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The Two Things Banks Actually Care About for Home Loans
184 Plays12 days ago
Think your credit score or smashed avo habit is what makes or breaks your home loan? Think again. In this eye-opening episode, Jayden reveals the two critical questions every bank asks before approving a mortgage—and why everything else is just noise. From loan-to-value ratios to serviceability and quirky property red flags, get the insider knowledge that could mean the difference between rejection and approval.
Want to take charge of your mortgage and build wealth? Get a free home loan health check from Hunter Galloway – the home for homebuyers. Visit huntergalloway.com.au or call 1300 088 065.
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Transcript
Introduction to Key Loan Assessment Questions
00:00:00
Speaker
Forget everything you've heard about credit scores, coffee habits, or even having to cut back on the smash ever on toast. When a bank assesses your home loan application, none of these things are their top priority.
00:00:11
Speaker
Instead, there are only two questions that a bank truly cares about. And if you don't know what they are, your application could be doomed from the start. Today, i'm going to give you the insider view on what the banks are really looking for.
00:00:21
Speaker
Everything in the lender's credit policy is about finding out answering these questions. In fact, once you understand these two questions, the whole loan application process starts to make a whole lot more sense. So what are these magic questions?
00:00:32
Speaker
Well, plain English, they pretty much boil down to firstly, will the bank get their money back? It's all about the security of the loan, usually summed up as something called the loan to value ratio or LVR. yeah Essentially, they want to know about how risky it's going to be for the bank to lend you this money given the value of the property.
00:00:48
Speaker
And two, can you afford to make repayments? This is about your ability to service a loan, known as serviceability in bank speak. In other words, do you have enough income and a stable enough financial situation to comfortably pay the loan back with interest?
00:01:00
Speaker
Everything the bank asks for, your pay slips, bank statements, credit history, property details, savings, feeds into one of these answers or usually both of these questions. I'm going to take you through this process in more detail. What you need to understand if you're looking to apply or if you're looking to build a portfolio, why the answer these questions still matter.
Understanding Loan-to-Value Ratio
00:01:19
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.
00:01:29
Speaker
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.
00:01:44
Speaker
Let's jump in. Question one, will the bank get its money back? When a bank lends you hundreds of thousands of dollars to buy a home, the number one worry is risk. Specifically, the risk of losing the money if things go wrong. So the first question the bank asks themselves is, will we get our money back?
00:01:59
Speaker
It's all about protecting the bank's interest in a worst-case scenario situation. In practical terms, that boils down to the loan-to-value ratio, your deposit amount, and the quality of the property being used as security. Understanding loan-to-value ratio.
00:02:10
Speaker
Let's talk about LVR because it's a term you're gonna hear a lot of. Loan to value ratio is just a fancy way of expressing how much of your property's value you're borrowing. It's a pretty simple calculation. LVR ah equals loan amount divided by property value times 100%.
00:02:23
Speaker
For example, if you're buying a property value at 500,000, you have $100,000 deposit, you a $400,000 The LVR 400,000 divided by 500,000, 0.8. so you need four hundred thousand dollars alone lvr is four hundred thousand divided by five hundred thousand point right i.e. 80%. the banks look at this, if you have a larger deposit, the LVR lower and it's less risk to the bank.
00:02:38
Speaker
If you have a smaller deposit, the LVR is higher and you're kind of seen as more risk to the bank. Banks place a lot of emphasis on LVR yeah when they're assessing your loan. Why? Because it directly affects how much they're going to lose if you don't pay back the loan and have to repossess and sell the property.
00:02:51
Speaker
The higher the LVR, meaning the more of the property value is funded by the loan rather than your own deposit, the less cushion there is for the bank if property values fall or they you sell quickly. Think of it from the bank's perspective.
00:03:02
Speaker
If you've only put down a 5% deposit, so you're borrowing a 95% loan, and the housing market dips slightly, the property might no longer be worth what you owe. In a worst case scenario where the bank has to sell the house, there's a real risk that they might not get all their money back after paying the selling costs and any market losses.
00:03:17
Speaker
That's a nightmare scenario to them. On the other hand, if you contribute a 20% deposit, so you've got an 80% LVR, there's way more buffer. Even if property values drop, the sale of the house would likely cover the remaining loan. So the lower the LVR means the lower the risk the lender and banks like that.
00:03:32
Speaker
The bank's question, will we get our money back, is really about managing collateral risk. When the lender looks your application, the property and the loan amount are really the first thing they look at. Some things that banks wanna ask about your security or your property is, how much the property worth, really?
00:03:46
Speaker
Doesn't matter if you think you're getting the deal of the century, the banks will still do their own valuation of the property, and sometimes they might be a bit more conservative than what you're actually paying. The bank's job here is to make sure that the property value isn't inflated. They'll ask if we had to sell this home today,
00:03:59
Speaker
What could we realistically get back for it? This is why, and we don't see it often, but sometimes a bank valuation comes in lower than your purchase price. The bank and the value are being cautious because it's their money on the line too. Where is the property located and what type is it?
00:04:11
Speaker
Location and property type can affect how easily it can be sold. Is your property in a big city with a liquid market or a remote area with a few buyers? Is it a standard house or unusual property, like a small studio or rural property with heaps of land?
00:04:23
Speaker
Banks have policies on all kinds of properties they'll accept as a security. For example, a lot of lenders have restrictions on apartments below a certain size, often under 40 square meters, or properties that they consider in high-risk postcodes or volatile areas.
00:04:34
Speaker
This can be mining towns or some regional areas. They're essentially asking how easy would it be to sell this property if we needed to? A house in a desirable suburb is easier to offload than a specialty property in an area with low demand.
00:04:45
Speaker
What is the LVR? As I mentioned earlier, this is a core metric when the banks are assessing
Impact of Loan-to-Value on Insurance and Rates
00:04:50
Speaker
application. The higher the LVR, the riskier it is for the bank. Every bank has its own LVR ah limits. Generally in Australia, most lenders consider anything above 80% LVR a higher risk loan.
00:05:00
Speaker
Very few will lend 100% of the property value. That usually requires a guarantor or another property of security. Most will lend up to 95% of the property value, often with conditions. Because of these considerations, you'll see banks do a few things when the LVR is high. Firstly, there's lender's mortgage insurance.
00:05:15
Speaker
If your LVR is above 80%, almost all lenders will require you to pay a lender's mortgage insurance outside of the government home guarantee schemes, obviously. LMI or lender's mortgage insurance is an insurance that protects the lender, not you, in case they have to take a loss in the loan. If you default and the bank has to repossess your home and sell it and they say make a $50,000 loss, the lender's mortgage insurer pays the bank that $50,000 and then they'll still come after you for that money, which is crazy.
00:05:38
Speaker
But in short, LMI shifts the risk of high LVR ah loans off the banks and onto the insurer. This is why banks are willing to approve the loans above 80% because even though there's less cushion there, the LMI covers their risk. But as I said, it doesn't protect you at all. It's there to protect the bank.
00:05:51
Speaker
The main benefit to you is it allows the bank to lend you with a smaller deposit than that otherwise except. Higher interest rates for high LVR ah loans. Some lenders charge a slightly higher interest rate for loans with an LVR yeah above certain threshold.
00:06:02
Speaker
This can often be tiers between 80 to 90% might be certain rate. 90% plus is a different rate. This is a way to compensate for the extra risk. The logic here is if you're buying say 95% of the property's value, the loan is riskier so the banks want to make a higher return or interest on it.
00:06:17
Speaker
Not all banks do tiered pricing for LVRs, but across the industry we do generally see better discounts or better rates for lower LVR loans if you've got 20 or 30% deposit for example. This is rewarding borrowers for a bigger deposit.
00:06:28
Speaker
And it can be frustrating. You might see the banks, some of the big banks, Combank and Westpac do this all the time, where they're advertising a juicy mouthwatering rate. and it's only for borrowers with a 70% or under LVR. ah So you need to have a 30% or more deposit, which is crazy.
