The coronavirus crisis is already having a devastating impact on Australia’s economy with almost 600,000 people losing their jobs in April after COVID-19 restrictions forced thousands of businesses to shut down.
Amid the financial uncertainty, banks and other lenders have changed the way they assess borrowers, in some cases, making it even more difficult to get finance to purchase a home.
Meanwhile, while tentative about taking on new clients, most lenders are bending over backwards to try and help their existing clients.
But for people looking to get a new loan or refinance their existing loan, it’s important to understand how lending practises are changing amid COVID-19.
1. Job security has never been more important
Banks are looking very carefully at the industry and sector where you work. People working in any of the sectors that have been hit hard by the health crisis – hospitality, tourism, events, aviation, entertainment and retail, to name a few – are going to find it pretty tough to get a loan, even with their existing lender.
It is still possible to get a loan if you work in one of these vulnerable industries, but you should expect to face much higher scrutiny of your job and financial position. To start with, you will need to be able to prove your income is secure and that you can meet your loan obligations.
In addition, many lenders aren’t including certain types of income in their serviceability assessment (i.e. whether they think you will be able to make your loan repayments), particularly income from casual work, contract work and overtime.
If you are in this situation and need a loan, your best bet is to talk to your mortgage adviser. They can look at your specific circumstances and help you work out what your options are.
2. Home valuers are being conservative
How well the economy and the property market hold up over the next 6-12 months will affect valuations, interest rates and mortgage insurance.
If you are borrowing to buy property, you may already find you can’t borrow as much. This is partly because the banks’ valuers are being conservative with the value they place on your property as the outlook for property is uncertain.
If your valuation is less than what you bought your property for, it pushes up your Loan to Value Ratio (LVR). If your LVR reaches 80%, you may have to pay Lenders Mortgage Insurance, and if your LVR gets too high, you may not be able to borrow the amount you need to settle on the property. If the property market worsens, valuations could decrease further.
3. Mortgage insurers are being more selective
Concerns around rising unemployment mean mortgage insurers are starting to be more selective in who they insure because they don’t want to insure a borrower if there’s a high risk they could lose their job.
This makes borrowing very difficult if you have an LVR above 80%, particularly for first-home buyers and those working in sectors considered to be vulnerable to the impacts of the crisis.
How to increase your chances of getting a loan amid coronavirus
Despite tighter lending restrictions, if you are in the position to purchase a home during the current economic climate there are four main things to consider before making a home loan application.
- Save your money and be prudent with your expenses. Buy what you need but don’t get sucked into excessive discretionary online spending; it isn’t looked upon favourably by lenders.
- Make a budget and stick to it. Banks are being extremely vigilant in examining your income and expenses, they also have very reliable data on your financial activity so you won’t be able to hide any unwise debts or expenses.
- Try to create some surplus in your financial position. Lenders like to know that even if your income drops by 20%, you will be able to meet your loan obligations and still live comfortably.
- Make sure your loan application is well-presented and comprehensive. If your application shows you have a secure income, you are operating to a budget, you have few ill-considered expenses, you have some savings and a plan for managing your finances, lenders should look upon you favourably.
In the end, your ability to get a loan is going to come down to how much risk a particular lender is willing to take on, whether you are a new or existing client and whether the lender is taking a short or longer-term view for their new and existing clients.