The economic damage wrought by the COVID-19 crisis has forced lenders to rethink how much money they will lend for a property purchase and to whom.
For some home buyers, the lenders’ policy changes could have major effects on when they’ll be able to buy and the sort of home they can afford.
Here’s what has changed in lender policies.
Reassessing borrowers’ incomes
When lenders assess how much money they’re prepared to lend you, one of the key considerations is your income, because this determines how much debt you’ll be able to pay off.
However, as a result of the COVID-19 crisis, lenders have changed the way they assess potential borrowers’ incomes when deciding how much to lend and even if they will lend at all.
They are placing closer scrutiny on income from sources such as casual work, overtime allowances, shift penalties, share dividend payments and rental income, and either not counting any of it in their calculations or counting less of it than they used to. If you would like to know more about how causal and shift work could help and hinder your home loan, read more HERE.
The net result is that buyers relying on these sorts of income to boost their repayment capability may be able to borrow less.
Additionally, lenders are becoming stricter on lending to people who rely on casual income. Many will require letters from their employers stating that they will still have a job in two or three months’ time and some lenders are not extending loans to workers relying on income from the hospitality and tourism sectors.
Much of this makes good sense anyway. If your income has been badly hit by the coronavirus crisis, now probably isn’t the best time to take on a major debt.
While this might be dispiriting news for would-be buyers, it’s worth remembering that the situation is changing rapidly, so your employment situation might change in the next few months or lenders’ might alter their policies.
it’s important not to give up and to keep saving, says uno mortgage advisor Amanda Denham. In particular, keep an eye on what you spend, because lenders look at the past three months’ spending when deciding how much they’ll lend. You don’t want to undo all your hard work with a few impulse purchases that will reduce your borrowing capacity.
The good news for borrowers with a PAYG job and an income that is mostly or all base salary is that they will be largely unaffected by the changes.
Resetting loan-to-valuation ratios
Lenders are also changing their loan-to-valuation ratios – that is, the percentage of a property’s value they are prepared to lend. For instance, an LVR of 80% on a $1 million property would mean they would lend you $800,000 and you would need a $200,000 deposit.
However, people with lower deposits than required by the LVR can still take out home loans if they take out lenders mortgage insurance, which means the lender will still be repaid if the borrower defaults.
In the past, lenders were able to lend up to 95% of the value of a property if borrowers had mortgage insurance, which could be added onto the loan, taking the LVR to around 98%.
But uno’s Amanda Denham says they have become more cautious as a result of the coronavirus and are now requiring LVRs of 85% or 90%.
Additionally, mortgage insurers would provide cover for loans of up to $1.2 million, but now most have an upper limit of $900,000.
The end result of these changes is that buyers will either need a higher deposit or will have to scale back the sort of property they want to buy.
For some buyers, the solution might mean saving for longer to boost their deposit. And in the meantime, the market might return to normal and restore LVR limits.
If you would like to discuss these changes with an expert, you can reach one of uno’s brokers from 8.30am – 6.30pm Monday – Friday and 9am – 5pm on Saturday. You can reach us on 133 866 or by email on firstname.lastname@example.org
You can also contact us through our online portal https://unohomeloans.com.au/home-loans/#chat-with-expert