00:06:41
Speaker
Additional credit requirements. At very high LVRs, so I'm talking 90% and above, some banks do put extra conditions in there. They may want to see genuine savings. That's evidence that you've saved at least 5% of the purchase price yourself and it wasn't just a gift, which shows you've got a bit of financial discipline. They might also be stricter about your credit scores or other aspects because you have less equity than people with a 20% deposit. Some lenders even reduce the maximum loan or LVR if the property is in the location they deem risky. From the bank's point of view, it's all about layering their risk protection.
00:07:09
Speaker
Property and policies. right so touched on property specifics, but now let's expand on that because this bit often surprises people. You might assume that if you got the required deposit, any property choose is fine, provided the price is right.
00:07:20
Speaker
But banks have entire manuals, on looking pages and pages, of guidelines that feed into this risk question. Here's a couple examples of property-related lending policies in Australia. Location and postcode restrictions.
00:07:31
Speaker
Lenders sometimes categorize postcodes by risk. A booming capital city might be a category one, that's the lowest risk, whereas a small town in a regional area could be a category three or a category four, a high risk suburb. So if you're buying in a less typical location, be prepared for maybe needing a high deposit or shopping around for lenders that are comfortable in that area.
00:07:48
Speaker
Property type and size. Many banks won't lend on an LVR above 80% on units smaller than 40 square meters and they often want a higher deposit. Ultra small apartments have a limited buyer pool and their values can sometimes be more volatile. Similarly, specialized properties like student accommodation, service apartments, company title units can be completely off limits if you have a smaller deposit and require higher LVR.
00:08:08
Speaker
If you're a first time home buyer considering something like a student apartment because it's cheap, heads up, finance could be a bit risky and tricky. Also, if the property is unique, like heritage listed warehouse conversions might only have a few comparable sales compared just to just regular two bedroom apartment, which then in turn means the bank's value puts conservative value on their property.
00:08:23
Speaker
Land size and usage. If you're buying acreage or a hobby farm type of property, a lot of lenders have limits on how much land size has to be. And if it's over, say, 150 acres, they may not consider it a residential property and it turns into commercial and you need a big, big 30% deposit to do that. At the end of the day, from the bank's perspective, it all ties back to how easy it is to sell property and get their money back.
00:08:43
Speaker
If your property might require a specific buyer, then it's risky for the bank if they have to sell it under duress. Construction and condition. If the house is in poor condition, so it's not livable, some banks might not give you the loan until the repairs are done or require a low LVR.
00:08:56
Speaker
New construction, house and land packages, or off-the-plan units carry risk and valuations coming in under purchase price, especially if the market shifts between when you sign it and often two or three years in the future when you settle. Banks know this and sometimes they value off-the-plan properties more conservatively if you're a few years out or if you're getting closer to it can go the other way if the market's moved up a lot.
00:09:13
Speaker
Your off-the-plan property could be worth more today because you signed a contract five years ago. At the end of the day, the bank wants to avoid a scenario where you agree to pay $500,000 for a property today. And then in five years, if the market dips, if something was $450,000, they're going to be underwater.
00:09:27
Speaker
So this is why if you're buying off the planned property, can't get pre-approved. You have to wait until a month or two before settlement and look to apply for finance then. Off the planned properties aside, the key point here is that all properties and deposit factors are the bank's way of mitigating the risk on the collateral side, on the security, on the property.
00:09:41
Speaker
Each bank has its own detailed credit risk policy addressing these, fitting their particular risk appetite. Some smaller lenders or non-bank lenders might be a bit more flexible on certain properties or higher LVRs, but often the trade-off is it's going to come with a higher interest rate or higher LMI premiums. This is where a good mortgage broker really earns their keep.
00:09:56
Speaker
From our point of view, we keep across different lender policies and which scenarios they're to be comfortable with. But whether you go through a broker or you go to the lender directly, understanding will the bank get their money back question is largely looking at the LVR ah and property risk helps you make sense of some of these weird conditions that banks might throw at you.
Improving Loan Security
00:10:12
Speaker
So how can you improve your position on this question, how the bank's going to get their money back? As a home buyer, there are some things you can do to help the banks feel a bit more comfortable in your situation. Save a bigger deposit. All right, it sounds obvious, but I'm just going to say it.
