busting apart the credit crunch myths
Updated: Jun 22, 2019
Thanks to the Royal Commission, challenges around loan approvals have become BBQ conversation. It’s been great from a business awareness perspective, but suddenly your Uber driver is an expert? Need it be said, it’s important not to believe everything you hear and read!
Myth #1 Uber Eats and Netflix will stop you getting a home loan!
Someone at your BBQ will have read this, or they’ll have experienced a bank lender asking them how much they spend on Netflix (it’s part of their script!). This is all part of the training programs that has been occurring within the banks to determine whether there is a net household surplus to support higher repayments than current interest rates require. As tedious as it is, done right, it can serve as valuable insight to managing debt well (like automating regular payments). And if there’s plenty of surplus income, there is no need to fear any of the interrogation (unless it feels like they are asking the wrong questions and don’t understand the full picture!)
One thing to watch though is that this interrogation isn’t going away. Early adopters within the banking community have already moved toward collecting full bank statements in either physical copy or digital extraction, so it’s only a matter of time before more do. And expect that providing this data easily will stand you in good stead for a cheaper rate, so be on the front foot.
Myth #2 No means No!
Moreso than ever, getting a decline from a bank is not the end of the line when it comes to the strategy you had in mind. Whether that be a renovation project, new home, new office or investment property purchase. There are literally thousands of policy decisions that banks are making that can rule out a loan application with one particular bank. It could be their understanding of the situation; it could be the bank’s willingness to accept various forms of income, such as bonuses or company cars; it could be one lender’s tolerance for credit history anomalies which are increasingly visible; it could be as simple as the assumptions that one lender uses vs another when it comes to assessing a household’s surplus income.
We recently withdrew an application from a lender upon notice that their income policies had changed to remove certain types of small business assets from depreciation add-backs. Needless to say within a few days, we had approval from an alternative option.
Myth #3 Pre-Approval or Conditional Approval means you can safely go to market!
Firstly, conditional approval is harder to come by than it was. For example, Lendi Home Loans, an Online Mortgage Broking Service, recently reported that their Conditional Approvals had skydived from 63% to 16%over the past 12 months. That means that their technology driven algorithms are no longer able to provide the majority of borrowers an indicative approval at all.
Secondly, the terms “Pre-Approval” and “Conditional Approval” are actually misleading terms for many borrowers to fully understand, because they imply that it’s safe to go to market. However these “approvals” are still subject to confirmation of the information provided (according to their assessment, not yours), including the valuation of the security involved. This means that until all of these checks are done, the best this is, is a “good indicator” of approval. If any of the assumptions change, the “indication” is out the window.
The safest thing to do is to ensure that the “conditions” on any approval are definitely able to be met, and that there’s enough buffer on things like surplus income and equity.
For more tips & advice, contact Lanie Conquest at Surf Coast Finance
With over 25 years’ banking & financial services experience, she helps local families & businesses make smart financing decisions.
M: 0418 938 646