It’s lately become difficult to secure a home loan in Australia. It’s because the Royal Commission discovered that several banks (lenders) were unable to verify the income and living expenses of their home loan applicants. This meant that banks were lending money to people who could not pay back. Overall, it could add to the economic crisis that Australia is currently facing.
And as a result of the Royal Commission’s discovery, banks have tightened their lending standards.
In this post, we’ll help you understand how exactly banks have raised their standards, what makes them reject a home loan application, and what you can do to maximise your chances of approval.
Let’s dive in!
Understanding Home Loan Rejection: Common Mistakes & Tips for Success
The following are some common reasons that lead to home loan rejections, along with tips on how to steer clear of these pitfalls.
- Insufficient Deposit
According to a survey, the average house deposit is about $119,560 in 2023. As per a report of 2022, the minimum average house deposit was around $80,000, while the maximum average was $128,469.
Given this, if you do not have a substantial enough deposit, your home loan application is likely to get rejected. Now, lenders evaluate your actual deposit amount through two methods:
- Local market’s average (given above)
- Loan-to-value ratio or LVR
The LVR basically determines how much of the property’s value you can borrow. Here’s an example to illustrate this: if the maximum LVR allowed is 90%, you’ll need a minimum 10% deposit.
So, say there’s a $500,000 home. To get your home loan application approved for this house, you must provide a $50,000 deposit. As a result, you’ll be able to borrow up to $450,000
Tip: Start saving early to build a healthy deposit. The more you reduce your LVR, the higher your chances of loan approval.
- Inadequate Income
Lenders assess your household income to ensure you can comfortably handle mortgage repayments. Typically, they use a mortgage stress threshold of around 30% — meaning your repayments should not exceed 30% of your household income. If it surpasses this threshold, your application may be declined.
If you’re not sure about the amount of money you can borrow based on your current income, we recommend using a borrowing power calculator here. It will give you an idea about whether your expected mortgage repayment would be beyond 30% or not based on the total house value.
Tip: Before applying for a home loan, evaluate your income and expenses to determine a realistic borrowing capacity and avoid overstraining your finances.
- Poor Credit History
Lenders review your credit score and history to assess your creditworthiness. Low credit scores from frequent late payments, defaults, or excessive debts can raise red flags and may lead to rejection.
Tip: Regularly check your credit report for errors and work on improving your credit score by paying bills on time and reducing outstanding debts. Also, avoid closing a credit card account, especially if you already have credit card debt.
- Unstable Employment
Lenders seek stability in your employment history. That’s because it reflects your ability to maintain a consistent income to repay the loan. If you’ve switched jobs too often in your recent past or have been unemployed during the loan application process, there’s a high chance your application will be rejected.
Tip: Try to maintain a steady job for at least two years and avoid major career changes right before you apply for a home loan.
- Overborrowing
Applying for an excessive loan amount beyond your means can raise concerns for lenders. They evaluate your debt-to-income ratio and may reject your application if it exceeds their acceptable limits.
Tip: Be realistic about your borrowing capacity and avoid over-committing to a loan that strains your finances.
- Insufficient Documentation
Providing incomplete or inaccurate documentation can lead to delays or even rejection of your loan application. Lenders require detailed financial records to assess your eligibility properly.
Tip: Organise all necessary documents, including income proof, identification, tax returns, and bank statements, to expedite the application process.
How Mortgage Brokers Expedite the Process?
Apart from implementing the tips above, you can rely on mortgage brokers to help you secure a home loan as quickly as possible.
Mortgage brokers act as intermediaries between borrowers and lenders. They help you in navigating the complexities of the home loan landscape. And they can even cut down the entire struggle for you — meaning once you’ve hired a mortgage broker, they’ll handle everything independently. You can continue with everyday activities, plan fully-engaged weekends with kids, attend events, and whatnot! All while they work on your home loan application and ring you only when it’s approved.
But how do they ensure such a smooth process?
Well, they engage with decision-makers on behalf of borrowers and independently push it forward even when there are obstacles. Brokers also have a deep understanding of what lenders look for in a loan application. Given this, they can address potential issues beforehand and prevent unnecessary delays.
Moreover, mortgage brokers serve as a gateway to alternative avenues. So, if your application is rejected by all the banks you applied to, they can show you verified non-bank lenders that remain unaffected by certain regulatory restrictions (i.e., those imposed by the Australian Prudential Regulation Authority).
FAQs
Is It Difficult to Get a Mortgage in Australia?
Yes. As mentioned earlier, banks have raised the bar for home loan eligibility.
Do You Have to Be an Australian Citizen to Get a Mortgage?
Not necessarily. Both permanent residents and temporary residents (but with specific visa types) can apply for home loans.
How Much Deposit Do I Need for a Mortgage in Australia?
Typically, a minimum deposit of 10-20% of the property’s value is required to secure a mortgage in Australia. If you provide a higher deposit, you can improve your chances of loan approval. Higher deposits may also help avoid additional costs like lender’s mortgage insurance (LMI).
Can Foreign Students Buy a House in Australia?
Yes, they can! But they’ll need approval from the Foreign Investment Review Board (FIRB) and satisfy specific criteria. Generally, foreign students are permitted to purchase one residential property to use as their residence while studying.
NB. This article is not financial advice and is meant for general purposes only. Always speak with a trained and certified professional before making decisions.
