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Buying a Home in 2024? Why It’s Tougher Than Ever to Get a Loan
185 Plays2 months ago
In this episode of the Buying Your First Home podcast, we break down the key changes in lending requirements, from APRA’s buffer benchmark to debt-to-income ratios, and how they affect your borrowing power. Discover practical tips on improving your loan eligibility, understanding bank scrutiny on expenses, and why working with a savvy broker can give you an edge in the current market. Tune in to ensure you're fully prepared for your home-buying journey!
Stop guessing about your buying power! Get a FREE personalised home buying assessment with Hunter Galloway. Call 1300 088 065 or visit huntergalloway.com.au
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Transcript
Introduction to Home Loans and Regulations
00:00:00
Speaker
Getting a home loan used to be such an easy experience, now it can just feel frustrating. And it's mostly because of government forces that have been pushed onto the banks. We're breaking down exactly what's changed and how you can still get a home loan easily.
00:00:12
Speaker
Welcome to the Buying Your First Home Podcast, your personal guide through the Australian housing market. Here we tackle the big questions and the small details that come up when buying your first home. From financial prep to finding the right neighbourhood, we're here to ensure that you've got all the knowledge at your fingertips. So let's take the first step towards unlocking the door to your new home.
Impact of APRA Buffer on Borrowing
00:00:37
Speaker
So starting from the top, the APRA buffer benchmark. This has been the biggest change that's really cut a lot of people's borrowing capacity and serviceability. Yeah, so the banks have to check if you can handle your payments if loan interest rates jump up by 3%. So this isn't new. APRA has bumped it up from 2.5% to 3% back in October 2021, and they've kept it there. This is what they call like the the APRA buffer. So it's designed to give you some room in case interest rates change.
00:01:07
Speaker
then you're not going to be immediately under mortgage stress. Let's say you are looking at a loan and say 6% interest, the bank's going to check and see if you can manage to pay at 9% interest. It's a good thing in some ways, but it's also a bit of a frustrating thing as well, Jaden, because it cuts your borrowing power by you know about 5%. It does, and it's one of those things where even the banks themselves have gone back to the regulator and said, well At the moment, by our own models, we're at the top of the interest rate cycle. It doesn't look like the interest rates didn't get to 9%. But Apra said, no, we still want this in place to to at least have some extra checks and balances. And you can kind of understand where they're coming from there, because you know people are starting to feel a bit of the the strain from where interest rates are. And if they didn't have these buffer rates in place back when they first put them in place, then the situation would be even more dire for some people. So it's kind of understandable.
Loan Approval Criteria and Personal Finances
00:01:54
Speaker
but If you're reaching the top of an interest rate cycle and they're not going to go any further you wonder whether they're just trying to make it more difficult to get a loan and whether they're really doing the right thing by the first time by the second thing that interest in the last few years is a debt to income ratio so the banks are measuring how much you're going to be compared to your income and they want that generally to be below six times.
00:02:13
Speaker
Now, this is largely dependent on how much deposit you've got. If you've got a larger deposit, they'll allow you to have a debt to income of up to eight times in some cases. But for most first home buyers, when you've got less than a 5% deposit, they are making you keep some of these debt income ratios. So what this means if you are looking to buy a home is that really there's two factors here. There's the amount of debt that you're taking on and then your income. If you can increase your salary by potentially know changing jobs or adding a side gig to pick up or even picking up some extra shifts, then you can bump up your income, which will then reduce the ratio. The other way that you can change your debt to income ratio is to get rid of some of the debt that you're carrying. So if you have a car loan or if you have credit card debt, looking to try and pay those off before you apply for a loan means that your overall debt to income ratio will be lower, which is something that the banks want to see.
00:02:57
Speaker
The third thing that banks are looking at in more detail now are your expenses. Now, this has been a thing that has changed a lot over the last few years. It's a bit of an evolving piece, but there are a lot of banks that will request your last three months of statements. So if you've gone to a lot of fancy dinners, if you've had a holiday, some of them might say, whoa, whoa, whoa, Simon, what is going on here? But the good thing is if it's one-off discretionary thing. So, for example, i was speaking to someone earlier this week, and they said, well, I just got back from a trip to the yeah UK. It was such a fun trip. I had a really good time, but I put my flights.
00:03:24
Speaker
you know all my food or my meals i spent a lot in the last month but before that it's back to normal and we can explain discretionary expenses like that so holidays if you've been eating out a lot can explain to the bank hey like it was christmas time so i was being generous buying lots of presents that's cool but some things are non-negotiable so those are childcare if there's gambling um private school things like that just can't be explained away private health as well so keep that in mind if if you've had a lot of those expenses you have to speak to your broker and work out the best way to manage it through And there's a bit of a contrast here from you know how the banks used to do it. They would, note to some degree, would take your word for it in terms of how much you'd be saying that your monthly expenses are. But these days, they're actually like literally going through line by line sometimes through your bank statements to see what's going on. So there was an example, Jayden, I think you were telling me of somebody who went to baby buntings or one of those places, and they didn't have children themselves. And the bank was like, well, are you ah like not telling us that you are pregnant? and
00:04:22
Speaker
planning on having a family like of just the present that they bought for somebody's like baby shower or something like that level of detail sometimes they'll they'll go into that it's it's pretty well. Yeah and that was crazy because that was her existing bank that we we're applying through so they didn't actually want to see the statements but they saw it because it was their existing bank is on the transactions there so keep that in mind if you are looking applying for a loan at at those expenses. Another one that we've seen, funnily, is OnlyFans, where the banks see that as like ah a gambling expense, almost almost as a recurring thing. So as much as you might have been on some of those platforms, keep in mind that the banks see that and and will ask you when it comes time to doing your loan application. The next thing that makes a big difference is is just, I guess, on that documentation thing, one thing I see pretty often at paperworkpalooza, like you've got Simon's got, you know, yeah I keep saying Simon, but you've got accounts with
00:05:12
Speaker
ING with up bank, CBA, ANZ, you've got a bit of savings here and there.
Strategies for Quick Loan Approval
00:05:17
Speaker
And it can be a bit of a mess when it comes time to actually show the banks your genuine savings history. So a lot of the banks will want to see, you've got at least three months consistent savings for say 5% of your savings. So if you're buying a home for $500,000,
00:05:31
Speaker
they might want to see at least $25,000 of your own money saved up there. There's a couple of ways around this, but if you do have accounts all over the shop, it can be worth starting to consolidate those down. Try and keep it in one spot because it can make it more difficult when it comes time to get your loan. And also there's an opportunity here if you are planning on buying sort of several months into the future, maybe have a look at what accounts you have and maybe look at consolidating some of them, closing the unused ones, just kind of simplifying your financial situation. It'll make your application cleaner and it'll be easier for them to complete their assessment. and That also speeds up sort of the approval time on your loan. If it's more straightforward for the banks, then they will be able to process your paperwork more quickly as well. Which comes to our next point, number five, the waiting game. so There are some banks now that are crazy, crazy, crazy slow. so
00:06:18
Speaker
You know, one thing as a broker that we help you out with and and especially a competitive market is when you make an offer, you you can't be waiting three weeks to get your bank approval. You need to get it done in a week. Sometimes people are waving their finance clauses. So having a quicker bank is critical here. So chatting to your broker, make sure if you're pre-approved, once you get a contract, is that bank going to be fast to process everything? Are they going to be slow? and And to your point, Simon, if they're asking for updated statements and it takes you three days to get your receipts and things like that together, it's just not going to work. so um you want to keep that in mind. To that point as well, Jayden, and I know you guys at Hunter Galloway, like you have a certain sort of status with some of the lenders, which actually puts you to the top of the list. So applying directly through the bank yourself or potentially applying with some other brokers who haven't reached that level means that they're kind of placed lower in the priority queue. Sometimes working with the broker with that kind of status can sort of put you to need towards the top of the list. Exactly right. Gives you your application of high priority than everyone
Factors Affecting Loan Terms and Conditions
00:07:14
Speaker
else.
00:07:14
Speaker
the The sixth thing to keep in mind and that has changed over the last few years and why it is getting harder or has felt like it's harder is the retirement reality check. So as much as the banks might have eased up on how they're looking at your living expenses, they're really concerned now if you're approaching retirement. In some cases with with one of the banks, once you're over the age of 45, they double or they they second can guess they ask questions around your retirement because they're saying, well, Jaden, you're 45 years old.
00:07:39
Speaker
you're going to be 75 when this loan term finishes. Are you actually going to be working there? What is your retirement strategy? How much have you got in super? What does that look like? So one thing we do cover often as a part of our process, we'll say, well, what's your exit strategy? If you're past 45, which is the case for a lot of people, we might be 55, 60 applying for a loan. We need to look at things like your superannuation. We need to look at potentially downsizing if you're buying a big home.
00:08:02
Speaker
can you downsize to a unit if you buy a unit can you go to a different location things like that the banks are asking questions on any need to address up front and if you do address you have a reasonable answer they're fine to move on but it is just something that has come up of last recent years and this is an interesting one jayden because like it's not the kind of thing that you would think of if you.
00:08:20
Speaker
weren't working in the finance space like a buying it at at forty five you don't feel like that's a particularly old age and you're not thinking about how am I gonna retire and what's that gonna look like all that other stuff it's kind of something that's sort of further ahead in the future for most people so yeah an interesting one that. That isn't doesn't come to mind immediately for most people who are looking fine but as you say really important to consider if you're buying a house at at an older age for sure.
