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Zoe smiles at the camera in front of a background of plants.

If you’re at the stage where you might be thinking about buying a house, one of the most difficult things to get your head around can be knowing where to start.

Should you talk to your bank first? Start looking at potential homes and worry about the finance later? Or start giving up your takeaway coffee, cold turkey?

That’s why Zoe asked us to investigate what is the process of getting a mortgage as part of our personal finance series.

“There’s been a lot of focus on the mortgage industry since the royal commission, and how it’s harder to get credit,” she told the ABC.

“It made me realise no-one teaches you the process of getting a mortgage and a property.

“The path to home ownership involves a lender and a mortgage broker, a real estate agent, a previous owner and a conveyancer. We never get taught how they all fit together.”

A person pours coffee into a cup.

She’s started a savings plan with her partner to afford a down payment for a house in a few years and wanted us to also look at how lenders calculated how much they were willing to lend you.

Here’s what we found.

How are prospective borrowers assessed?

The big four banks use a number of measures to decide if you’re loan-worthy and how much they’re willing to lend you.

Mortgage broker Bruce Carr says borrowers can think of it like three or four c’s (which can vary from lender to lender):

  • Cashflow: This is an assessment of borrowers’ incomes, other loans, other expenses (including their living expenses) to see how much cash is left over to service the loan
  • Collateral: Is the property you’re looking at going to be easy to sell if you default on your loan?
  • Character: Are you someone who is actually going to want to pay off a loan?
  • Credit History: Have you struggled to pay your bills in the past? (This step can sometimes be folded into the character test.)

A property expert with home loan comparison site Mozo, Steve Jovcevski, says lenders operate loosely around those principles, although they have begun to scrutinise living expenses more recently.

“I think it’s happening across the board for all lenders … so you’re finding all the lenders have cut back and definitely made it more difficult to get a home loan than it was a couple of years ago,” he said.

A young couple is handed a set of silver house keys.

Mr Carr said each of these assessments are largely seen as equal “because any one of them could knock you out”.

“On the day you apply, they basically take a photo of you,” he said.

“They don’t know you could get a car loan next week, they don’t know that you’re going to leave your job next week, or that you’re going to fall pregnant.

“So they take a snapshot on the day you apply [do all the necessary checks], and after that it’s up to you to manage it.”

Your Uber Eats and avo brunches can work against you

Smashed avocado on toast on a plate.

Yep. Although in some cases, these expense checks have become a recent requirement for banks.

Last year, Westpac updated its credit policies to improve the way it measures the household spending of people applying for loans, including increasing the number of expenses categories from six to 13 to get customers to provide much more detail about what they spend money on.

On top of asking about basic expenses, childcare, education, insurance, telephone, internet and others, potential borrowers were also asked to questions in categories like groceries, medical and health, recreation and entertainment, transport, and others.

Mr Jovcevski says in some instances lenders are looking closely at your expenses, including your telephone bill, AfterPay debts, internet, media streaming subscriptions and child care.

What’s the process for applying for a home loan?

  • Save for a deposit
  • Get pre-approved for a loan
  • Start looking for a house
  • Think about buying at auction or through private sale
  • Remember the additional costs

For more information, you can check out the saving to settlement guide here.

“Even credit cards, if you hardly use it but it’s got a $10,000 limit it will be [assessed at that limit], so you’ll need to cut those limits right down to say $1,000,” he said.

These measures have followed reports from investment bank UBS that a large minority of mortgage borrowers had been understating their living expenses, with almost three-quarters of loan applications defaulting back to the household expenditure measure (HEM) benchmark to assess household spending.

As Mr Carr puts it:

“If you say you’re spending — and I’ve actually had people say this to me — $1,500 a month and then I go through your banks statement and find out you’re actually spending $5,000 a month, I’m going to start asking some pretty serious questions,” he said.

Person holding remote pointing at TV with Netflix

The key for those looking for home loans is that it’s not always assumed that you’re going to cut your current spending habits once you get a loan.

“I’ve had a clients that could clearly afford a loan, for example a double professional couple borrowing relatively modestly who made quite a realistic expenses declaration,” Mr Carr said.

“And the bank came back to me and said they’ve just put thousands of dollars on their credit card last month. How does this reconcile with their living expenses?

“So then the client and I went through it and weeded out the one-offs — the air tickets they bought for an overseas holiday and other one-offs — to show their regular spending was as per their declaration.”

Mr Carr said in those cases, it was a matter of providing a reasonable explanation for these one-off expenses to the bank.

