Planning to buy a property?
Sneaky expenses that add up without you noticing will no longer escape the attention of lenders being increasingly careful about loan approvals.
It’s easier than ever to have food delivered, book an Uber and stream movies and music to your device on the go, but lenders are on the lookout for modern-day expenses that could impact your ability to pay back a home loan.
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry is one of the reasons banks have become more scrupulous when it comes to mortgages, and are going through potential borrowers’ spending habits with a fine-tooth comb before granting approval. The Royal Commission, which launched in December 2017, culminated in a report to the Governor General in early February 2019, but banks have already taken action to avoid embarrassing finger pointing that they’ve been lax in their lending practices.
No longer do banks rely on customer say-so when it comes to how much they spend on ‘living expenses’ each month.
“Previously you could just take the client’s word for their living expenses and lenders would verify them, most lenders now will review three months’ savings (transaction account) and credit card statements and make sure it roughly matches the expenses in the application.” – Derek Farmer, Mortgage Broker Shore Financial
Spending under scrutiny
It can be hard to keep track of how much you spend on meal deliveries, getting around and monthly subscriptions, and impulse spending has never been more tempting.
No cash or card is required at the end of an Uber ride, for example (it’s charged directly to your credit card when you exit the car), and meal-delivery services such as Deliveroo, Menulog and Uber Eats use app-enabled systems that make ordering and paying for food a snap – an enticing option for people with busy lives. According to Canstar, Australians spend an average $2420 on food delivery annually, with almost a third ordering in one night a week.
Even pet ownership comes into the lending equation, with insurer AAMI estimating the annual cost of owning a pet to be $1335. If you’ve bought dog food on your credit card, be prepared for a lender to ask how much you spend on your dog and why you didn’t include it on your application.
Open banking reforms, slated to be introduced from mid-2019, will make it harder still to hide your spending habits. But there will be benefits, too. it will be easier for consumers to share detailed information about their expenses, and quicker for banks to approve loans. Under the open banking framework, the government has set a timeline for the big four banks to make credit and debit card, deposit and transaction account data available by 1 July, 2019, and mortgage data by February, 2020. Other banks will have an extra 12 months.
Canstar group executive of Financial Services, Steve Mickenbecker, says the idea behind open banking is to give consumers a clearer picture of their financial situation and to allow banks to make faster, more accurate assessments of customers.
Until then, it pays to be upfront with your spending habits, and confess everything from your Netflix and Spotify subscriptions, to how much you spend on that gym membership you rarely use.
Getting into some good habits early on in the process of getting ready to buy a home or investment property is a smart move. Shore Financial’s Derek Farmer advises setting up a separate savings account you can’t access via an ATM. “ Set up a direct debit into this account and don’t touch it,” he says.
Farmer also suggests doing “a sweep” every few months of unnecessary spending, and to run your numbers by a mortgage broker early so you’re clear on how much you’ll need to save for the deposit.
“Be mindful of the little voices in your head that tell you ‘you deserve things’,” Farmer cautions. “Let go of ego and trying to keep up with The Joneses.”
To fast-track your loan application, he advises submitting all requested paperwork and being honest when it comes to income and expenses. “An application that isn’t 100 percent complete will mean that the assessor has questions. Every time an assessor has questions it adds two to three days to the pre-approval process.”
Ready to buy
When it comes to bidding at auction, it’s vital to have pre-approved finance in place to give you complete confidence on the day. If buyers have finance pre-approval on auction day and bid within their approved range, it is very unlikely that the finance will then fall through. But make sure you shop around when getting finance approval. Find the finance broker that understands what you are wanting to achieve. They’ll give sound advice and organise the best possible finance deals.
A good finance broker will also be able to guide you through the process of factoring in all purchase costs when buying property so there are no surprises along the way. An extra 5-7 percent of the purchase price on top of your deposit will generally be enough to cover costs and avoids unnecessary stress at settlement time.
Be sure to factor in these expenses:
- Stamp duty
- Council rates and strata fees
- Building, pest and strata reports
- Mortgage insurance (if applicable)
- Building, contents and landlord insurance
- Legal fees
- Mortgage refinancing fees (if applicable)
No matter what happens in the banking industry, those with an organised and proactive approach to saving and applying for finance will always be one step ahead. And if that means curbing impulse Ubers and last-minute dinner deliveries? Getting ahead in the property game will make these small sacrifices well worth it.
A simply smarter property experience.
Speak to our agent about a free property appraisal.