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Buying a home

What the Royal Commission could mean for your borrowing power

12 July 2019

The Royal Comission into Misconduct in the Banking, Superannuation and Financial Services Industry (“Royal Commission”) in Australia wrapped up earlier this year, with plenty of recommendations made. But what does this mean for those looking to apply for a home loan?

Suncorp Local Market Manager, Andy Wilgose, explained what the Royal Commission’s recommendations mean for customers in the market for a home loan.

Expense measurement practices have changed

“After the Royal Commission we now need to pay closer attention to applicants’ expenses,” Andy said.

“Some Bank’s have relied too heavily on Household Expenditure Measure (HEM) which is a benchmark used to estimate likely household expenses. However, the Royal Commission has made it clear that closer attention needs to be placed on actual expenses that a customer incurs rather than relying on a benchmark estimates.”

“We assess actual household expenses by analysing current and previous bank statements, credit card statements, or regular scheduled transfers to gain an overall understanding of the customer’s position.”

The banks will look at several things when assessing a home loan application. However, some of the main areas are:

  • Capacity to repay (CTR)
    • Can the applicant repay the proposed loan once we consider things like income and expenses?
  • Credit history
    • Does the applicant have a good history of meeting their financial commitments?
  • Equity
    • Is the customer already a property owner with free equity or are they bringing a sizeable cash deposit into the transaction?

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Which expenses could impact your ability to get a home loan?

There have been reports of things like your daily coffee having the potential to impact your home loan application! Andy says that banks will look closely at all expenses (including all those fun things like your daily cappuccino, streaming services, gym fees, and pay-later services). But customers should take a more holistic view of their spending, rather than zoning in on one discretionary expense, such as your morning caffeine hit.

“Suncorp will now look more closely at all expenses as part of the application process. Regular payments and direct debits need to be considered as this is a current and ongoing liability. This means reviewing bank statements to ensure that we have a good understanding of applicants’ expenses and their capacity to repay a potential loan.

“Many applicants simply don’t know how much they spend and what they spend it on. Understanding your expenses and budgeting is a great first step towards taking control of your finances and knowing your position.

The Suncorp App has a budget tracker feature that automatically lists your expenses from your Suncorp account and groups them into categories such as ‘Petrol’ or ‘Groceries’. This is a great place to start.”

How you can improve your chances of getting a first home loan

For first home loan applicants, Andy says saving up a deposit of at least 20% of the property price is a good way to show your suitability for a loan to lenders.

“Save a good deposit and demonstrate a good savings habit,” he said.

“If you can bring a sizeable deposit into the transaction, not only will you provide a good ‘buffer’ for volatile changes in the market, but you may also not have to pay for ‘Lenders Mortgage Insurance’ (LMI). LMI is an additional premium on top of the loan amount to protect the lender in case of default.” It’s important to understand that LMI protects the Bank as the lender, not you the borrower. For more information on LMI, please refer to our LMI Fact Sheet.

“Consistent savings habits not only help you build a cash buffer, they also demonstrate that you’re able to meet regular scheduled payments, such as mortgage repayments.

“Ask yourself: if you’re unable to regularly contribute to a savings plan, would you be able to confidently repay a mortgage? The lender will likely ask the same question!”

The recently re-elected Liberal government has made some promises that could affect borrowers.  

“The Morrison government has advised they would set up a scheme to offer loan guarantees for first home buyers, so they could buy their properties with deposits of just five per cent of the price. This was a pre-election commitment, but more information will likely surface over the coming weeks on how this would look.

“It also appears that the current structure around negative gearing will stay in place, for now, which might please current and future property investors.”

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Insurance is issued by AAI Limited ABN 48 005 297 807 trading as Suncorp Insurance. Consider the Product Disclosure Statement before making a decision about this insurance. This advice has been prepared without taking into account your particular objectives, financial situations or needs, so you should consider whether it is appropriate for you before acting on it.