00:10:23
Speaker
The closer you get to that 20% deposit, the easier it gets from the bank's credit policy perspective. At a 20% deposit, 80% LVR, you eliminate the LMI and you look a lot less risky. It also simplifies the bank's policies because there are some smaller banks where they've got a certain policy up to 80%. And as I said before, from 80% above, they have the lender's mortgage insurance policy. So it changes things around that.
00:10:43
Speaker
The next step is consider first home guarantee scheme or other schemes. If you qualify for the government home guarantee scheme, then you leapfrog the deposit issue. The first home guarantee scheme allows a 5% deposit without lender's mortgage insurance.
00:10:55
Speaker
There are limited spots and property caps on this, so check out other videos we've got on that whole dedicated scheme. Using this home guarantee scheme though, you actually use the bank's policy under 80% LVR, ah so it is a bit more flexible and it's lower risk to the bank.
00:11:07
Speaker
Use a guarantor or family pledge. If you're lucky enough to have parents willing to help you go guarantor, the banks may allow a family guarantee. This is where your parents might use the equity in their home to secure part of your loan. Effectively mean the bank could say lend you 100% the full purchase price and they put 80% of that against your home and then 20% against your property's view.
00:11:24
Speaker
That way that when the bank's assessing things, they view your portion of the loan at that 80% and there's no LMI needed. It's a great way to overcome a low deposit, but you want to make sure your parents are comfortable with this. So chat to a broker in a bit more detail on that.
00:11:36
Speaker
We've also got a bunch of videos on guarantor loans you can check out. Next up, choose your property wisely. Quirky properties like tiny apartments, rural properties, I've even seen clients try and buy converted churches, seem really cool and funky, but Don't be surprised if the banks have different policies around this.
00:11:50
Speaker
Chat to your broker if you are looking at anything that's just not a standard four bedroom, five bedroom house or a unit because the banks can have strange policies around this. The other one that's pretty common is the apartment size. So generally over 50 square meters, you're all good.
00:12:02
Speaker
Some have different policies between 40 to 50 square meters if it's including internal, balconies, car spaces, a bunch of other stuff. So speak to your broker on the specifics around that. right, so that covers the first big question, is the bank going to get its money back?
00:12:13
Speaker
We learned that it all comes down to the property value and the LVR you deposit and mitigating things like the lender's mortgage insurance costs. But the second question is really as important.
Serviceability Calculations Explained
00:12:22
Speaker
The bank's second question is this, are you able to comfortably pay back this loan month after month, week after week without falling into hardship or missing repayments?
00:12:30
Speaker
In lender lingo, they put it down to one word, serviceability. Your capacity to service or repay the loan given your income and financial obligations. While the first question about getting the money back is about protecting the bank in case of default, the second is aimed at preventing the default in the very first place.
00:12:45
Speaker
Banks don't want to repossess your house. It's a last resort and really it's lose-lose situation in many ways. They'd much rather lend to people who would reliably make repayments, banks after all earn its interest and profit smoothly, and you keep your house and everyone's happy.
00:12:59
Speaker
So the end of the day, the banks will go to great lengths to analyze your ability to pay the loan. What is serviceability? How banks calculate your ability to repay. In simple terms, serviceability is whether your income is enough to cover your proposed loan repayments plus all the other living expenses and costs with a bit of a buffer safety.
00:13:15
Speaker
A common way this is expressed in the background in bank calculators is debt to service ratio, DSR or debt to income. But at the end of the day, it's about cash flow. Money in versus money out. Can you afford the loan? Every lender will take your financial information and plug it into their own serviceability calculator. This is basically a formula that includes your income from all sources, salary, income, bonuses, overtime, commissions.
00:13:35
Speaker
I'm talking to everything. Family tax benefits. You got it. Minus your expenses, living expenses, food, utilities, any regular expenses, basic living expenses. And if you think you've underestimated, the banks will use the housing expenditure measure, HEM, as a bit of a flaw.
00:13:48
Speaker
Your existing debt commitments. Other loan repayments you have made such as home loans, car loans, personal loans, HECS, help student debt, or other buy now, pay later obligations. And then finally the proposed home loan debt, the new details, interest rate, and therefore the new monthly repayment required. They crunch these numbers to see that you've got a surplus.
00:14:05
Speaker
Essentially, they want to confirm that you' can to have money left over after paying for these obligations and everything else. They also include a 3% interest rate buffer on top just in case interest rates go up. interest rate buffer. Can you still pay if times get tougher?
00:14:17
Speaker
One critical aspect of Australian lending practice is the interest rate buffer. Banks don't assess your ability to pay on the actual interest rate today. assess it on a higher interest rate to create a safety margin. Right now, they add 3% to actual loan interest rate to test your borrowing capacity.
00:14:32
Speaker
So if you're looking at home loan at 6%, the banks will actually check whether you can still confidently make repayments at 9%. This buffer isn't just a random number that picked out the air. It's set by APRA, the banking regulator. APRA put this 3% buffer in place back in 2021 to ensure people could still afford loans when we had super low interest rates in case the rates went up unexpectedly.
00:14:50
Speaker
Why do they do this? It's simple. The banks want confidence knowing that you'll be paying back your home loan even if interest rates shoot up or your circumstances change. It might feel frustrating if your payments at the current rates seem totally manageable, but the bank can still knock you back. What they're trying to do is protect themselves and you, I guess, from financial stress.
00:15:06
Speaker
Income, what counts and how it's assessed. Now let's break down income because not all income is treated equally in the eyes of the banks. Broadly speaking, banks love income that's stable, regular, and easy to verify. if your income situation is straightforward, a bank's job is easier and they'll feel more confident you'll keep earning that money.
00:15:21
Speaker
If it's complex or variable, they're going to scrutinize it or shade it. That means to count less of it to be safe. Here's some common types of income and how lenders view them. Salary or wages. This is your PAYG bread and butter employment. If you're full-time or part-time employed with a steady salary, banks will typically take 100% of your base salary.
00:15:37
Speaker
Many Australians in industries like healthcare, mining, sales, earn a chunk of income through overtime and bonuses. Lenders will often count this income, but not at 100% of what you earn unless it's regular and guaranteed. Typically, they might take the average of the last three months overtime and then use about 80% of how much you earned on that.
00:15:53
Speaker
This depends on the industry too, because if you're a nurse, a frontline healthcare care worker, they can take 100%. But for example, if you earn $10,000 in overtime over the last three months, they'll shade that. They'll take 20% off. So then they use $8,000 in your income assessment.
00:16:05
Speaker
It's the same thing like bonus. A lot of banks, if you get an annual bonus, will want two years history. There's some that can consider one. But the key thing is consistency. The banks really want to see a history, pay slips or group certificates showing year on year and showing that your ability to earn that income wasn't just a big flash in the pan. It's going to be consistent over the next few years.
00:16:21
Speaker
Casual or contract income. If you're casual worker or on a contract, like a fixed term contract or labor high, Banks are probably less easy on your income because it's not seen as secure as a permanent role, but it's not a deal breaker. They specifically want just a bit more history to prove stability.
00:16:35
Speaker
For casuals, minimum is usually six months in your current role and they're pretty happy with that. If your income goes up and down, it fluctuates a lot. They may want to annualize last six months income to work out what your income is if you're casual contractor.
00:16:48
Speaker
And if you're only being short time in the role, we can sometimes use your last two years worth of history to show you that, well, Jayden's been in the IT industry for two years. He's just changed for new contract. That's completely fine with a lot of banks too.
00:16:58
Speaker
Self-employed. This is a big one. If you run your own business or work for yourself, so... In other words, if you invoice some every month and you have to pay your own tax, the banks will typically want at least two years tax returns or financials.
00:17:11
Speaker
It's not that banks don't like self-employed borrowers, it's just that they're a bit hard to assess. Your income isn't guaranteed like an employment contract, so they compensate by digging more into your financials. If you're self-employed and a first-time home buyer, definitely chat to a broker, reach out to us, we can help out and assess situation.
00:17:25
Speaker
Investment in income. If you have an investment property, bringing in rent, dividends or shares, banks can consider that. Dividends, not as much now, but it is possible. With rental income, they'll usually only count a portion of it. So they'll only use 75 to 80% of that rental income because they assume some of that rent goes towards paying agents, maintenance, vacancies, that sort of stuff.
