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How to position yourself for successful borrowing

lending

Having your finance sorted is the first thing you should have prepared when looking to purchase a home. The Hayne Royal Commission and investigation by APRA has meant there are now tougher regulations implemented around lending. Gone are the days of filling out application forms without interrogation, making it important for you to understand your spending habits as lenders now review your expenses and commitments under a microscope to ensure you have the capacity to repay your loan.

Buy now, pay later programmes such as Afterpay act as another line of credit for flexible access. Many users don’t understand the implications of falling behind on minimal scheduled repayments and accessible limits.  We have investigated on your behalf how commitments like Afterpay and living expenses impact your ability to achieve a loan approval.

Factors that commonly impact your borrowing application

A bank (or mortgage broker) will request a breakdown of your living expenses and financial commitments to ensure you are financially fit to meet your future loan repayments. Regular commitments such as car leases, childcare costs and gym memberships are taken into to consideration when you apply for finance, as they provide evidence of your spending which impacts your ability to meet (or not meet) future loan repayments.

Other factors that may impact your borrowing application are:

  • Your type income i.e. self-employed versus PAYG, bonuses, etc
  • The level and nature of your expenses i.e. are they discretionary expenses (holidays, shopping) or fixed expenses (childcare costs, gym membership)
  • Your credit repayment history
  • Your existing assets base
  • The value of the property you wish to purchase
  • The percentage of deposit you have available to contribute towards the purchase
  • Directorships/shareholding of a company i.e. you may be accountable for liability in the company

How do banks view different debt facilities?

No interest, no problems

Buy now, pay later companies like AfterPay and ZipPay offer customers the option of paying off their purchases in regular interest free payments. Nearly 2 million Australian’s have used platforms like these, most likely due to the convenience of a minimal application process when compared to credit cards.

Each circumstance is obviously different, but it is important for users to remember that these platforms are ultimately a form of credit. This means that missed payments or consistent use may cause lenders to question your spending habits, as well as your ability to afford a loan repayment when you are borrowing money for items such as clothing and furniture.

Missed payments can impact your credit score, however some lenders are now looking into borrowers AfterPay activity as part of their assessment process.

Credit Cards

Credit cards are still a very common debt facility with 14.7 million active credit card accounts in Australia. Failure to pay your credit card bill on time will mean your payment will be recorded as late on your personal credit score and will be filed as part of your repayment history. The record of late repayments can stay on your credit file for years, which will potentially impact your ability to obtain finance in the future.

Analysing the limits on your credit card is a significant component that the bank considers when reviewing your expenditure. Regardless of whether you only use this card for points, or you spend a minimal amount each month, the bank assumes a 3.8% per month payment* of your total limit towards serviceability. For example, having a credit card with a limit of $30,000 will mean that the bank assumes you have monthly repayments of $1,400.

The most important thing to note in relation to credit cards is that banks will still assume this 3.8% payment* per month regardless of whether you are paying your card off in full each month.

Store Card

Your David Jones or Myer credit card may offer some appealing benefits when you shop at their stores such as loyalty points, airport lounge access or exclusive discounts. Many of these cards incur an annual fee that can range from $69 – $295 and charge interest just like a traditional credit card. The same 3.8%* of your total limit is still assumed by the bank for a store card.

Car loan

The current low rates offered for car finance make an enticing alternative to purchasing a vehicle in cash. However, car leases can have a negative impact on your borrowing capacity for home lending as banks regard the full repayment into the calculations for servicing and view this as a recurring payment. Generally, this means the larger the repayment on the car lease, the less you can borrow for a home loan.

If the car is purchased for business purposes, some lenders may not factor this into the servicing since it is a business expense. It is recommended that you talk to your bank or broker before taking on a car lease, to evaluate the best option for your personal situation.

Case study

As discussed, the bank will assume a 3.8% per month payment* of your total credit card limit and regard the full repayment of your car loan towards your serviceability. The below examples show a single person with an annual income of $120,000, and how their borrowing capacity increases when they reduce their car lease and credit card limits.

HEM (Household Expenditure Measure) is a benchmark that lenders use to estimate your living expenses and is separate to your other outgoing expenses such as your car lease or credit cards etc.

Scenario 1
Annual Income $120,000
HEM (Household expenditure measure) $2,200
Monthly Car Lease $1500
Total Credit Card Limit $30,000
Total Loan Capacity $400,000

 

Scenario 2
Annual Income $120,000
HEM (Household expenditure measure) $2,200
Monthly Car Lease $0
Total Credit Card Limit $5,000
Total Loan Capacity $835,000

 

Scenario 3
Annual Income $120,000
HEM (Household expenditure measure) $2,200
Monthly Car Lease $0
Total Credit Card Limit $0
Total Loan Capacity $870,000

When this client reduces their credit card limit from $30,000 to $5,000 and eliminates a car lease, they can access $435,000 more than before. If they close their credit card completely, they have a further increase in their borrowing capacity by $35,000.

Ways to avoid negative impacts on your credit score and borrowing capacity

  • Review your regular expenses and work out whether these are likely to change significantly in the future. You may need to decide whether it may be best to hold off on purchasing a new vehicle or lounge suite.
  • If you have a car loan with a remaining balance, you may consider paying off the remainder to eliminate the regular expenditure from your expenses.
  • Reducing credit card limits will minimise the amount that the bank assumes you will be repaying at 3.8%. For example, if you had a limit of $30,000, the bank assumes your monthly repayments to be $1,140. By reducing your limit to $10,000, your monthly repayments will be assumed as $380.
  • If you have a gym membership for a gym near your work and your home, it may be worthwhile temporarily evaluating this and reducing it back to one. Keeping on top of these recurring expenses which may seem minimal in cost can be a simple way to adjust your outgoings.
  • Some insurances may give you the option to pay using your superannuation fund. This can reduce your outgoings and can also be changed back later if you wish.

 Disclaimer

It is important to understand that in the current environment, lenders are likely to scrutinise your expenses. This means that it pays to speak with a mortgage professional several months prior to your application to fully understand how each credit facility might impact your potential loan application. Having the ability to shape and adjust your outgoing expenses prior to an application, could be the difference between an approval or rejection.

*In this article we assumed a 3.8% payment of your total credit card limit. Some banks may use a higher or lower rate when analysing your credit cards and financial commitments.

To get in touch with  a member of our team, feel free to contact us by clicking here

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Whether you’re buying a home, an investment property, looking to renovate or simply want to check you’re getting the best deal on your mortgage, Orium Finance are experts that make it easy.

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