Lenders Loan Affordability Tools- A Tale of Differing Calculations

14 June 2017
Ever since banks were advised by Government legislation introduced in 2015 that they had to comply with “Prudent lending” guidelines, there has been a much stronger emphasis for borrowers to be able to prove affordability for any loan taken out. 
The legislation which came into effect as part of the Responsible Lending Code states that lenders must:
“Make reasonable enquiries before entering into a loan (or taking a guarantee) to be satisfied that: 
the credit provided will meet the borrower’s needs and objectives 
the borrower or guarantor will be able to make the payments under the loan, or comply with the guarantee, without suffering substantial hardship.”
In order to satisfy this need, most lenders introduced loan affordability calculators with differing sets of requirements to support a borrower’s ability to comfortably manage debt without suffering financial hardship. However, the rules applied to these calculators vary from bank to bank and on many occasions clients who have failed to qualify with one banks assessment tool, have been approved by another lender simply by qualifying under a different set of standards. 
These standards can vary by simple degrees such as one bank taking only a basic wage into account for an income stream where another will include regular overtime or commission payments, or by differences in criteria relating to the required monthly surplus - calculated after all household expenses are subtracted from household incomes.
Yet it’s not even a case of working out which banks online calculator works for you. I took a look at one major banks website and discovered three different home-loan calculators titled “What could my rent get me?”, “How much would my repayments be” and “How much can I afford?”. Curiously, “How Much Can I afford” just prompted me to leave my contact details, so in other words was purely a sales tool. The other two at least allowed me to put in some figures, yet paint far from the full picture on affordability. The repayment calculator was exactly what it said. Put in the house price, less your deposit and out comes the required monthly or fortnightly amount to be paid on your mortgage. The figures that I entered were those that I obtained from the other calculator’s question “What could my rent get me”. After entering an average rental figure of $300 per week the calculator determined that I could get a loan of $220,000 with a $55,000 deposit to purchase a $275,000 home.
All well and good apart from the following facts;
The final figure didn’t take into account additional costs such as rates or house insurance.
None of the calculators factored funds being spent on existing debt such as car loans, hire purchases or Credit Cards and store accounts.
The calculators used the bank’s current everyday floating rate and not the assessment rate (Often two to three percent higher than current available rates) used by their credit departments when assessing borrowers affordability.
There are clearly a number of ways that different lenders calculators can provide different scenarios regarding what you can or can’t do, and your best option if you’re considering buying property is to talk to a mortgage adviser who can work through the figures to get you the best loan option while making sure that you can comfortably manage the costs of getting into your own home.

Published In Whakatane Beacon

This post was written by

John White - who has written 90 posts

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