00:17:42
Speaker
Government payments. Certain payments are accepted income if you have kids. So for example, family tax benefits, part A and B, can be counted by many lenders. If you get a pension from overseas, I've seen some people get back counted, disability pension, that sort of stuff.
00:17:55
Speaker
um So it is possible, taxed a broker, not all banks will accept that. Other income like child support payments, if you get scholarship income, all this sort of stuff can be considered, it just depends on the bank. As you can see though, reliability and consistency of income matters. The bank basically asks, how likely is it for this income to keep coming in the foreseeable future? a permanent job with a salary? That's easy as.
00:18:15
Speaker
A commission job where you get paid a commission one week and then it's gone for six months swings wildly and makes it risky for the bank. And this is why it can be frustrating. You might hear of someone getting a loan approved really easily and someone else with the same income struggling.
00:18:26
Speaker
If the composition of that income differs, say one is a salary, some is part-time self-employed, the banks assess everyone very differently. Expenses, the underestimated side of the equation. This is where a lot of first-time buyers trip up and and aren't sure what to declare. Banks will generally ask you to fill out like a living expense template for things like food, transport, entertainment, insurance, that kind of thing.
00:18:45
Speaker
They'll want a monthly figure. out They also look at, importantly, existing debts and financial outgoings. The two main parts expenses in a loan assessment, your everyday costs, like living expenses, and your debts and commitments, loans, credit cards, the like.
00:18:58
Speaker
For living costs, Australian banks typically use a benchmark called the household expenditure measure, HEM as a bit of a minimum based on your household size. You know, if it's two adults, two kids, one adult, single person, that sort of thing. If your monthly living expenses are way below that, they'll default to the HEM.
00:19:11
Speaker
And if it's way above that, they're lot of questions on what is going on there. You can Google and check out the HEM as well. And if you're a few years away from buying a house, check out your expenses in the last three to six months to see if you've got any outlying categories there and stuff you can cut back on.
00:19:23
Speaker
Now for debts. This part is often what reduces how much you can borrow and shocks people out. Because any existing loan or credit card limit can significantly eat in your serviceability. Here's how.
00:19:33
Speaker
Personal loans, car loans. The monthly repayment on a personal loan or car loan will reduce the available income that you have every month. So if you pay off or close your personal loans before applying for a mortgage, it can make a big difference.
00:19:44
Speaker
Credit cards. Even if you don't owe anything on the credit card, lenders assume you might use it. So they factor in a theoretical repayment. Many Australian banks assume about 3% of the credit card limit as a monthly expense.
00:19:55
Speaker
So if you have a $10,000 credit card limit, they'll count a $300 per month liability against it. If you have multiple credit cards, it can really add up. So if you have any old or unused credit cards, just consider getting rid of them now if you don't need them.
00:20:06
Speaker
Hex or Helplone. A lot of people have student loans. It's just part of life. Even though it's a government and income contingent loan, that's there's no interest, there's indexation, banks still treat HECS as a compulsory repayment and ongoing expense.
00:20:18
Speaker
You generally shouldn't rush to pay off your HECS just to get a loan because it's cheap debt, but at least be aware that it's potentially going to reduce your borrowing capacity and chat to your broker about what kind of difference it makes. Buy now, pay later. off These relatively new, but a lot of banks treat Afterpay zip kind of like a credit card.
00:20:33
Speaker
So they'll look at the limit that's available, or they'll look at how much you're paying per month and reduce that from your borrowing capacity. Other regular commitments. This can include child support, medical expenses, private school fees, private health insurance. These will get factored in as almost like a liability and they reduce your borrowing capacity.
00:20:49
Speaker
When the bank tallies up all your current expenses and the new mortgage repayment rebuffer, they then compare it to your income. Typically, they want to see a surplus or see that at least your income covers the expenses with a certain ratio.
00:21:00
Speaker
and here's something I want to clear up. A lot of first-time buyers think, well, if I can show the bank I've been paying $500 a week in rent, the bank should know that I can pay $500 a week in a mortgage. And it's true that it's good to be able to show that you're capable of making their payments.
