The mortgage landscape has changed substantially in the wake of COVID with lender norms getting a lot more stringent. Given the changing lender requirements coupled with the urgency to apply for timely relief, it is not uncommon for borrowers to make moves that could adversely impact their mortgage approval chances. Here’s a quick peek into common mistakes borrowers should avoid.
Accessing your superannuation without experiencing any financial hardship
On March 22, 2020, the federal government announced that individuals facing COVID caused financial hardship could withdraw up to $10,000 per financial year
from their superannuation fund
. A lot of people accessed their super in anticipation of COVID financial hardship without experiencing it. Lenders view prospective borrowers that have accessed their super as financially insecure, thereby significantly reducing their chances of mortgage approval. Potential borrowers looking at a home loan should, therefore, steer clear of using their super to either show genuine savings or accumulate a home loan deposit – unless it is through the First Home Super Saver Scheme
Opting for a repayment holiday in anticipation of financial distress
Several borrowers especially the first time round applied for a holiday in anticipation of hardship as they felt they would probably not get timely relief when they faced financial distress due to the rush the banking system would experience. A mortgage holiday pushes up the cost of a loan as interest capitalises during the holiday period. To make up for this, a borrower would either need to increase repayment amounts, extend the loan tenure or opt for a combination of the two based on the lender’s policies. In all cases, this would delay homeownership, eat into savings and most importantly impact your ability to borrow in the future. A repayment holiday should, therefore, be viewed as a last resort and only in case of genuine need.
Extending a mortgage holiday without considering alternatives
Extending a mortgage holiday isn’t always the best way forward. Consider alternatives. There are three possible situations.
- You are in dire financial straits and don’t see an income correction any time soon: In such a situation, it is best to apply for a mortgage holiday without missing a repayment.
- You don’t see any income correction in the foreseeable future: If you happen to be in a high-risk industry like international travel or tourism and don’t expect things to improve, then opting for a mortgage holiday may only dilute your property equity further. Under such circumstances, it may be a good idea to bite the bullet and look at selling your property while you still have equity in it. Lenders are assisting affected borrower as much as possible to make the best of a property sale.
- You are just about meeting repayment requirements but are looking at improving savings: If you are looking at building your savings without increasing the cost of your loan then consider these options:
- Interest-only repayments: You could check with your lender on interest-only repayments for a fixed duration. This could help you reduce repayment amounts without increasing the cost of your loan as much as a mortgage holiday.
- Refinancing: If your home loan is over two years old, there is a high possibility that your rate isn’t the most competitive in the market. Even a small dip in your interest rate could reduce your payment size substantially instantly offering you much needed financial respite.
Increasing online spending
With many Australians working remotely coupled with a consequent reduction in daily commuting expenses, many of us have increased our online spending thanks to this extra saving. This increased online spending could adversely impact the chances of mortgage approval.
With lenders getting more conservative and cautious with dispensing loans, they are likely to scrutinise borrower spending habits more closely. Here’s what prospective borrowers need to keep in mind:
- Lenders are obliged to check your living expenses and will know if you have credit card accounts from your credit report.
- Many lenders will request copies of bank and credit card statements to check your spending patterns
- If your online spend has increased significantly during COVID, they may view this as long-term spending, which could limit the amount you can borrow.
So, if you are looking at securing a mortgage, be cognizant that a spike in your online and credit card spending activity could adversely impact your chances.
If you are considering a home loan, it’s best to reach out to us to enhance your chances of approval.
The information is a compilation from various sources for your benefit and should not be relied upon in lieu of appropriate professional advice.