Home loan mistakes to avoid during the cost of living crunch

Anyone applying for a new home loan or refinancing amid the cost of living crunch needs to cut down on their credit cards and buy now pay later schemes, mortgage brokers warn.

Some banks are poring over applicants’ recent bank statements to ensure they can afford to service a loan at today’s higher interest rates plus a three per cent buffer.

Borrowers should clean up their spending habits months before they apply for a home loan.Credit: Nikki Short

Banks consider borrowers’ expenses when assessing home loan applications but have zeroed in on different costs in recent years to ensure borrowers can afford their repayments, famously cracking down on food delivery and coffees during the financial services royal commission.

Different forms of credit are in the crosshairs now as homeowners feel the pinch. Some home loan borrowers in financial hardship have been accruing additional debts via credit cards, buy now pay later, borrowing from friends and family, and unpaid utilities and council rates, according to National Debt Helpline briefings contained in a Reserve Bank Freedom of Information request released last week.

The Reserve Bank held the cash rate steady on Tuesday, in the wake of 12 rate hikes since May last year that have put pressure on home loan borrowers. Repayments on a $600,000 mortgage have risen by more than $1350 since then.

Many borrowers are yet to roll off low fixed rates onto higher variable mortgages. There were 590,000 fixed facilities expiring last year, 880,000 in 2023 and 450,000 in 2024, RBA figures show.

Credit cards and buy now, pay later facilities would affect an applicant’s borrowing power, even if they are not used often, said Gavin Dingley of BONDiQ prestige mortgage brokers.

“You might not have used those credit cards. They [still] assign those limits to you and assume they’re fully drawn and that is sucked directly out of your servicing capacity,” Dingley said.

Leighton Packer of Distinctive Finance said even dormant credit cards opened years ago should be closed, and spending habits tightened in advance as that could also hurt borrowing power.

“If you’re not prepared a few months in advance before you apply for that finance, they can get caught,” Packer said.

He said serviceability was the main problem for most applicants as incomes have not kept pace with the rising cost of living and rising interest rates as well as the 3 per cent serviceability buffer on top.

Mortgage Choice Berwick principal David Thurmond said banks were more meticulous than a few years ago in scrutinising a home loan applicant’s expenses as opposed to taking their word for them.

“The biggest difference has been how banks calculate living expenses. Banks will go through the last three months of your everyday account. They use software to scan the transactions and categorise them and match up with what you’re declaring,” Thurmond said.

He said borrowers in the market for a new home loan should be mindful of spending habits, including gambling debts, expensive dining out expenses and pet insurance.

“The other thing to be mindful of, especially those who are looking to purchase in the city, body corp fees are a massive [factor in borrowing capacity],” Thurmond said.

“A first home buyer who is buying in Collingwood, his body corp fees are $5000 a year. That’s $400 to account for a month. That’s like having a car loan, that reduces your borrowing capacity by roughly $100,000.”

Even so, other banks have been bending the rules to write new loans as business slowed.

The value of new home loan commitments in August was 9.4 per cent lower than a year ago, on ABS data, albeit picking up from its February lows.

Forty40 Finance mortgage broker Will Unkles said some banks were adjusting internal assessment policies to improve applicants’ borrowing power.

For example, normally banks accept 80 per cent of rental income and one major has adjusted that to 90 per cent to boost borrowing power for some.

“They really want to give you money. So, when rates are going up like that, they too, are trying to find a way to engage their clients,” he said.

Serviceability is the main problem for borrowers, brokers say, as many are assessed at around 9 per cent.Credit: Peter Rae

Founder of Open Home Loans Samuel Philipos said some refinancers may have the opportunity to be assessed under a lower, 1 per cent serviceability through the big four banks under strict rules, such as no missed repayments in the past year and a loan less than 80 per cent of the property’s value.

“It allows those in mortgage prison to switch easier,” Philipos said.