00:21:12
Speaker
In fact, some cases the banks will use your rental histories evidence to not have to see genuine savings, but it doesn't help your ability to service. Rent of $2,000 a month doesn't automatically mean the banks can approve you for $2,000 mortgage repayment.
00:21:24
Speaker
They need to run through their calculators, look at your expenses and make sure it all fits together. It's also worth touching on another thing here is your credit history as part of the willingness and affordability question.
Role of Credit History in Loan Assessment
00:21:33
Speaker
This ties in because even if mathematically you can afford the loan, banks also check your past credit history and behavior to make sure you're going to pay as agreed.
00:21:40
Speaker
Your credit report in Australia shows any loans, credit cards, et cetera you've had, and any applications you've made with any negative marks like late repayments, defaults, or bankruptcies noted on there. It shows your repayment history for the last two years on credit accounts.
00:21:53
Speaker
This is called comprehensive credit reporting. If you have any outstanding defaults, that's unpaid debts that went to collections, or a history of frequently missed repayments, that's a pretty big red flag. A lot of lenders are gonna outright decline your application with an unpaid default, or at least require to be repaid, and some will want a bit of time to have passed since you repaid it.
00:22:11
Speaker
Why? Because the default suggests you didn't pay someone back And why take on the risk that you might not pay you back your mortgage? Even a small default like an old phone bill can hurt. It goes to the heart of the question, will you repay as promised?
00:22:22
Speaker
Credit score. In Australia, you have a credit score from agencies like Experion, Equifax, et cetera. Banks do look at it, but unlike in some countries like in America, it's not the sole determinant of your interest rate or approval.
00:22:33
Speaker
It's just a piece of the puzzle. A very low credit score could get you rejected by a bank. So if it's under 650, it can be trickier. But there's also some banks that don't have an exact number. They'll look at all the other bits and pieces we've covered this video.
00:22:43
Speaker
I will say though, if you've applied for a bunch of credit cards recently, so if you've applied for five different personal loans and three credit cards in the last six months, it can make a net lender nervous. They worry that you're so desperate for credit and you're taking on lots of new debt. What's actually going on in your life to cause that?
00:22:56
Speaker
Even multiple home loan inquiries in a short period can ding your score and perception. So try not to just take a shotgun approach and apply forever with a home loan. Do your time, research and use a broker that's going to help you one step at a time.
00:23:07
Speaker
So in short, credit history is like a report card of your willingness and reliability to pay. The bank already covers your ability with the income expenditure stuff, but they also want to trust you will make the mortgage your priority. If your history has some blemishes on it, you can't really hide it, but be upfront. Sometimes a good explanation like you lost your job, you weren't traveling, you fell behind can help.
00:23:25
Speaker
Especially if there's issues in the past, it was four five years ago, you might have gone through a separation. There are banks that will willingly consider that. And worst case, there are specialist lenders like Pepper and Liberty and Latrobe that can consider a situation if your credit file is in great shape.
00:23:38
Speaker
All right, so putting it all together, thanks for sticking to this rundown. Hopefully, it hasn't been too much detail. Maybe not enough. i don't let me know. me in the comments below. By now, you should have a clearer picture on what makes the home lending process so complex.
Recap of Key Questions for First-Time Buyers
00:23:48
Speaker
Interestingly, at the end of the day, it boils down to two key questions.
00:23:51
Speaker
Can the bank get its money back if things go wrong? And can you afford the loan repayments so things don't go wrong? Aussie first home buyers, understanding these two questions can be pretty empowering. cuts through a lot of the noise and helps you know where to focus in preparing. Building a solid deposit and choosing an affordable property is going to really help answer the money question.
00:24:07
Speaker
Organizing your finances, your income expenses, debt can help prove you can make those repayments. And hopefully you've addressed some of the misconceptions in the market. By focusing these two questions, you're to increase the chance of a smooth approval and you become a more informed borrower and not over borrowing it too stretched.
00:24:20
Speaker
If you need help with a home or finance, hit us up at huntsgallow.com.au with a home for homebuyers across Australia. And if you've got any questions, leave a comment below. I read every single one. And until next time, I'll see you later. um