What Is Debt Servicing And How Does It Affect Your Approval Chances?
Do You Pass The Debt Servicing Test?
Borrowing at the moment isn’t easy and a lot of this comes down to bank credit policy in this market and their appetite to lend. Credit policy varies across banks, however in most respects they remain very similar. Here Peter Norris from Squirrel helps to explain the importance of debt servicing when applying for your first home loan.
Debt Servicing Test Rates
A debt servicing test is a calculation to assess whether your financial situation would stand up to changes in situation during the term of your home loan. This could be increased home loan rates, a change in employment or something else that could impact your ability to maintain your loan payments.
Servicing test rates are currently above 7.25% at all the major banks which means you as a borrower need to prove that you can afford to borrow at that interest rate even though real rates are down in the low 4’s. At a high level, banks use that rate along with a general living allowance depending on the number of applicants to determine your fixed outgoings and therefore your capacity to borrow.
In this current market, lending above 5-6 times your income is proving almost impossible.
In recent times, credit policy has been more broadly dictated by Reserve Bank LVR restrictions and responsible lending codes. Responsible lending codes are guidelines for lenders to ensure that your lender does not put borrowers in a situation they can not afford.
Variations in bank interpretation of these rules allows banks to separate themselves from each other in small ways. However none of them test these boundaries very much. Up until recently, the gap between the lowest test rate and the highest was over 1%. This is no longer the case now with the gap closing to around 0.7% and because of this, your ability to borrow won’t move too much across lenders.
For An Idea Of How Much You Can Borrow, Try Our Online Mortgage Calculator Here
New Build Exemption From LVR Restrictions
Construction and new build lending remains exempt from the RBNZ rules, allowing you as borrowers to do more with less deposit and allowing lenders to play with policy a bit more. Most major banks will go to 95% LVR on an off-plan residential build and 90% LVR on a progress payment. This doesn’t solve the servicing problem but it does mean that with a smaller deposit you can find yourself in a better quality home.
With changes in bank policy becoming more regular, having an adviser working for you is now more important than ever and could be the difference between an approval and a decline – or more importantly the difference between getting your own home or not.
Getting a home loan approval is now not simply about how much deposit you can get together but your ability to service or maintain the mortgage payments. Therefore ones income, current debt levels and outgoing expenses are increasingly important in helping you get the ‘Yes’ from your lender.
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