Most of us enjoy internet shopping, whether it’s a once-in-a-while indulgence or a weekly habit. However, if you’re applying for a home loan, online purchasing may cause your application to be hindered.
Find out why, as well as some useful home loan advice if you’ve recently gone on a buying spree:
What does it mean to have a home loan that is serviceable?
Lenders are required by law to examine whether you can repay your loan without significant hardship. This is referred to as “responsible lending.”
The Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) make sure that lenders follow responsible lending regulations and conduct checks to guarantee that this is the case. This is where the concept of debt serviceability comes into play.
Loan serviceability is a computation that determines whether or not you will be able to repay your house loan based on the size of your loan, your income, and your costs. Different lenders use a variety of methods to determine serviceability, some of which are rather complicated.
Types of income assessed in home loan serviceability include:
- Rental income
- Centrelink payments
- Overtime payments
Types of expenses assessed in home loan serviceability include:
- Living expenses
- Car expenses
- Education expenses
- Private health cover
After taking into account your income and expenses, all lenders are obligated to add a ‘buffer rate’ to the home loan interest rate you’re looking for. This is done to see if you’ll still be able to make your payments if interest rates rise. APRA and ASIC previously required all lenders to assess borrowers’ ability to service a house loan with a 7% interest rate. However, in light of today’s record low interest rates, this was changed in July 2019 to merely require lenders to add a 2.5 percent buffer.
Is it true that online shopping has an impact on the ability to service a home loan?
Online purchasing would be deemed an expense and, as a result, would be factored into the house loan serviceability calculation, potentially lowering your serviceability.
It won’t have much of an impact if you aren’t a frequent online shopper or have just made very low-cost purchases. On the other hand, if you’re a shopaholic who spends a lot of time online shopping, it could prevent you from acquiring a loan.
Lenders will not penalise you for a single spend. However, if they notice a trend of online buying bingeing, they may have worries about your ability to pay back the debt.
What about buy now, pay later platforms?
Users’ credit scores are run by buy now, pay later (BNPL) businesses like Afterpay and Klarna, therefore missing payments on these platforms will affect your credit score. Your ability to obtain a loan will be severely hampered if you have a bad credit score.
When determining whether you can service a loan, lenders will look at your expenses as well as how you pay for them. They’re more likely to look favourably on this if you’re using a debit card and aren’t spending over your means. However, using BNPL services frequently or making many payments at once is likely to raise questions about your ability to service the loan.
BNPL is simply a line of credit, and lenders dislike potential borrowers who use credit services regularly because they are easy to fall into financial difficulties with.
Tips on how to apply for a home loan – while keeping your expenses in mind
Don’t worry if you’re preparing to spend a lot of money on Black Friday or Cyber Monday; there are ways to increase your serviceability.
Increasing your income is one such method. Of course, this is easier said than done.
Alternately, reducing your expenses is perhaps the simplest approach to increase your serviceability. This can be accomplished by:
- Reducing or stopping usage of BNPL
- Only have one or two BNPL debts if you must
- Wiping other credit debts
- Reducing the credit limits of your credit cards
- Cutting back on non-essential items
If you’ve recently gone on a huge shopping spree, try waiting a few months and using the advice above. People who have a history of solid financial behaviour are viewed favourably by lenders. It may hinder your capacity to receive a home loan if you apply for one a week after making a large online purchase.
If you’re looking at buying a home, apply for pre-approval with Homestar today!
Disclaimer: This article is not intended as legal, financial or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature you should seek advice from a qualified and registered Australian legal practitioner or financial or investment advisor.