What does it take to service a loan?
So, you are thinking about getting a loan and you know the banks are going to want all sorts of information and documents. What do they do with it? The documents that the lenders request are proof of the story that you tell them (or that your Mortgage adviser tells on your behalf).
It feels like a pretty invasive process giving all that information to the lenders. To have someone going through all your spending and seeing where you go, what you eat and how you spend your money. You probably feel judged!! At Building on Basics we have a no judgement philosophy. It is your money, and yours to spend however you like. At Building on Basics we prefer you to spend your money consciously, rather than letting the money that you work so hard to earn just waste away and potentially miss out on getting what you really desire. We will be looking at those bank statements in the same way as the lenders, looking to confirm your expenses and the spending that you indicate you do.
Why do the Lenders do this? To meet the Responsible Lending Code as set out in the CCCFA. Oh that nuisance bit of legislation again. Lenders do this to confirm your ability to service debt. Under the CCCFA the banks are taking a closer look at your outgoing expenses, and they are wanting to make sure you have a clear uncommitted monthly income. ASB and ANZ are also limiting the amount of debt that they will allow to 6 x your income (this includes your investment income from investment property). The banks want to see that you are conscious of the money coming in and the money going out. To make sure that you are able to pay your debt and to meet your financial commitments. The banks have until they advance the money to you to make sure that you can afford to pay it back. Once they have advanced the funds then they are at risk too. While they make massive profits, the damage to their reputation if they are putting homes into foreclosure is far more damning to them than the writing off of a loan.
So the banks look at your income and your expenditure and they want to see evidence through your bank statements to show that the saving and the spending is what you have indicated your expenses are. The banks do not trust that you will change your behaviour when you get the loan. If you tell them that you will change your spending when you need to, they are going to look at you with a lot of cynicism. Perhaps you are a first home buyer and you are saving as well as having a good time spending and eating a lot of takeaways – the banks are not convinced that your “discretionary” entertainment and takeaway spending will reduce when you purchase the home and have additional costs such as property insurance and rates.
The banks also use benchmark figures for household costs and spending, so even if you live very frugally you will need to prove to the banks that you are consistently living within your means as they will be looking at the benchmark figures regardless of what you say you actually spend. Tricky.
There are new tools coming out for the Banks and Mortgage Advisers to use to do the analysis of your statements, and to provide the summary of your spending. We will be talking more about these tools in the coming blogs. In the meantime, if you are considering getting any lending in the future you need to look at adjusting your spending habits now so that the banks can see what they need to see in regard to your spending.
If you would like some help with creating a spending plan, we are more than happy to help. Get in touch.