Banks have doubled down on their dissection of loan applications, holding up the application process to grill borrowers on peculiar transactions.
Pets, maternity leave and exit strategies are now under the microscope as banks question every aspect of borrowers’ finances.
The level of scrutiny surged during the banking royal commission, according to data from Lendi.
Prior to the commission’s public hearings on consumer lending, banks requested more information from 40 per cent of applicants.
That figure rose to 67 per cent during the first quarter of 2019, with a peak in questioning coinciding with the release of the commission’s final report in February.
Lendi co-founder and managing director David Hyman said banks were increasingly focused on whether borrowers could service their loans.
“Applicants need to be prepared to justify their expenses and provide proof of their situation across a range of areas both inside and outside of traditional lending policy parameters,” he said.
“In some cases, customers are being asked to go to extraordinary lengths to substantiate their application.”
What do lenders want to know?
Banks are now trawling through borrowers’ transaction history line by line and questioning expenses that don’t stack up with information provided by applicants, according to Hyman.
“The nature of these inquiries typically means the banks are digging into expenses,” he said. “As a result of that, more often than not banks are taking a view that someone’s expenses are higher than first stated.”
The ongoing financial impact of children and pets is a particular focus.
Hyman said a purchase at a pet store could prompt a bank to clarify how many pets the applicant actually has. Considering one dog or cat costs about $25,000 over its lifetime, it’s a concern that may be justified.
One borrower was asked whether they were hiding children from the lender because they had shopped at a baby store. In reality, the applicant had bought a pram as a gift for a friend.
Banks have also questioned joint applicants over whether children would jeopardise their ability to repay loans.
Some lenders have requested proof that borrowers are returning to work after parental leave, even if the loan can be serviced on one income.
Other borrowers have been asked to show evidence of savings set aside to cover childcare costs despite this being itemised in their monthly living expenses.
Young applicants have even been quizzed over their exit strategy – proof they would be able to repay their loan when they retire – which was previously only required by borrowers retiring within five to 10 years.
“Banks are increasingly asking for it earlier, especially for long-term loans,” Hyman said.
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Why are lenders so curious about borrowers?
The intensification of questioning is the progression of a push for more responsible lending by the Australian Prudential Regulatory Authority (APRA), according to AMP Capital chief economist Shane Oliver.
“There’s no doubt that lending standards became a bit lax through the property boom,” he said.
“Initially the focus was very much quantitative – the 10 per cent speed limit on investor lending, the 30 per cent speed limit on interest-only lending and the 7 per cent serviceability test.
“It moved towards a more fundamental focus on responsible lending towards the end of 2018. There was more talk of the Household Expenditure Measure benchmark not being appropriate.”
He said increased scrutiny was reinforced by the royal commission, which highlighted examples of irresponsible lending.
“That made the lenders somewhat paranoid,” he said. “They’ve got to this point of asking seemingly trivial questions.”
Oliver said more intense questioning would mean loans would take longer to process and the likelihood of applications being rejected was greater, but it wasn’t all bad news for borrowers.
“It could be more beneficial if borrowers are forced to think about their true ability to service a loan,” he said.
“It could result in them ending up with a product or a loan that is more appropriate for their financial circumstances.”
“If it leads to more appropriate matching of borrowers to loans that could be a good thing.”
Borrowing capacities set to get a boost
For buyers worried about how a financial interrogation could affect their borrowing capacity, there may be light at the end of the tunnel.
Last week APRA confirmed it would proceed with proposed changes to its guidelines that would lower the serviceability floor for borrowers, effective immediately.
Previously, lenders had to ensure borrowers could meet repayments if interest rates were 2 per cent above the rate they were offered, or 7 per cent, whichever was higher. Most lenders assessed applications at an interest rate of 7.25 per cent.
But historically low interest rates meant the gap between actual and assessed rates had grown unnecessarily wide.
“A serviceability floor of more than 7 per cent is higher than necessary for [authorised deposit-taking institutions] to maintain sound lending standards,” APRA chairman Wayne Byres said in a statement.
Borrowers’ serviceability will now be assessed at 2.5 per cent above the loan’s interest rate. The move would boost an average buyers’ borrowing power by 15 to 20 per cent within weeks, according to Hyman.
“Banks have implemented serviceability changes in the past relatively quickly,” he said. “I’d suggest we’d start to see it flow through lender by lender by the start of August.”
The five most important questions banks ask borrowers
While home loan applicants should expect detailed and often strange queries about their spending habits, these five questions matter the most, according to Lendi.
1. What are your living expenses?
Applicants are required to provide a highly detailed view of their monthly living expenses. Omitting details will raise doubts and questions.
2. Do you have a good credit history?
Borrowers who have been slack with credit repayments or slow to pay bills will have reduced borrowing power.
3. What is your employment history?
Banks want to see a consistent and sustainable work and income history. For full-time permanent employees, most lenders like to see at least six months’ continuous employment in their current job. Applicants who are not permanent full-time employees will face more scrutiny.
4. Are you a good saver?
Saving history is particularly important, especially for first-home buyers. Banks often want to see how a borrower acquired their deposit. The size of the deposit will also determine the loan-to-value ratio and affect the loan package offered. Lenders also like to see some extra savings that can be drawn on for unexpected expenses.
5. How do your loan terms fit with your broader plans?
Increasingly, lenders are closely examining proposed loan terms so it’s important to explain the rationale behind the proposed length of the loan or interest-only period.
Domain Loan Finder is a joint venture of Lendi and Domain Holdings.