“The question I ask myself is, would this person go on an overseas holiday ever year and lose their home? Or would they forgo the holiday, maybe go on a camping trip instead, to keep their home?” he said.

Private school fees are coming under greater scrutiny

Mr Jovcevski says the greater focus on everyday living expenses has also included greater scrutiny of private school fees.

“In the past they didn’t assess private school fees, now they do,” he said.

“Some private schools [in Sydney at least] can cost $25,000-$30,000 per year, per child, and if you have two children in private school that makes a big difference in your ability to service a loan if you’re paying those sorts of fees.

“And then they’re also looking at how much you’re spending on medical and health, clothing and personal items where in the past they sort of based [living expenses] in this instance on an average of a two-child family.”

Singles can also find it harder to get a loan

Mr Carr says it’s definitely harder if you’re applying as a single person, “because your expenses don’t change that much from a couple”.

“The living expenses of a couple together are certainly nowhere near double a single’s — you’re sharing electricity, water, food and so on,” he said.

Couples live much more efficiently and the second income can almost go completely to the borrowing.”

He says this has been highlighted in the past 25 years, where we’ve gone from a single income borrowing culture to a two-income borrowing culture.

“The thing that people haven’t quite got their heads around yet is that we’re not going to go from a two-income loan to a three-income loan, or interest rates are not going to drop from 3 per cent to -3 per cent, which is the same as going from 9 per cent to 3 per cent, so there’s a lot of reasons the property market should not go off in the stratosphere,” he said.

You’re also assessed at a higher interest rate

Mr Jovcevski says lenders are also required to apply a base interest rate percentage figure (otherwise known as a stress test rate) to loan repayments.

It was historically set at about 2 per cent over the loan interest rate.

However, according to Mr Carr, as interest rates have come down in recent years, lenders have left their evaluation at a floor rate of around 7 per cent.

“Now, one of the consequences of that is as interest rates have dropped from 5 per cent to 4 per cent that hasn’t increased people’s borrowing capacity,” Mr Carr said.

So what do you need to apply for a home loan?

A collection of credit cards.

You’ll need to provide a bit of information to a lender to assist them with calculating how much they’re willing to lend you.

If you’re a first-home buyer you’ll need to:

  • Showing savings and debts, which might include a few months worth of bank and credit card statements, billing statements and other loans
  • Proof of identification, which could be your birth certificate or passport
  • Proof of employment, including your pay slips and a group certificate, or if you’re self-employed your tax returns
  • Contract of sale: This would be for the property you’re buying
  • Assets list: Including any other properties you might own
  • An application form

And Mr Jovcevski says people should refrain from making too many credit inquiries.

“Even if they haven’t rejected you, but as soon as they do a credit check in pre-approvals it starts counting as an inquiry, and it can count against you if you have too many inquiries,” he said.

“And if you got to a lender and you’ve done 10 inquiries, they’ll ask you about it — and that’s always been a factor.”

Borrowers advised to cut back on spending before applying

Under these circumstances Mr Jovcevski says first-home buyers in particular might have to start cutting back on their spending at least three or four months prior to applying for a loan.

“Make sure you’re paying off your credit card debt or AfterPay and try cutting back on your Uber Eats … get your spending in order,” he said.

“And sometimes it’s a good idea if you show savings, or at least that you can repay the loan.

“So for first-home buyers setting aside the amount the loan would be, that you’re looking to get in, those prior few months would make the banks feel more comfortable.”

For example, if you’re looking at a $600,000 loan with repayments of $2,000 a month, set aside that amount every month before you actually apply for the loan.

I thought it used to be much easier to borrow?

Sold sign on Queenslander-style house in a street in Brisbane.


The Australian Prudential and Regulation Authority (APRA) directed banks two years ago to tighten their loan tests to ensure financial stability.

It followed other measures designed to moderate higher risk lending, including a 10 per cent cap on housing investor loans in 2014 and a cap on new interest-only lending in 2017 to 30 per cent of home loans they issue.

Last year’s third wave of intervention was in response to banks using something called a HEM benchmark to estimate a loan applicant’s annual expenses, which was then used to calculate their borrowing capacity.

“Use of HEM took out of the equation potential vast differences in spending between otherwise equivalent families (eg. kids in private school or not, cost of child care, medical expenses and so on,” Mr Carr said.

People could be assessed across four categories: student, basic, moderate or lavish.

But experts say banks are now scrutinising an individual’s expenses as well as using the HEM benchmark.

This article contains general information only. It should not be relied on as advice in relation to your particular circumstances and issues, for which you should obtain specific, independent professional advice.

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