00:08:44
Speaker
The next thing that's changed over the last few years is the size of your deposit and how the banks weight you for risk. So in the eyes of a bank, the smaller deposit you have, the bigger loan they give you and the bigger risk there is compared to if you have a bigger deposit, their loan's smaller and you're a lower risk. So I think that's changed over the last few years is is the way that the banks see this risk rating and the way that they'll charge you interest rates. So a couple of years ago, didn't matter if you have a big deposit, a small deposit, everyone pretty much got the same rates.
00:09:11
Speaker
These days, if you have a 5% deposit outside of say the government schemes, you actually are charged a higher interest rate because you're seen as a bigger risk to the bank. So it's it's amazing, you you'd sort of think, well, you know, it's you've got a small deposit, it's kind of hard for you to get into the property market should be easier, but it's it's not that way. So potentially, the more savings you have if you're outside of the home guarantee schemes, then potentially the lower interest rate you have. But yeah interestingly, if you are getting the assistance of the home guarantee scheme, that's the 5% government scheme where the government access your guarantor, you get the same rates as if you got a 20% deposit. So this is where having a broker to help you through this process, because not all banks and office home guarantee scheme can really help you find the best deal in your situation. And we're talking about how this kind of feels like it's harder to get a loan nowadays than it used to be. And I mean, that's kind of true, Jayden, remember?
00:09:57
Speaker
Like years ago, you know i guess almost pre gfc that the amount of money that banks are willing to land with such little criteria it was a very different kind of lending environment back then you know hundred and percent hundred and five percent loans in some cases.
Navigating Opportunities for First-Time Buyers
00:10:12
Speaker
with you know, people mortg stress hasn't increased dramatically i guess it's also caused a bit of a bank battle so banks yeah next point are still fighting really hard for your business, and they're still wanting to get your business over the other bank. So one thing as a broker we can help you out with is is shopping around and instead of you having to go to this bank and that bank and compare, well, will they give me a better deal as an app, you know, see you a whoever. we can help shop you around and find other options that could find a situation a bit better. and One thing we've seen a lot lately is is sort of the growth of potentially non-banks and alternate solutions for for property investors. So where that servicing buffer really sides to bite people is if you're trying to build a portfolio, if you sort of hit your debt to income limits, as you sort of get into your second and third property, the big banks will say, sorry, we can't help you anymore. But there are non-banks there's alternatives that can be more flexible criteria and give you options to increase your portfolio and build your wealth with property. And on that subject about the the battling, ah this is one practice that the banks do that that I really think is a bit dodgy is that they don't reward loyalty. So if you're and potentially a new person that's going to get a ah home loan with say the CBA or other the big banks, they'll give you these sweetheart deals. you know They'll give you a better interest rate, a better deal,
00:11:37
Speaker
all of that stuff. And then a couple of years time, they'll maybe offer a better deal to new clients, but you're still on a different interest rate and different benefits. And they won't come back to you and say, Oh, hey, you know how we're making the loans cheaper for these people. um We should make it cheaper for you too, because you're loyal to us. and They don't do that. So one of the key things is keeping an eye on when you reach that say two year mark with your home loan to think about and reaching out to, say, a broker and doing a home loan health check to see whether you're still on the best rate. Sometimes, Jayden, you guys can just call up the banks and let them know the situation and ask for a discount back to the current rates that they're offering. Yeah, it's a service that we offer all our existing clients every at least 12 months. We'll do a home loan review. We'll contact the bank first nicely and say, hey, we're looking at doing a review. This is where the market is. This is where your rate is. We'd like to get a better deal. Sometimes I'll come back and say, yep, we definitely want to keep that person happy. Here's a better discount.
00:12:32
Speaker
The next step in that process is, well, we we sort of start rattling the cage of it and say, well, we're going to leave. Here's the other bank's offer. If you don't match this, we're going to leave. and And like you said, Simon, it can take this sort of extremes, but they'll sometimes reward your loyalty. But oftentimes it's surprisingly to say, not like we can't do anything and we may need to move. So definitely where a broker like us can help you with keeping everything sharp.
00:12:56
Speaker
Yeah, so I guess to kind of wrap up, if you are a first-time buyer and if you're in a lower income, things are a bit trickier than they used to be to get a loan, but there are still plenty of opportunities to to move forward with buying a home. You know, Jayden, you mentioned the the first-home guarantee scheme. There's the first-home buyer grants.
00:13:14
Speaker
There are options that you can look into that can help you sort of navigate through the home loan application process. And ah there's some great resources on the Hunter Galloway website, which sort of talk about some of the things you can do to prepare for getting a loan, like sorting out your finances and your debt, et cetera. And it' it's still possible to to move forward and and buy a home even if things feel a bit harder than they used to.
00:13:37
Speaker
If you're ready to explore these opportunities, contact us at huntergalloway dot.com.au. We're here to help you every step of the home buying journey. We're mortgage brokers, we're based in Brisbane, we help people all around Australia. So if you want help or a free review, hit us up at huntergalloway.com.au. We'd love to help you out. And until next time, we'll see you guys.