Why’s it so hard to get a loan? What’s changed?
3rd September 2018
The new era of lending is here! You can either take advantage of the changes or we become a victim, but please read this Blog in detail – the new Credit Reporting regimes effects each and every Australian whoever wants to apply for credit for any product or service – from setting up a mobile phone account, to buying a new home or investment. Credit report ISN’T just going to report the severely negative, but the everyday activities such as repayment history and finance applications. The data will produce patterns and display a history the Lenders and credit providers will then assess and read into to determine your “risk profile” which will either benefit you or harm your credit applications in the future.
Let’s start with the “WHY”
Banks/Lenders are businesses. Their business is to lend money for a financial gain. It is their money and not only do they want to ensure they are lending their money to a person who can return the money, they want to make sue the borrower is likely to have the capacity and the Character to honour that commitment. When it comes down to the number crunching, the banks have very clever economists and financial wizards which determined economic models regarding human consumption based on demographic factors – one famous model is the Henderson Poverty Index, which stated that if you are married, with 2 kids, earning X, you most likely spend Y on your cost of living. In this model, a bank could feel comfortable that it had effectively tested the clients ability to repay the loan they are applying for.
Behind the scenes, every economist has also been taught that social humans largely adhere to another model which believes that we have largely have a “marginal propensity to consume” based on the income we earn and therefore we spend our disposable income. The banks have applied logic that the vast majority of people adjust their “marginal propensity to consume” based on their NEW expenses and life goes on for more cases than not (knowing that there will always be some that will meet some difficulty but the majority will be ok).
In 2018… this isn’t acceptable.. In the age of corporate responsibility and societies change to care for all as equally as possible, we want to care for each and every person… burning a few for the good of the many is no longer an acceptable practice and the banks one biggest change is in their assessment of their prospective borrowers to repay is now completed based on each and every borrowers personal financial ACTUAL circumstances…historically.
Therefore, if you so happened to be saving up for a holiday and spent all your money on a holiday – that means that you have in fact spend 100% of your disposable income – that fact that you won’t do 8 week trips to Europe when you have a $1.9m mortgage isn’t a good enough declaration… as we have a natural propensity to consume, only very few are model bank clients that work off spreadsheets and multiple accounts delineating their spending money, from their bills, rent/mortgage, car repayments, clothing Christmas, holidays and auxiliary of course…
Here is “HOW” to make it work in your favour.
So in order to now operate in this new world of credit, we just need to understand the “rules of engagement”… read above…..and here are FIVE simple tips:
- Plan ahead and accept the changes…..
- You need to show and demonstrate your ability to repay. But, not on today’s low rates, use 7.25% as the interest rate for your loans and base the repayment over 30 years with P&I repayments (even for an investment property). Put the money above your current mortgage or rent paid into a separate saving account or make as a separate additional repayment into your off set account (if you have a loan). Demonstrating your ability to meet the new and higher repayments. This is the EXACT proof the banks want to see.
- Set up all bill/expenses to be paid from ONE credit card and ensure that credit is swept from your OFF SET ACCOUNT and ensure your off set account has a healthy 2-3 months of expenses buffer sitting it at all times (if not possible – start building up the buffer today and monitor your expenses closely – you just need to have enough money to clear the credit card and you will never have a late bill reported on your credit file. This change will strongly increase your “Character” component and again PROVE your financially responsible.
- Honesty is the best policy – do your own affordability spreadsheet – disclose it to your mortgage broker and/or financial planner and work on real numbers.. not generalisations.
- Teach the kids early – don’t allow them to be a victim before they have even started their journey into adulthood.
Read all Mandatory Comprehensive Credit Reporting Treasury documents – Learn More
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This article is not credit or investment advice and does not take into account the investment objectives and policies, financial position or credit composition of any recipient
. It is intended as industry commentary on loan credit and credit scoring in Australia.