With interest rates at rock bottom, home loans have never been so affordable. But has the COVID-19 pandemic made things harder for would-be borrowers?
John Rolfe, head of Elders Home Loans, calls it a ‘moving beast’. “Lenders are definitely very wary. They’re trying to avoid risk in an environment that keeps changing, and every bank is doing things differently from the next.”
To help them avoid that risk, banks are asking a lot more questions. On top of the standard questions that most lenders ask, expect to answer questions about whether your hours are likely to be cut or your industry impacted by COVID-19.
Banks will be looking at where you’re employed
If you’ve still got a secure job, banks are usually still willing to lend. If you’re in an industry which has been relatively unaffected, now might be an ideal time to apply for loan approval. “There’s definitely an appetite to lend out there, but banks are looking for long-term surety,” says John. “Most lenders are happy to consider the application as long as you’re not in a vulnerable industry. Others won’t even consider you if you’re on temporary contracts, no matter what the job is.”
For people in industries which have been hard-hit by the pandemic, getting loan approval might prove tougher again. “Some industries, and again it depends on the lender, might disqualify you right off the bat,” says John. As you might expect, those industries include tourism, hospitality, travel and entertainment — even if you’ve kept your job. “Even long term employees working for tourism operators and travel agents are considered to be at risk, because the whole industry is so vulnerable right now.”
Self-employed applicants need to show recent evidence of income
If you’re self-employed, banks will want to see that your income hasn’t taken a big hit during the pandemic. If you’re applying for a loan in the final quarter of the financial year, make sure your quarterly BAS statements are up to date. “If you go to a bank now, and your last proof of income was June 2019 when you last did a tax return, that’s too long ago. They want to see something more recent to see your current cash flow.”
Rental income will be discounted on investment properties
“Lenders have increased the amount they discount rental income since the Royal Commission,” explains John. The Commission advised lenders used to discount rental income by around 20%. That means that if you want to buy a rental property that rents out for $500 per week, your lender will only factor in $400 per week when calculating whether you can afford it. That discount is there to account for risk factors such as the property being vacant.
Some lenders are now further discounting this income by as much as 50%. “They’re worried that rents will drop, or that homes will sit vacant for longer, especially in tourism-heavy areas.”
What can would-be borrowers do?
That said, all is not lost. “It depends very much on the strength of the individual deal. If you have a larger deposit and a strong savings history, that’s weighed in your favour. And of course, most people do still have their jobs. Even if we hit 15% unemployment, which is a worst case scenario, that still leaves 85% of people in work.”
And while the details may have changed, the fundamentals of getting a home loan haven’t.
“The banks still want to see that you’ll be responsible in paying down the debt,” says John. “That means that you should pay off any outstanding debts you already have, keep up to date with credit card payments and demonstrate a strong savings record.”
And with pubs, shops and holidays cancelled for the foreseeable future, now is the perfect time to shore up those savings.
It’s also more important than ever to use a mortgage broker. “There are more variations between lenders than ever before,” John says. “Every bank has a different set of policies around how they weight risk, what they’ll look at and what disqualifies you. It’s almost impossible for the average person to know the differences and keep up to date with changes, but it’s literally our job.”
Talking to a broker first can help save your credit rating. “If you apply to a lender, they run a credit check on you. If they then turn you down, that dings your credit rating. Come to us first and we can help you decide which lenders are best to approach so you stand the best chance.”