Episode Details

Over the past two years, I have highlighted how tight the credit (mortgage) market has become a couple of times. In the past, borrowing was simple. The bank would always offer you more than you wanted to borrow. You only had to provide a few documents and the money was yours!

Things have changed dramatically. These days, banks spend most of their time trying to look for reasons to decline a loan rather than approve it. It’s as if they don’t want the business! The onus is on the borrower to prove why they should approve the loan – you are guilty until proven innocent.

The other problem is that many bank employees are just too scared to use their discretion. As a result of closer scrutiny from the regulators and the Royal Commission, the banks significantly tightened credit policy. They also tightened their oversight of credit managers to the extent that they are now reluctant to move outside credit policy for fear being disciplined (e.g. loss of bonus or even job)! This creates perverse behaviour such as being highly pedantic, nonsensical and over-analysing due to fear of missing something.

In this new environment, borrowers are beggars, not choosers.

With this in mind I have listed 11 tactics you can employ to make you ‘loan ready’.

1. Start preparing 3 to 6 months out

My first tip is to start preparing for a loan application a minimum of 3 to 6 months in advance. Consider all the tactics I have listed below. If you need to take corrective action, you will have enough time to make any changes. Leaving things to the last minute might reduce the pool of lenders available to you.

2. Reduce discretionary spending three months out

The banks will not distinguish between discretionary and non-discretionary expenditure. They will trawl over your bank statements (3 months) to independently verify how much you spend each month and base the loan assessment on that number. Banks have asked questions about once-off transfers to family members, swimming lesson expenses, small charges by Uber Eats, ATM withdrawals at casinos, a Buck’s Night expense (!?) and so on. You would be flabbergasted by the detail they go into. They must spend hours looking at these things – inventing questions to ask! It is very pedantic and intrusive but unavoidable.

Therefore, to make it easier on yourself, minimise expenditure three months prior to lodging an application. Reduce as many discretionary expenses as possible. There are two benefits of doing this. Firstly, you will make the loan approval process a lot easier for yourself. Secondly, you might find it enlightening – allowing you to reset your spending habits.

If you have a high income, it might not be necessary to do this – consult with your mortgage broker (us) to ascertain how important this tactic is in your situation.

3. Control information flow

Having all your accounts with one bank probably makes things simpler and cleaner. However, it also means that bank knows everything about you. When lodging a mortgage application, banks will typically want to review your last 3 months of bank transaction statements (see item # 2 above). However, if you are an existing customer, it means the bank is able to see whatever history it wants. Keep this in mind.

If you want to control the information flow, then it’s wise to use a separate bank for your day-to-day transactions from the bank that holds your mortgages (or you plan to borrow from). Also refer to tip # 5 below.

4. Consider shifting loans onto different securities

Lenders borrowing capacities can vary a lot. One way to extend your borrowing capacity in this very tight credit market (assuming