Don't buy coffees!  Live off 2-minute noodles!  Think twice about that movie ticket!

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A lot of belt-tightening has been happening lately as a result of the controversial bank lending rules that came into effect in October last year.

Several new regulations around lending were introduced by the government under the CCCFA. These regulations have made home loan applications harder to process and secure, with every expense scrutinized under a more stringent lens of due diligence.

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It's been a bit rough lately...

Financial advisers and banks are required by law to confirm all expenses and fixed payments that their clients make every month, to ensure that they can afford their loan in future.

But is has gone a tad beyond this. Banks must scrutinize every line on bank statements with a fine-tooth comb. Every coffee, every takeaway and lotto ticket purchased will be considered a fixed expense. Most bizarrely, even transfers to savings accounts for a house deposit is considered an expense as well.

These new rules have hit first home buyers the hardest.

Hopeful buyers’ savings towards a deposit have been unfairly treated as an expense by the banks.  Surely, it would seem logical that once the property was purchased this savings “expense” would change, however this was not taken into account.

The result of this super stringent lending policy is that people are virtually starving themselves to cut down on expenses or working themselves into the ground to increase their income to be able to afford a new home. As financial advisers we heard many tales, none of them pretty.

All of this added diligence has increased the time taken to process loan applications, requiring extra confirmation from clients to prove expenses on their statements, and in turn potentially reduces the amount that one can borrow overall. It has been rather ugly.

The government's March announcements regarding relaxing the policy has come as some welcome relief.

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What has changed includes:

·       The amount of checking and confirmation required for current expenses on a bank statement has been reduced

·       A more realistic picture of future expenses, once the home has been purchased, is now being considered

·       Personal savings transfers into savings accounts are no longer being treated as a fixed expense.

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So that has loosened the reins up a bit on borrowing. However, we are not out the woods yet. CCCFA regulations are not the only thing contributing to the reduction of loans being approved. LVR restrictions, debt to income ratios, the Brightline test, increases in inflation and interest rates, along with high property prices, are all contributing to a perfect storm in terms of successful lending applications. It can feel a bit grim, but there are things you can do to work the system and get positive results.

Today, the key requirements for getting a home loan are:

Deposit

Know what properties are in your price range and work out the deposit that you need. Some banks are now lending at less than a 20% deposit. Know the numbers you need to get, and make a plan to get there with an achievable budget that is specific and timebound.

Affordability

The banks will look at your last 3 months of bank statements to get a snapshot of your spending habits and ability to repay debt. Look at your monthly spending, line by line, across your statements. See what reductions you can make to your outgoings.

Many clients I talk to have no idea how much they are spending each month on groceries, coffees, subscriptions, or takeaway. A regular review of outgoings often gives a timely reality check on what expenses are exactly, and what could be realistically diverted towards saving for a deposit or repaying high interest debts.

This doesn't mean have less fun! Rather, it is about being aware of where your cash is going to make informed choices.

Overdrafts

If you have an overdraft facility (or no overdraft facility) ensure that your account is not going over arranged limit. Even though the banks will give you the ability to do this, they also look at it unfavourably when assessing a loan application.

Consumer Debt

If you have any after pay or secondary debt, repay this as quickly as you can, and close it off. Regardless of whether you use the facility or not, the banks will calculate a portion of the full limit as a fixed monthly expense.

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What's next?

More changes in the CCCFA rules will be announced in June. We hope this will make it easier to get a home loan for you, however a lot of the changes in terms of added diligence are possibly here to stay and we will just have to work with them.

It is important to know that you can still get a home loan if you have enough deposit and income to repay the lending.

You just need to make sure you have all your ducks in a row, and you are in the best position you can be to get the loan that you want approved. As financial advisers it is our job to walk your through this process and give you the best advice.

If you are looking for a home and you have less than a 20% deposit, chat to us early. We can put a plan in place for you to get where you need to be. Or a pleasant surprise may be that you're already in the right position now to begin the process. Now wouldn't that be a nice thing to discover!

All the best,

T.

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Disclaimer: Tania Crocker (FSP769894) is a Financial Adviser with Velocity Financial(FSP95466). No investment decision should be taken based on the information in this blog alone. Please see Tania’s disclosure statement on our website.

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