Australian banks are tightening their credit standards by the day as result of the expected increase in unemployment and loan loss following Covid-19. Now it is more important than ever to understand the key points banks would look for in bank assessment for mortgage loans.
This is applicable whether you are buying a house, investment property either commercial or residential real estate or even just taking equity cash out to buy shares. Banks broadly uses the same criteria in their credit decision to decide how much you can borrow.
1. Income Leads Borrowing Ability
The biggest impact on banks loan assessment is the income of the borrower. On a most basic level, this is also linked to the borrowers ability to pay interest after living expenses. The idea that expenses increase as income increases is called lifestyle inflation.
The opposite of this is for most there is certain level of minimum living expenses and having income to service the loan after paying the bare minimum is the first thing the bank would look for.
It is important to note that not all income are the same. If on a scale between most dependable and lease dependable or valuable in the bank’s view. Salary sets the baseline, commissions and bonus are discounted due to the volatile nature. In most bank assessment for investment loans they will also take account of the rental income of the property here.
Once the income is determined the lender will then apply a fixed multiple to the borrower’s income and working backwards the total amount they are able to lend per their credit standards.
As part of income verification in the bank assessment for mortgage they will ask for recent payslip right up to the credit approval process.
2. Improve Equity invested in the property
The inverse of the equity invested is the amount the borrower is looking to borrow against the value of the asset or loan to value ratio. The simple rule of thumb is that 80% LTV should be the maximum before lender mortgage insurance requirements kicks in. Inversely this means bare minimum of 20% should be required.
Don’t forget to take into account stamp duty as lenders would want that paid as part of the settlement rather than the delay after settlement typically allowed by state governments.
3. Avoid Dodgy Property
If you combine first two points above the loan assessments tips, it is much easier for high rental yield or positive gearing properties as the income will contribute to the baseline borrowing capacity and the property return will be enhance with leverage.
However the type of property that is high yield usually involves some degree of risk the lenders don’t like such as properties in mining towns where valuation are inflated during the boom or over saturated markets full of investor stock rather owner occupier stock.
Lenders could wholesale block postcodes that they will not write loans on.
4. Limit Much Other Debts You Have
All debt are not created equal. When you have other debts, potential lenders will not only reduce the same amount they will lend you but also adjust some more to account for the higher interest debts like credit card debt since they cost more than say car loans.
In most instances they will apply the total loan limit allowed in your other loans rather than the actual drawn amount as the most conservative position.
5. Credit Rating
Every adult Australian has a credit rating and by law eligible to get a free credit report every 12 months. Checking credit score does not impact the rating but applying for loan and most loans, especially mortgage loan assessment will lead to credit checks.
The higher the credit score, the easier the assessment will be and the report will include details about the loans you have, repayment history, applications for loans and information about court judgements, defaults and bankruptcy history.