What does the bank need to know to give me a loan?
EVERYTHING!! Lenders are bound by many external rules and their own policies. Partly this is to protect the customer (you) and partly this is to ensure that they don’t lose money! Lenders need to make a profit to stay in business and to provide dividends to their shareholders (remember that many of you are shareholders with the banks, through your KiwiSaver Funds).
So why do they need to know so much about you and your life? Because they need to ensure that when you borrow the money that you can afford to pay it back. Not just the first few payments but for the full term of the loan. For a personal loan that is for the next 3-7 years, for a mortgage that is for the next 20-30 years.
Once the Lenders have given you the money, the only way they get it back is if you pay it back through the planned payment arrangement – or they sell a security that you have used to secure the loan. So, lenders are super cautious about giving out the funds. Understandable? Yes. Frustrating at times? Yes.
No-one has a crystal ball that will tell your future so the banks and lenders will base your ability to repay the loan on your past behaviour. This is why they want to see all your bank statements to check out your spending habits. The Lender will check to see that you are operating your account within the limits of the account and making payments on time with no defaults. Lenders also look for regular payments out of your account and will want to know if this spending is essential or discretionary. The banks’ definition of discretionary is a payment that is being made that is not essential and that can be stopped at any time. An essential payment is something like loan payments, rates and insurances.
Before you buy a home you will often have surplus money and you may use those surplus funds for entertainment purposes, with the intention that when you buy your home you will reduce your entertainment spending. Lenders are now looking at those spending habits and are less convinced that you will change your spending habits when you purchase your home. Lenders are now asking for proof of some of the regular incomings and outgoings including insurance policy schedules. Some lenders are treating savings as an expense which is interesting.
Lenders require a minimum of 3 months of personal bank account statements and 6 months statements for any credit facilities like mortgages, loans and credit cards. Banks will be checking your credit report to make sure that you are declaring all your credit facilities and to check your payment history.
When granting a loan the Bank will want to know what you intend to spend the money on, and in some circumstances will not release the funds without evidence that it is being spent on the purpose that the funds were loaned for.
In short getting funds for a new home, a top up for a renovation, or for debt consolidation is going to take a bit of effort and a lot of paperwork to satisfy the lenders needs to ensure they are meeting the responsible lending code. Ultimately the code is in place to keep you safe, but sometimes it can feel like it is causing a big headache! We can help you navigate this process, so don’t be put off by how difficult it can feel. We will help you! Send us an email, or book at appointment at the Calendly link at the bottom.