For anyone buying a property, it’s easy to assume that so long as you meet the basic criteria to secure a mortgage, your lender will be only too happy to take your money.
While that is largely correct, there are some internal rules that banks apply, especially to those buying into apartment buildings, that can complicate your situation.
For example, lenders do not like being over-exposed in a particular apartment block. Depending on their own internal rules, a lender may refuse to offer a loan if it has issued loans to 15%-30% of owners in the same building.
Evidence of these types of policies have revealed themselves in high-density developments, especially near new infrastructure, such as railway lines.
Mortgage applications in some regional areas, such as those dependent on single industries for their wealth – think mining or tourism – are also in the crosshairs. Lenders want to know they are issuing loans in areas of economic diversity to limit their risk.
If you’re planning to purchase in a new development, be aware that banks will consider the track record of the developer. Automated valuation models will flag potential concerns.
Another factor is the environmental changes we’re all witnessing. Homes that are prone to the threat of flooding and fire can be a red flag to lenders.
Greater scrutiny is also being placed on your employment. If a lender believes your career has a limited lifespan due to technology change, this may work against you.
Volatility of your industry is another factor – somewhat ironic given the latest round of redundancies in the banking sector. Sectors such as hospitality, where the business failure rate is significant, are not always seen favourably.
Self-employed people have faced this challenge for years. Their applications come under far greater scrutiny than those from people with a regular job. They’re required to produce two years of income statements for not only themselves but their businesses, too.
One relatively well-known policy that mitigates a lender’s risk is Lenders Mortgage Insurance (LMI). Buyers with less than a 20% deposit must purchase this policy to protect the lender against defaulting.
It’s a punitive policy that costs tens of thousands of dollars. However, the Federal Government is now offering a new Home Guarantee Scheme in which first-time buyers need hold only a 5% deposit to avoid LMI. The Government will guarantee the missing 15%.
Here are eight tips to help you with a mortgage application:
Demonstrate a history of genuine savings – Lenders like to see that you have a consistent savings history. This shows you are financially disciplined and able to manage your money.
Don’t make too many applications – Each time a lender performs a “hard inquiry” on your credit file, it can lower your credit score. Applying to multiple lenders in a short period can be seen as a sign of financial distress.
Avoid big financial changes – Lenders want to see a stable financial situation. Avoid changing jobs, taking on new debt (like a car loan or new credit card), or making other major financial decisions in the months leading up to your mortgage application.
Work with a mortgage broker – A mortgage broker can help you navigate the process. They can assess your financial situation, find suitable loan products from a range of lenders, and guide you on what documents you need to prepare.
Research the developer of new properties – If you are buying in a new development, be aware that banks will consider the track record of the developer when assessing your application.
Be mindful of environmental risks – Homes that are prone to floods and fires can be a red flag for lenders.
Demonstrate stable employment – Lenders place greater scrutiny on your employment, particularly if your career has a limited lifespan due to technology changes, or if you work in an industry with significant business failure rates or seasonal changes.
Prepare extensive documentation if you are self-employed – If you are self-employed, be prepared for greater scrutiny and have at least two years of income statements for both yourself and your business.