The Pain of Getting a Mortgage
Not my first roll of the dice. In fact my 5th mortgage application, from the same bank, in around a dozen years. Three homes and two investment properties. Every single one, we were told that we didn’t quite qualify, but when they tweaked some numbers we passed by a whisker. Each one we never missed a payment. That’s quite a history and one you would think suggests that I am good for a new mortgage.
Especially when it is a property I already have a mortgage for, and I am easily managing the repayments.
Divorce means that I need to buy “our” investment property so that just I own it. The rent covers the mortgage, and the loan to valuation ratio is 60%. The town typically has zero rental properties available, so keeping it tenanted is quite easy.
But no – I have to pass the affordability test. This is an evil thing that arose from the Global Financial Crisis due to lending practices in the USA. No such problem existed here in Australia, but our government erred on the side of caution.
The reasonable assumption is that, when asked how much they spend on various things each month, people typically under-estimate. So the test, and the numbers you provide, are more complicated than it seems. Because you are compared to everyone else who has made a loan application. If your self-assessed spending is above the average of people like you (basically single / married / dependants), then they use that number.
If you are below average in your self-assessment, even if you are completely honest, your affordability is based on the average. 50% of applicants get assigned a spending figure higher than what they state.
Guess who this disadvantages the most? The frugal, like me. I was a backpacker for 5 years, and I come from NZ. I know how to live cheaply and I do. But the bank says I must be judged by what the average Aussie spends.
- Regardless of affordability, with a 60% loan to valuation ratio, the bank can’t lose if I default
- Australians don’t default much anyway, only 0.5% of loans (the USA is 5%)
On top of that, it is tedious, frustrating and embarrassing, trying to convince a bank you can afford what you already demonstrably afford.
I got there in the end, by lowering my credit card limit to $500, but it took many weeks.
It’s a 25-year mortgage. You can guarantee that somewhere along the way I’ll be without a job, and I’ll get a new credit card with a higher limit. Banks don’t check back every year to see if you can still afford the loan…