COMMENT: In the past month, the Reserve Bank has communicated their unease at the amount of lending that is still being given to low-deposit borrowers; that is, borrowers with less than 20% deposit. The concern is that, if there is a market correction and property values drop, recent low-deposit borrowers would owe more on their mortgage than they could sell their property for which causes a number of problems in the event of missed payments and forced sales.
At the moment, a bank can lend up to 20% of their money out to these low deposit own-home buyers but the banks are staying well away from this threshold, often at around half of the lending allowed, mainly due to the severe repercussions for breaching the limit.
It’s at this point that we enter the strange world where good income earners can struggle to get a mortgage, not because of anything that they have done but simply because their bank doesn’t have any more money to lend to low deposit borrowers.
There are, in effect, five lending scenarios that the banks typically have for low-deposit borrowers:
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1: The bank does not to lend to any low-deposit borrowers;
2: The bank only lends to the its current clients for live deals (e.g. clients who deals that are fully signed or about to bid at an auction);
3: The bank only lends to the its current clients and to “new to bank” clients for live deals
4: The bank only pre-approves their own clients
5: The pre-approves anyone
You often see a mix of scenarios where the bank will allow pre-approvals for their current clients and only accept live deals for new to bank clients. Pre-approvals hold an element of risk for the banks because if all those pre-approved buyers purchase at once, they are bound to honour the approval, which increases the risk of going over their lending limit.
For the past year, the four main banks have hovered between scenarios 2, 3 and 4. It would be fair to say that if a bank moves to the most flexible fifth scenario, it doesn't stay there very long, often only a number of days.
The frustration for low-deposit borrowers, is that they'll never know if their bank is going to have enough money to lend to them when they decide it’s time to buy. They might have had enough last month, or even last week but not today.
One simple way for couples to double their chances of being able to borrow is for them to bank at separate banks. Only one person in a mortgage application needs to be a “current” client, so by banking at separate banks, you double your chances of being able to more easily get a mortgage. This is counter-intuitive for a lot of households who often like their banking to be all together with one bank.
The definition of a current client varies from bank to bank but most often involves having your salary deposited into a transaction (EftPos) account with the bank for at least 3 months. This means if you are considering purchasing in 2022, now is the time to look at diversifying where your household receives it’s income. You can still operate your expenses from a joint account, just make sure your salary goes into another bank.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.
