By Effie Zahos
magazine, March edition
Forty may be the new 30 but when it comes to getting a home loan, lenders will look at you as if you’re 65. Under responsible lending guidelines in the new National Consumer Credit Protection Act (NCCP), lenders will have to verify a customer’s financial situation, assess their capacity to repay without substantial hardship, and not offer credit products that are unsuitable.
While there’s nothing new about lenders checking a borrower’s income, expenses, employment, assets and liabilities, it’s the “without substantial hardship” part that’s hurting. If you’re already 40 and you can’t prove to your lender how you intend to repay a 30-year term mortgage, your lender will say no.
Offering to sell your home as an exit strategy isn’t good enough – the code presumes this "loan will cause substantial hardship and is therefore not a suitable loan". Lenders will want to know what other income streams you have to help meet your repayments if you hit retirement and still have a home loan.
The new laws are designed to protect consumers from irresponsible lending, but there’s no doubt getting a home loan today won’t be as easy or as quick as before the NCCP kicked in on January 1 this year.
So does this new code discriminate against the elderly? Not that 40 is old – I’m a woman in her 40s with a mortgage!
No, it’s all about serviceability and, more importantly, lenders protecting themselves against a possible whiplash from the Australian Securities and Investments Commission if they breach the new rules.
But exactly what "without substantial hardship" means I’m not sure as it’s not spelt out. Older borrowers, the self-employed seeking low-doc loans, pregnant women, retirees looking to access a reverse mortgage, and even credit card lovers with high limits but no ongoing debts may all find their access to credit reduced or at the very least difficult.
Mortgage Choice, Australia’s largest home loan broker, has cited a case where a couple expecting a child were knocked back for a home loan even though they had saved up $80,000 in cash to serve as a buffer while the wife was on maternity leave.
Either they wanted a mortgage over $1 million, because that’s how big it would have to be for $80,000 to be eaten up in interest within the first year, or their lender was just playing it safe. Either way they never got a home loan.
Mortgage Choice’s compliance and corporate standard manager, Tim Donahoo, says there are people who were given preapproval at the end of last year only to find out that they don’t qualify this year. Donahoo asks: "If our brokers are finding it hard to work out who is willing to lend what, then how will consumers cope?"
It’s important borrowers don’t panic. Not much has really changed when it comes to lenders assessing how much you can borrow. To minimise delays and avoid disappointment it’s important you go to your lender prepared.
As Donahoo says: "Unless the right questions are asked a wrong answer will ensue."
Don’t leave anything to chance – give your lender every possible detail that may help you prove you can service the loan. In the meantime you can take the following simple steps:
Reduce your credit card limits
A quick play on several online home loan calculators showed a couple on a combined income of $100,000pa (gross) with one dependent child, a car loan that requires monthly repayments of $150 and a credit card with nil owing but a limit of $15,000, could increase their borrowing capacity by up to $50,000 if they simply reduced their credit card limit down to $1000.
Avoid mortgage insurance
Having to seek approval from two bodies, your lender then your lender’s mortgage insurer, just makes things more difficult as you have to satisfy two different credit policies. Often it’s the mortgage insurer that dictates the terms to the lender. Borrow less than 80% of the purchase price and you avoid mortgage insurance.
Build a deposit
Lenders want to see genuine savings. This means funds held or accumulated in a savings account for three months or more, shares held for three months or equity in residential property. It may not include the First Home Owner Grant, a gift or a sale of an asset such as a car.
For me, it’s too early to tell if these new laws governing "responsible lending" will be a help or hindrance to homebuyers. I know one thing though – if it’s taking an extra 30 to 60 minutes to complete the loan process, it’s a step backwards!
Money editor Effie Zahos has over 19 years experience in finance. She moved from banking to TV in 1997, kick-starting her journalism career as head researcher for Channel Nine’s successful Money Show. With an array of broadcast experience she specialises in consumer banking stories.
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