount, another may accept this.
Plus, if you’re keen to buy a property worth more than a lender is willing to give you, there are ways to increase your borrowing power. Let’s look at these now:
1. Consolidate debt If you have many loans and outstanding bills to pay, then it’s time to reduce these. You can do this by either paying more off these debts, so you can pay them off faster, or by refinancing and including these debts in your existing mortgage.
2. Reduce your credit card limits – If you have credit cards with high limits reduce these to just $2,000. You can always increase your limits after you’ve acquired your home loan. The general rule of thumb with a credit card is for every $1,000 of value in a limit, you’ll reduce your borrowing power by $4,000. For example, a credit card with a $15,000 limit will reduce your borrowing power by $60,000. But, a card with a $2,000 limit will only reduce your borrowing power by $8,000. If you have credit cards that you’re not using, then cancel the credit card.
3. Keep your financials up-to-date By completing your tax return on time and by having your information current, you will reduce waiting times for home loan approval. The more financial data you can provide to a lender, which spans over a number of years, rather than weeks, the more likely you are to get loan approval.
4. Know what income types a lender prefers Not all income is considered by every lender as viable or stable. Therefore, some of your income may be excluded from your borrowing power. For instance, all lenders have different guidelines and requirements so they may overlook Child Support payments and Family Tax benefits when it comes to accessing your income. They may also not count a part-time income that you collect from babysitting or mowing lawns, especially if this is a job that you do every once-in-a-while.
5. Save more as a deposit Saving more typically allows you to borrow more. This is due to the fact that you are reducing the amount that you need to borrow, and reducing your risk, because you have greater equity in the property you’re seeking to buy.
6. Increase your loan term By asking for a 30-year loan, rather than a 25-year home loan term, you may find that you’re able to borrow more. This is attributed to the fact that you’ll have longer to pay off the loan, which decreases your monthly repayment.
Are you thinking of buying a home? Then contact eChoice and find the right home loan for YOU today.