Monthly expenses could harm your chances of a home loan

The royal commission into banking has persuaded lenders to think in earnest about tighter lending criteria set by the banking regulators several years ago.

Capacity to service

Though the specific requirements for a loan vary from lender to lender, your capacity to repay a loan is what their inquiries are all about.

This is calculated from your after-tax income, minus your cost of living, minus your repayments for existing liabilities. The balance is what is left to repay any potential borrowing amount - your capacity to service.

Of course good income, steady job history and evidence of saving all help but there are two things you can do immediately to improve the chances of your loan being approved.

Credit Cards

Customers tell us they think that carrying unused credit cards with high limits is good for their credit score and that's why they keep them. If you're in the market for a home or investment loan, one of the first things you should do to increase your chances of having you application accepted is cancel those cards or reduce the limits.

Lenders now typically assume that your credit card will cost a monthly 3.75 percent of its limit (up from the previous 3 percent) whether you use the card or not. So if you have a $10,000 limit, that's $375.00 of your repayment capacity for a home loan each month. If you're carrying multiple cards with combined limits of say, $40,000, that's $1,500.00 of your borrowing capacity that will be unavailable.

Curb your Spending

Many lenders are now asking to see three months of living expenses and require proof via your bank statements, checking for the 12 most common categories on which you spend:

  • Groceries (and other household expenses)

  • Clothing and personal car

  • Owner-occupied utilities and rates

  • Investment property utilities and rates (if applicable)

  • Insurances

  • Transport costs (fares, fuel, registration etc)

  • Telephone, internet and other media (pay TV etc)

  • Medical and health

  • Education

  • Child care

  • Recreation, sport and entertainment

  • Child maintenance (where applicable)

Banks aggregate your total spending across these areas and form an average monthly spend and include this in your capacity to service a loan. So prior to applying for finance, consider what you're spending your money on in the months before. However, it's no use being so frugal you almost live on air. Lenders will still apply the Household Expenditure Model (HEM) and apply the greater of the two to your capacity.

If you're uncertain about any aspect of your ability to borrow for any purpose it's best to call someone who understands the current lending criteria.

Call 1300 55 22 30

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