Diana Clement: How to be sure the bank will say yes

Borrowers who aspire to living in a little more luxury should make sure their loan application stacks up. Photo / Supplied

Life goes on even if there is the ghost of a recession affecting mortgage lenders' confidence. People still need to buy homes and refinance.

Yet some borrowers are getting a shock when they can't get a loan for their next home, an investment property, or even to simply consolidate some credit card debt on to their mortgages, says Jonathan Michell of Quicksmart Mortgages in Takapuna.

It's a balancing act for the lenders. They need to sign up borrowers to meet business targets. But they can't stomach even a whiff of risk.

The borrowers having the most difficulty raising mortgages are big-time investors, says Michell. Lenders don't want to know about them.

Not far behind are the middle- income families who are struggling a little financially and have interest-only loans. Many are finding when loan roll-over time comes their lender is assessing them against much more stringent criteria than when they applied for the loan initially.

Another group that fails the lenders' beauty parade is home owners accustomed to capitalising their credit card debts on to their home loans from time to time.

When it comes to how much people can borrow for regular home loans, the banks are still tight-fisted compared to their position up to two years ago.

Typically, says Michell, the banks are rarely offering to lend more than 3.3 times annual salary - although they will bend the rules in exceptional cases.

If, for example, you're earning the same as the next person, but can show you're saving $1500 a month compared to nothing, you'll have a much better case.

He also sees a lot of dreamers who want to add $200,000 or so to their loans despite being unable to service their current mortgages. And he gets a steady stream of callers looking for 100 per cent loans, which just aren't an option in today's market.

"The banks are very black and white at the moment and they insist on servicing [ability]," says Michell. "The credit departments are looking for a reason to say no, not yes."

What's more, lenders are basing their calculations on three-year interest rates of around 8 per cent a year, not the 5.75 per cent you can get on a variable floating rate at present.

But there is a lot borrowers can do to present themselves better to lenders. Having a significant chunk of capital in the property as well as a squeaky-clean banking history and credit record helps.

Devonport resident Tony Reynolds was pleasantly surprised when the National Bank didn't bat an eyelid about lending money on a new property even before there was a buyer for the old one.

Had it not sold, the bank was aware that the property would be tenanted.

It helped that the new property was being bought by three people all working full-time.

"The bank didn't seem at all concerned. It could see it had more people to chase if it needed the money back," Reynolds said. "It also helped that we had a reasonable amount of equity. We were probably right in the sweet spot for the bank."

Another factor in his favour was that an independent valuation matched the price that they had agreed to pay.

Another buyer I spoke to this week was equally surprised when the ANZ verbally agreed to lend on a $1.7 million property which was "two rungs up the ladder" from the family's existing home. The loan was four times her husband's salary, but the family would have 50 per cent equity, which was the clincher.

This buyer considered getting bridging finance in order to sign a deal on the new property, but found that such a loan would have been crippling.

"The bank wanted 3 per cent just for the application, would charge 12 per cent interest and wouldn't lend over $1 million on bridging finance."

Michell confirms that lenders have tightened up on bridging finance, no longer offering open bridges if the old home hasn't sold.

"Now they are only offering closed bridging. Either you have to prove servicing ability or have an unconditional contract on your house."

In a number of instances, clients who would have walked away with a loan previously have been declined.

"I had one client who passed servicing by a country mile who wanted to consolidate a credit card debt. The bank declined the loan because he had spent all his income and consolidated his credit card a few times in the past."

Lenders are looking very closely at borrowers' bank statements and budgets. Evidence of honour and dishonour fees being charged for exceeding credit limits or evidence of gambling are real no-nos.

"Some people are happy to pay that $25 honour or dishonour fee. But it will kill a loan."

Michell sometimes sends clients away for three months to tidy up their spending and banking habits and the resulting cleaner bank statements enable them to borrow.

In one case a client earning $200,000 a year had a mortgage application turned down for having about four honour or dishonour fees a month on his bank statement.

This client wasn't willing to change his ways and Michell got around the problem by encouraging him to have one account for his salary and another for his spending. The lender was shown statements for the main salary account three months later and the client got his loan - which he was well able to afford.

Where an individual may fail to get a loan, brokers sometimes use lateral thinking.

One broker faced with a seemingly impossible situation in which the man of the house was recently bankrupt simply put the loan forward in the wife's name. She was earning $150,000 a year and passed servicing requirements. The property was then put in a trust with the wife as trustee and both as beneficiaries.

In another instance the same broker had a divorced client who didn't pass servicing. He arranged for her to form a trust with her brother, who became the trustee. She was the trust's beneficial owner. The trust bought the property and let it to her.

If your income isn't high enough on paper for a lender, Michell often recommends a non-working spouse to get a job for 20 hours a week to hike the family's income, at least until the mortgage is secured.

One issue that is catching home buyers in the current tight market, says Michell, is valuations which highlight problems with the property.

It's not worth showing these to the lender. It's better to arrange for the seller (or buyer) to have the problems fixed and removed from the valuation before it is given to the lender.

Lying to your lender is terminal to an application, says Michell. Yet borrowers try it routinely - sometimes because they're embarrassed. Lies can include failing to disclose debts, hire purchase and child support payments.

"If you are going to do it, I don't want to see it on your bank statements."

Michell always goes through a client's last three months' bank statements with a fine-tooth comb because he knows the banks will.

Lenders are also a lot stricter on credit checks than they were two to three years ago.

"The banks aren't forgiving the cardinal sin of arrears - especially when it's to the bank," says Michell. If you do have black marks on your credit record you need a good story to tell the lender.

"Blame a flatmate or say that you changed address and the bills went to the wrong address."

If you can't keep your account in the black, Michell's advice is to use a broker to beautify your application and pitch it on your behalf.