Applying for a mortgage can be a frustrating and even invasive experience.
Not only do lenders ask lots of questions, but some of the questions can seem irrelevant and unnecessarily personal.
So why do lenders do this?
Lenders always ask themselves two big question when considering home loan applications. If we do approve the mortgage, will we get our money back? and, Am I covering off my responsible lending obligations?
But before they can answer these big questions, they first need to ask you lots of little questions. Almost like piecing together a jigsaw puzzle.
A mortgage is a significant amount of money to borrow. As such, banks will go into a very detailed analysis to ensure that you are a good risk. Finding out all about you, how many addresses you have lived in in the past few years and details of your financial history may seem like overkill to you but to lenders they all help piece together a picture of you as a borrower.
In years gone by lenders would rely on demographic averages. This gave a profile around based on national averages of households. Households that are living in certain areas with a certain number of children etc. In recent times regulators have been critical of using these preferring a more complete assessment on an individual basis.
That’s why they dig into your unique circumstances – your age, your marital status, your postcode, your credit history, your employment situation, your spending patterns and your saving skills.
It’s all about establishing you as an ‘individual’ borrower rather than an ‘average’ borrower. They want to ensure that they don’t lose money. Aside from that, they also need to ensure they are being responsible in lending you the money.
Lenders also think about what might happen in adverse circumstances. For example, would you be able to afford the mortgage repayments if you lost your job or interest rates increased? What if the your investment property were to remain vacant for a period of time? What happens when your child support income no longer applies? They have to factor in rate increases, periods when the property is vacant and knowing how you manage your money.
Once they’ve worked out who you are, lenders also need to understand what sort of property you’d be buying. This property is the security for the loan and their “insurance” if it all turns pear shaped.
Valuers detail a lot more information than just the value when they inspect a property such as:
- how long it will take to sell?
- any risks associated with the property or the area that the property is located
- does it have an odd zoning or in close proximity to power lines?
- what sort of repair is it in?
- is it readily saleable in its current state?
You may be able to provide this type of information yourself. However, they will usually want it to be verified by an independent third party.
What’s in it for me?
All of this means that when you are approved for a loan both the lender and the regulator are comfortable that you are a good risk and can afford the repayments. The rigour around this process is to help ensure that you don’t get into trouble down the track.
A lot of this is being driven by the NCCP, or National Consumer Credit Protection Act. The federal parliament introduced it in 2009 to help borrowers survive what can sometimes feel like a ‘lending jungle’. After the GFC, regulators wanted the onus to be on the lender to act responsibly and in the best interest of borrowers.
It is in no one’s best interest when loans fall over and people experience financial difficulty. Even in the GFC an excess of bad loans led to a financial crash that caused severe economic pain. Sometimes when house prices are increasing quickly and we feel an urgency to just get into the market, we need to be saved from ourselves.
Planning to get a loan? Expect to get asked some really detailed questions. It might be a good idea to come prepared with an annual budget. Include what you spend and save each month as well as your ongoing commitments. Think of it as putting time into something that could save you from financial distress sometime in the future.
By Peter Ellis
The Borrowers Advocate, Lending Mate™
Peter is a trail blazing campaigner with a vision to put power back into the hands of borrowers. He was disheartened by the industry. An industry where home loans were less about the individuals borrowing the money and more about sales targets. Those impacted most were people that didn’t tick all the boxes to fit the ideal profile. Do you know what happens? They are left to fend for themselves.
Lending Mate™ wants to restore this power imbalance and start a movement where borrowers get a fair go. Lending Mate™ is having someone on your side, genuinely working in your interest to enable you to get ahead financially. We aim to provide the information, help and guidance you need to put you back in control.