Home loan tips to help prevent your application being refused

Some lifestyle expenses can severely damage people’s chances of securing a mortgage, so it pays to know the danger zones.

Home loans have been harder to obtain amid high house prices, rising interest rates and tougher lending rules, but some potential borrowers are shooting themselves in the foot with their own spending habits.

Mortgage specialists say not every household expense is equal when it comes to lenders assessing home loan applications, and it pays to understand their key focus areas.

Two Red Shoes mortgage broker Brett Sutton says he has seen “countless clients surprised by the level of scrutiny lenders apply to their financial habits”.

People often have an expectation of financial privacy and do not expect such a deep dive into their personal spending, he says.

“The level of detail required can feel intrusive, especially if they have not prepared for such a thorough review.”

Non-bank lender Liberty’s manager of group communications, Kate Jenkinson, says lenders can categorise expenses in different ways.

Two Red Shoes mortgage broker Brett Sutton

Liberty manager of group communications Kate Jenkinson

“For example, items such as school fees, health insurance and strata fees may be treated differently,” she says.

“Generally, lenders reference a benchmarking tool called the Household Expenditure Measure, which sets out expected expenses for a household of a certain income and family size. Any expenses that are higher than these benchmarks will attract attention.”

Here are some key expenses that can make home loan applications stand out, but not in a good way.

BUY NOW, PAY LATER

These consumer credit products have boomed in recent years but they can have a nasty side effect.

“BNPL repayments are often treated as a recurring expense that will negatively impact a person’s ability to get a loan,” Jenkinson says.

“Engaging a broker early in the home-buying journey is going to be the best way for a customer to ensure they are application ready.”

GAMBLING

Oracle Lending Solutions managing director Angelo Benedetti says online betting is a big red flag for lenders.

“The bank really drills down on those,” he says.

Even multiple smaller purchases can attract attention, Benedetti says.

“We had someone questioned about the amount of coffees they bought, four of five times a day and the bank was looking at that,” he says.

“There’s a fact-finding process we fill out with clients, and some lenders will ask for bank statements and go through those with a fine-tooth comb.

“They want to make sure people aren’t overspending in areas such as restaurants and dining.”

EATING OUT

Sutton says frequent dining out and other expensive events can indicate a high-cost lifestyle that affects your ability to save.

“Services like UberEats and other meal delivery options may offer convenience, but the extra fees can significantly add to your monthly expenses,” he says.

Sutton says late-night ATM withdrawals from pubs, clubs and casinos can signal risky financial habits.

Expensive hobbies such as collecting or high-end sports can leave lenders unimpressed too, he says. “They can drain your finances and display a pattern of high spending.”

CREDIT CARDS

You may not owe anything on credit cards but they still can play a huge role in denying a home loan.

Sutton says while large debt balances on credit cards can indicate financial stability, your borrowing power can be damaged even with zero debt.

Home loan success is more likely for people who watch their spending. Picture: iStock

“Lenders consider your total credit limit as a potential liability because you could theoretically draw on that limit at any time,” he says.

“For instance, if you have a credit card with a $10,000 limit, lenders might assume that you could incur a $10,000 debt at any point, which impacts how much they are willing to lend you for a mortgage.

“A $10,000 credit card limit can impact your borrowing capacity for a mortgage by approximately $80,000. Borrowers can improve their borrowing power by reducing their credit card limits or even cancelling unused cards.”

BIG BUYS

“Regular large purchases, such as luxury items or vacations, can signal that you may not prioritise savings or that you have high-risk financial behaviour,” Sutton says.

“Lenders want to see that you’re capable of managing your finances responsibly … during the application process lenders often request several months’ worth of bank and credit card statements.

“Overspending in discretionary and lifestyle areas really gets scrutinised.”

Originally published as Home loan tips to help prevent your application being refused