How to find the best lender for you
There is plenty of talk in the market at the moment about interest rates. Lenders are offering large discounts for new business and rebates for new borrowers refinancing with them.
Alan Hemmings, General Manager of McGrath’s mortgage broking division, Oxygen Home Loans, provides the following examples.
New business discounts (owner occupied loans with LVR below 80%)
- St George offered a 1.35% discount on new business valued above $500k and 1.45% above $1m
- Commonwealth Bank of Australia offered a 1.4% discount on new business above $750k
- Suncorp offered a 1.55% discount on new business above $150k
Refinancing rebates (T&C apply)
- St George is offering a $1,500 rebate for all new refinances valued above $250k
- Commonwealth Bank of Australia is offering a $1,500 rebate for all new refinances valued above $250k.
These offers sound great but what the banks don’t talk about is the way they assess your loan application. This is far more important than any discount or rebate because it has a significant impact on firstly, your ability to borrow; and secondly, how much you can borrow.
I asked Alan to provide some detailed information on this to help you best manage your next finance application. Over to you, Alan.
Every bank has a different process for assessing your application and this is known as your credit score – not to be confused with your credit file:
- Your credit score is a form of ranking applied to you as a person by a lender. It is based on a range of factors unique to the lender and based on the performance of their loan book. They look at all the attributes of clients who have loans that perform to determine the types of clients they will lend to; and
- Your credit file is a long-term record of your financial behaviour, which banks can access to help them calculate your credit score. Have you ever defaulted on a home loan repayment or electricity bill? Bought new furniture on interest-free terms? Applied for a home loan or any other finance? All of this will be on your credit file
How your credit score is assessed could mean the difference between application approval and decline; and it will also impact how much money you can borrow, sometimes by tens or even hundreds of thousands of dollars.
Factors lenders consider to determine your credit score.
- Your age
- Drivers’ licence – lenders see this as an indication of financial stability
- Home phone number – another indication of stability
- Number of credit enquiries on your credit file (such as home loan applications that were rejected or approved but not used; as well as purchases on interest-free terms, such as new furniture)
- Defaults on your credit file (gas, electricity, council rates, home loan repayments)
- Employment – lenders will look at your type of employment (part-time, casual, self-employed, contract or full-time); the industry you work in; and how long you’ve worked for your current employer. If you are full-time in a relatively stable industry and you don’t change jobs every two years, you will score higher than someone who is part-time or has changed jobs frequently
- Savings history – lenders will consider how much you’ve saved and over what timeframe. Your ability to save indicates your ability to repay a loan
- Other assets – includes cars, furnishings, shares etc. A strong asset base, like a strong savings history, shows you’re not wasting your income and you’re motivated to build wealth
- Loan to valuation ratio (LVR) – the lower your LVR, the better your credit score. This ties in to your savings history – the larger your deposit the better
- Residential history – lenders want to know whether you’re still living at home, boarding, renting, living in your own property etc. How long you’ve lived there is also an important indicator of stability
So these are the typical things lenders look at. But there’s also many crucial differences between lenders in how they calculate your credit score. Part of your credit score relates to ‘serviceability’ – that is, your ability make your repayments. This, in addition to your equity in other assets, will determine how much you can borrow.
- Examples of differences in how lenders assess your income (or ‘serviceability’)
- Rental income – lenders will use 60%-80% of your rental income. Some lenders will use rental income as determined by a valuation, others will use actual rent receipts
- Other mortgage debts – most lenders now apply the benchmark rate to other existing debts, so a rate of 7.5% is applied to existing mortgages rather than the 4-5% you’re actually paying now
- Credit card debt – lenders will use 2.5%-3% of your credit limit (not the outstanding balance) to calculate a monthly repayment
- Other expenses – any regular ongoing expenses will factor into your serviceability
- Bonus Income – lenders will use 80%-100% of any bonus income
- Commission income – lenders will use 80%-100% of any commission income
- Industry allowances – some lenders won’t include allowances at all, others will use 80-100% of shift allowances or tool allowances when calculating income
- Overtime – lenders will generally use 80% of overtime income
So, you can imagine what a difference it would make if your chosen lender bases their calculations on 80% of your rental income, 100% of bonus income and 100% of your allowances compared to say, 60%.
In order to ensure your loan application is approved for the highest possible borrowings; and to avoid loan rejections which will stay on your credit file for 7 years, you need to choose the lender that will assess you the most favourably when making your next application.
This is why it is so important to work with a broker to determine the best lender for you based on your personal circumstances. This is especially important if you’re borrowing for investment, as the criteria for investor loans is now tighter and interest rates on these loans are higher.
Engaging a broker costs you nothing because they get paid by the lender, but do your homework to find a reputable broker or broking company.