How Do Banks Assess Borrowing Capacity?
Thanks to changes by APRA (The Australian Prudential Regulation Authority) the lenders have a responsibility to ensure you can afford the loan repayments as well as your living expenses. As such they may have to really dig into your personal finances before they can approve you for a loan and assess your borrowing capacity.
What are they looking for?
They are looking to assess that you can pay back a mortgage even if economic factors move against you. Look, we have historically all-time low interest rates. Although it’s possible we will see negative interest rates in our new future (the bank PAYS us to borrow), it is far more likely that interest rates will go up in the long term.
APRA is there to ultimately protect us from ourselves. The question they MAKE the banks answer is “Will this borrower be able to make repayments when interest rates go up?” (not if but when – they will go up at some point in the next 30 years)
This means that although today’s mortgage payment can be lower than your rent that doesn’t mean you’ll be automatically approved for a mortgage.
What the banks want to see when they dig into your bank and credit card statements is that you live responsibly and can live below your means. Some lenders can require up to 3 months of personal financial history as part of a loan application.
So if you want to prove to a bank that you are able to handle the responsibility of a mortgage, and also can handle rising interest rates in the future, there are some steps you should take in the three months leading up to applying for a home loan:
- No major holiday expenses and especially not with borrowed money such as a credit card
- Keep your ‘discretionary spending’ manageable.
- Don’t eat out or eat take away every night – once in a while is fine
- Minimise your luxury purchases (Don’t buy a whole new range of kitchen appliances because the old ones are ‘so last season’)
- Don’t have lots of subscription services like Foxtel running up your expenses, especially if you aren’t using them
- Avoid large one off purchases such as expensive appliances etc
- Make regular and consistent deposits into a separate savings account (that proves you are living below your means)
- Large/regular payments to gambling providers is a big red flag. It implies you may have a problem or have one in the future even if you don’t now. I’m sorry that is how the banks will see it
You can’t game the system by stripping expenses to the bone either. You do actually have to be able to live comfortably when you start paying off your mortgage.
Following that advice is just common sense financial intelligence. It’s not rocket science and you should be following it anyway as part of a sensible living plan.
If you think your affairs are in order and that you have given yourself the best possible chance to prove yourself capable for paying off a mortgage then get in touch and I can find you the best possible deal for your circumstances all you have to do is call 1300 661 211 or register online at https://www.mortgageworldaustralia.com.au/contact-us/ and we can take care of the rest.
Patrick is a Director and a Home Loan Specialist. He has been helping Australians with home loans since 2001. Prior to working as a mortgage broker Patrick was employed by Macquarie Bank for 3 years and also worked as an accountant for a publicly listed company. Patrick’s qualifications include:
Bachelor of Business, UTS Sydney. Majored in accounting and sub-majored in Finance and Marketing.
Diploma of Finance and Mortgage Broking Management FNS50310
Certificate IV in Financial Services (Finance/Mortgage Broking) FNS40804
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