Once the Lenders complete all the document checks they often come back to me and say, ‘Do you know your customers have an Afterpay account?’.
Once the lender detects this Afterpay facility they count it as an ongoing liability which reduces your borrowing capacity, or they request a statement to show that it has a zero balance.
In the past customer spending patterns have not been scrutinised by the lenders. Most of my customers responses to documents I now need to assess an application have been “We never expected to have to account for our spending, nor the extra requirements from the bank to show where our money has gone in past months”.
But with banks increasingly taking a closer look at the financial habits of applicants this is becoming more common.
Domain economist Trent Wiltshire said it was no surprise that the banks were now scrutinising loan applicants’ use of buy-now-pay-later platforms such as Afterpay.
“It is a debt so it should be considered just like a credit card,” he said.
APRA rules limiting lending
The Australian Prudential and Regulatory Authority has stipulated that banks should assess borrowers’ ability to service new and existing loans on the higher of 2 per cent above the loan product rate, or a floor rate of at least 7 per cent.
While this is to ensure that borrowers can meet repayments if interest rates rise, it puts pressure on borrowers to prove that their spending is well within their means.
Lending to households fell 2.4 per cent in January 2019, following a 3.6 per cent fall in December last year, according to the latest ABS figures. This leaves lending to households down 20 per cent from January last year, the largest decline since 2008, 11 years ago.
Mr Wiltshire said APRA’s policies could act as a real restriction on lending given how unlikely a rate rise is now looking.
“This floor now does seem high considering the next move in interest rates is likely to be a cut,” he said. “Some commentators have speculated APRA could reduce this floor, but APRA doesn’t look like it will move.”
Why banks are targeting spending
Banks have begun examining spending habits more closely, with less focus placed on the household expenditure measure and an expansion of expense categories to include items like streaming subscriptions, healthcare costs and transport.
Mozo housing expert Steve Jovcevski told Domain banks weren’t just looking at basic expenses like they had in the past, adding that the changes were worse for people who’d already demonstrated they could pay their mortgage.
“The problem is that if you refinanced a few years ago, it’s now very difficult to do it again,” he said.
“They’re saying you can’t afford the loan even though you’re paying it today. It’s a bit unfair in that respect.”
Clean up your credit
Our advice to cleaning up your credit.
- Begin cleaning up your credit 3 months prior to a new mortgage application.
- Make sure all current credit cards are paid on time (by the due date) and haven’t broken the credit limit for the last 3 months
- Make sure any personal loans you have are paid on time, so no late payment fees for the last 6 months
- Three months is a minimum with most lenders for current debts/liabilities and transaction accounts, but new credit reporting meant any unpaid debt – as far back as six years – could come home to haunt buyers. If you are in doubt as to how your credit file may look we would suggest you get a copy of it.