We live in a completely different financial world compared to four months ago and the banks have had to make some serious changes to the way they assess a mortgage application as a result.
The most obvious change is how the banks assess income. Previously, for a salaried employee, three payslips would suffice as evidence of income. Now the banks are having to assess the likelihood of you being employed in the future.
For example, the tourism sector is a difficult industry at the moment, making it hard to give the bank enough comfort to lend.
Similarly, anyone who relies on commission or bonuses will have to prove that they they are likely to continue. For example, it’s hard to know if someone who receives commission for selling cars is going to earn their usual income going forward? Are people selling their cars as they discover they can work from home? Or did everyone save so much money during lockdown that they have spare cash to put towards upgrading their current car? Proving your future commissions will be the key to giving the bank comfort to lend to you.
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It’s not all doom and gloom though. For some industries, proving they are back on track will be a simple matter. Contractors can show renewed contracts. Self-employed retailers can show the sales from the last few weeks.
Related to income is the ability to use income from flatmates. Although banks have previously viewed flatmates with relative skepticism, they have usually allowed applicants to use some of the income, especially for those with more than 20 percent deposit.
But at least two banks have changed their policy for flatmates recently. One has completely removed the ability to use the income to help pay the mortgage. Another has limited the income to just one flatmate, no matter how many rooms you have in your house. The banks want to know that your income is enough to cover the mortgage without relying on others. Of course, getting flatmates in is a great way to quickly reduce your mortgage and I absolutely encourage it (if you can find a good one!). You just can’t rely on it to pay your mortgage as much as you could in the past.
What hasn’t changed is the way that banks calculate how much mortgage you can afford. Most banks use approximately seven percent as the “test rate” for affordability - far from the 2.8 percent rate you can get on most mortgages these days.
To be clear, no banks think the interest rates will return to 7 percent any time soon. But the banks have to calculate the worst case scenario and if the past few months have taught us anything, it’s that things can change very quickly.
This can be frustrating for home-buyers who know they can afford, for example, a $600,000 mortgage and the bank approves a significantly lower amount.
It’s possible that the banks will lower this test rate in the near future but it would be surprising to see it much below 6 percent. The banks have to stay conservative with what their customers will be able to afford in the future, even if it doesn’t seem likely.
Finally, a lot of current mortgage holders recently applied for mortgage relief - a mortgage deferral, interest only payments or an extension to the term of the mortgage.
If you are looking to sell your current home and upgrade, now is the time to revert back to how your mortgage was, if you are comfortable you can afford it. Applying for a new mortgage with a hardship in place will be very difficult and will raise a lot of questions around your income.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer
