How cost-cutting can improve your chances of home loan approval during COVID-19

Are you aware of what your spending habits are and how they might be impacting your home-loan approval chances?

With the increased scrutiny and documentation required due to COVID-19, you can set yourself up for a smoother application process by staying on top of your living expenses and cutting down on unnecessary costs.

COVID-19 shut down entire industries overnight in late March. In response, Australia's biggest banks have all introduced new requirements to the home loan application process. Tightened lending criteria, extra COVID-19 crisis-related processes and a record number of customer inquiries have blown out home loan approval times and made it increasingly difficult to apply.

The approval process for some banks is taking anywhere between two to eight weeks due to record volumes of applications.

With additional income and employment verification requirements, and lenders asking more questions and making fewer exceptions to policy, staying on top of your living expenses is more important than ever for securing a home loan. Minimising unnecessary spending and establishing good saving habits that you can maintain in the long-term will dramatically improve your chances of home loan approval.

Closer scrutiny of your every day expenses

Following the banking royal commission in early 2019, banks have moved away from using the standard Household Expenditure Measure (HEM) benchmark and have been screening individual home loan applications more thoroughly.

Even prior to the onset of the COVID-19 pandemic, lenders have been screening home loan applications more thoroughly. Following the banking royal commission, banks had moved away from relying on the standard Household Expenditure Measure (HEM) benchmark and were approaching discretionary spending with a fine-tooth comb.

These are the top two things to keep in mind for your home loan application when it comes to living expenses:

• Analysing your recurring transactions: Banks are looking much harder at expenses by analysing credit card and transaction account statements to scrutinise “recurring” transactions regardless of amount or nature. Regular expenses such as Netflix subscriptions, Afterpay purchases, Uber Eats and gym memberships will all be examined and questioned under a microscope.
• Last three months of living expenses: Most lenders will want to see three months’ worth of living expenses so it’s a good idea to critically assess your expenses (credit card and bank account statements) six months prior to applying for a home loan and curb any spending habits that might hurt your chances of home loan approval.

If you want to minimise the chances of your loan application being rejected, or delayed, you should consider every dollar you are spending. A mortgage broker can conduct a thorough review of your living expenses in the same way a lender’s credit assessor would and ask you about the spending habits which could decrease your chances of getting a loan approved. This will result in a stronger home loan application and may drastically reduce the time it takes your loan to progress from application to settlement.

Find out more about what a broker can do for you that a bank can’t and set yourself up for a successful home loan application.

So, how does cost-cutting help with your home loan approval?

It’s important to understand exactly what lenders look at when assessing your spending. Once you’ve looked at your financial position in all of these areas, you’ll be able to identify where the easiest changes can be made.

Here are the main categories that lenders use to break down your living expenses:

1. House and property costs - This includes things like utilities - water, gas and electricity - as well as council rates, land tax and property maintenance and costs.
2. Communications and streaming subscriptions - Paying for your mobile phone, data and internet, as well as streaming services like Netflix, Stan, Foxtel, Binge, Disney+, Apple Music or Spotify can all add up. Moving to a better phone plan and cutting back on your streaming subscriptions is an easy way of reducing a recurring cost.
3. Food and groceries - With most people and their children either working or studying from home, grocery costs have skyrocketed in recent months. Your weekly grocery costs are likely one of the largest areas in your living expenses, especially if you’re feeding a family. Look for savings and better ways of budgeting at the supermarket.
4. Recreation and entertainment - All the fun stuff keeping us sane during COVID-19 from eating out at restaurants, alcohol and tobacco to gym memberships, pet care and holidays are included here. Eliminate any magazine or club subscriptions you aren’t using. Consider if you’re making adequate use of that gym membership. What can you live without to save some money and improve your borrowing power?
5. Clothing and personal care - Clothing, footwear, cosmetics, and personal care such as getting your hair or nails done are covered in this category. With recent shutdown conditions, you probably won’t even have to go out of your way to minimise costs.
6. Medical and health - This includes all doctors’ expenses, dental, optical and pharmaceutical expenses. Understandably, many of these expenses are necessities.
7. Transport - Transport costs range from your Opal card to Ubers to motor vehicle running costs like fuel, servicing and registration, plus parking and toll costs. One thing to note is that vehicle insurance is included below in the insurance category.
8. Education expenses - As part of your application, you’ll need to account for books, uniforms, excursions and any other costs for school, university or TAFE, plus school fees if your children are enrolled in private schools.
9. Childcare - If you have children that need childcare, whether it’s at a daycare centre or with a live-in nanny, you’ll need to state these costs.
10. Insurance - Health insurance, home and contents, motor vehicle, life insurance and income insurance are all necessities. Rather than get rid of any insurance covers, consider shopping around for less expensive policies.
11. Everything else - The majority of your everyday costs will be covered in the above categories, however if you have any other discretionary spending, particularly recurring costs, they need to be included in your overall review.

Whether you’re starting your first home loan application, looking for refinancing options, or negotiating a rate change, it’s important you always demonstrate to the lender that you can meet the proposed repayments.

Assessing your home loan application requirements

Creating an itemised list of all of your discretionary expenses will help you to identify areas where you could improve your savings. Remember that a lender will assume these reductions are ongoing so make sure the changes you implement are sustainable in the long-term.

Assessing your monthly living expenses and working out where you might be able to make reasonable reductions to enhance your borrowing power is just one of the ways a great mortgage broker can help. A broker can help you assess your full financial situation and let you know how lenders would view your current spending.

If you’d like to find out more about home loan application requirements and improving your chances of home loan approval, give us a call on 1300 932 584 or set up a time that works for you.

DISCLAIMER

Any advice/information contained in this newsletter is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person or company. Therefore, before making any decision, you should consider the appropriateness of the advice with regard to those matters. These articles have been written for general informational purposes only, and are not intended to provide, and should not be relied on for, tax, legal or accounting advice. We encourage you to consult your own tax, legal and accounting advisers before engaging in any transaction. Information in this edition is correct as of the date of publication and is subject to change.

Credit services are provided by Kelly Partners Finance Pty Ltd as an authorised Credit Representative under Australian Credit Licence 38908