Have you applied for a loan recently? Did the bank ask you about how often you buy takeaway coffee? What about how many items you purchase on Afterpay? You’re not the only one. Due to the fallout of the Banking Royal Commission, banks and credit unions are now looking at your daily spending habits to determine your chances of getting a loan. Your chances are now slimmer than ever, with it being the hardest time within the last 15 years for Australians to get a loan. Your daily coffee purchases, using Afterpay, food deliveries such as Uber Eats and entertainment are now all being counted against your chances of approval.
Why Are Your Daily Spending Habits Counted Towards Loan Approval?
Banks are now focused on your day-to-day living expenses, assuming you will continue to spend the same amount you do now once you have been approved for a loan. In the past, banks used to use the Household Expenditure Measure (HEM) to work out the living expenses of your family. HEM is calculated based on the borrower’s family size, location and lifestyle – including the median spend on basics such as food, transport, utilities and other discretionary items like alcohol and takeaway. This is the same method used by the Australian Bureau of Statistics (ABS).
The Banking Royal Commission’s report found banks did not further investigate a borrower’s capacity after using the HEM method. Basically, the HEM method has been majorly criticized for underestimating a person’s living expenses, which leaves borrowers struggling to make repayments. The Commissioner said using HEM as the default measure of household expenditure does not verify how much a borrower actually spends and usually masks the fact no sufficient inquiry has been made about the borrower’s financial position.
Fallout of the Banking Royal Commission
The fallout of the Banking Royal Commission’s Final Report means the big 4 banks and some other smaller banks and credit unions have taken steps to reduce its reliance on HEM and become more conservative. However, this means lenders are more interested in your living expenses, including the smashed avocado you bought for brunch yesterday. Unfortunately, this means banks aren’t taking any notice of people who do live within their means and positively adjust their finances after taking on debt.
If you have a high household income, lenders will scale your living expenses to be appropriate for your income. This greatly reduces your borrowing power compared to a few years ago when banks were more reliant on HEM. The lack of loans being approved will also potentially affect Australia’s construction industry. If people can’t qualify to buy new properties, it may have a knock-on effect to new home sales as new home construction will be negatively impacted. Not only did the Banking Royal Commission affect the use of HEM, but If you’re looking at applying for a loan, lenders require more documents to verify your financial situation before moving forward.
What Do You Need to Apply for a Loan?
For a lender to assist you in determining your approval for a loan, you’ll need to provide them with information on your financial situation. This includes:
- Evidence of savings and debts, which might include a few months’ worth of bank and credit card statements, billing statements and other loans,
- Proof of identification, which could be your birth certificate or passport, and
- Verification of employment, including your pay slips and group certificate. If you’re self-employed, a lender will ask for your tax returns.
Each lender will specify the required documents they need and some may need more than others. This also changes depending on your individual circumstances. But to be prepared, its best to get these documents ready for when you want to apply for a home loan. As long as you have all of the necessary information, there’s ways you can improve your chances of getting a loan.
How to Improve Your Chances of Getting a Loan
Lenders will look closely at your last three months of spending when you apply for a home loan. This means you should cut back on your spending three months prior to your application. Here’s how you can approve your chances of getting approved for a home loan:
- Do your research. Talk to someone who has applied and been approved for their advice on what questions the lender asked during their application process. You really can’t have enough information about this.
- Check what you’re spending on your day-to-day living, such as takeaway coffees, entertainment, beauty, alcohol and dining out.
- If you have buy-now-pay-later services such as Afterpay and Zip Pay, try to have them paid off.
- Reduce the limits on your credit cards or cancel them altogether. High limits mean lenders will assume you will draw on your credit card and apply a repayment on it which will affect your borrowing capacity.
- Maintain a good credit score. Ensure you keep on top of your bills because missing payments can impact your credit rating and make it more difficult for a lender to approve your application.
If you’re looking for a loan but keep getting rejected by the banks, Positive Solutions Finance can help. We specialise in providing loans for people who have been previously declined by other lenders. Get in touch with us today on 1800 560 591 for a free consultation.
For more information on bad credit home loans and how we can help, check out our bad credit home loan page here.