By Patrick Marion

If the 2 or 3 years preceeding the Global Financial Crisis (GFC) can be described as excessive or bordering on irresponsible lending, the current lending environment can only be described as the "Hangover" or the "Morning after".

As it is not uncommon among Banks, we're now seeing a fair share of "knee-jerk" reaction and over correction resulting in a much tighter lending environment even for low risks borrowers. Gone are the "No Deposit Home Loans" and "Low-Doc Loans" exist pretty much in name only.  

So what exactly has changed?

The Deposit on a house:

Whilst over the last few years lenders were prepared to accept the deposit on a house purchase irrespective of its source, borrowers now have to give evidence that at least 5% of the purchase price has been genuinely saved over a minimum of at least 6 months. Sale of an asset such as a car does not constitute genuine savings!

Many lenders have also moved to a maximum loan amount representing only 90% of the property value which means that the borrower now has to find a 10% deposit.

Borrowers Income:

Borrowers now have to show job stability and rely mostly on their base income alone to demonstrate their capacity to repay the loan. Whereas overtime had become a widely accepted source of reliable income, the Global Financial Crisis has meant that many employers are cutting back production meaning that past overtime history is no longer an indication of future income.  

In the same context, lenders are no longer prepared to accept a self-employed own declaration of income (as in Low-Doc loans) as a reliable document. Self-employed borrowers wishing to apply for a Low-Doc loan now have to back up their income declaration with at least 12 months of Business Activity Statements (BAS) and in many cases copies of their business bank accounts.

Credit Reports:

A clear credit record is no longer sufficient to obtain a loan. Too many credit enquiries on a borrower's credit file is seen as detrimental by many lenders and can result in a loan application being declined.

Defaults, even small ones, whether they have been paid or not are becoming increasingly difficult to overcome.

Credit Scoring:

Although "credit scoring" is not new in lending, banks are increasingly relying on this tool to make decisions on loan applications. Credit scoring means that a borrower is literally being assessed by a computer based on the lender's previous experience with its client base. In other words, it doesn't matter that you may have a clear credit record and can prove that you can afford the loan, if the lender has had previous bad experiences with the type of borrower that you represent, you may be denied a loan without being given specific reasons.

Mortgage Insurance:

Lender's Mortgage Insurance premiums have increased dramatically over the past few months. Borrowers with less that a 10% deposit are in our opinion being charged an excessive amount which is not representative of the risk and would be better advised to increase their savings/deposit before committing to a purchase.

Conclusion:

Be better prepared before you embark on a property purchase especially if you are a first home buyer. Talk to a Lending Specialist at least 6 months before you decide to buy and if you are self-employed at least 12 months ahead of a proposed purchase.