Did you know that right now, bank lenders are assessing borrowers on 7.25% Principal & Interest (P&I) (in some instances this figure may be an even higher assessment rate).
Speaking to a number of first time buyers, whilst there is plenty of cash surplus available, often one is left unsure as to why the lending has been so tight.
So… whilst you may only be paying an actual interest rate of 3.xx % Principal & Interest, the bank will determine your borrowing capacity based on the 7.25% P&I. So whilst you may have the cashflow surplus to sustain a more expensive purchase, post APRA, the lenders don’t think so. This means the borrowing amount is a lot lower. Taking into account future rate rises and stress testing borrowers on their ability to sustain the increase in prices and therefore the loan sizes, when the rates do go up.
Additionally, lenders do reflect their calculators with living expenses based on:
1) Your family income
2) Number of family members (including depdents)
3) Post Codes
So if you’re on a family income with 2 dependents of say $150,000 and you suggest you’re living on $1,500 a month, be prepared for this to be overriden as according to the HEM (Household Expenditure Measure) thinks otherwise and this is getting more scruitiny than ever by ASIC and the lenders.
Where this may be high risk (risking your deposit and hence your financial future) include:
1. Putting offers without looking at your borrowing
2. Putting offers without considering where your scenario fits the policy (often home buyers – and rightly so – have a simplistic view – that all banks have the same polciies and walking into a branch will solve this for them – untrue)
3. Thinking that regardless of the loan to value ratio or purpose of the loan, you are entitled to the same low rate that lender XYZ offered your friend who actually had a completely different deposit and financial position
4. Acquiring a purchase which may not settle for quite some time to come – this doesn’t take into account the lending policies at that point in time and neither does it take into consideration the state of the market then. Valuations stacking up is important.
5. Registering for land and house where the land hasn’t yet been titled (note if you do go for a different purchase in the mean time, this future purchase needs to be recorded as a liability. So it’s important to consider whether you can actually borrow with your current purchase and a purchase that you have committed yourself to in the future?
6. Getting a new credit card too close to when you are about to go for a home loan
7. Getting a car loan or any other sort of loans such as personal loans and line of credits – look at the loan term and monthly repayments – these will impact your month on month cash flow
8. Considering job change whilst in contractual arrangement to complete an upcoming deal, without looking at the financing arrangements
Our view is:
1) Prioritise what is important
2) Consider where your scenario fits (considering your situation & your goals and what resources you need)
3) Get the deal across the line as a first step
4) Then consider any other life circumstances changes
Happy Shopping!
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