Whether it’s a rare guilty pleasure or weekly occurrence, most of us love to online shop. But if you’re trying to get a home loan, online shopping may hold back your application. Find out why, and helpful home loan tips if you’ve just had a shopping splurge.
What is home loan serviceability?
Lenders are legally required to determine whether you can afford to repay your loan without substantial hardship. This is called responsible lending.
The Australian Prudential Regulation Authority (APRA) and Australian Securities and Investments Commission (ASIC) ensure lenders abide by responsible lending laws and implement checks to confirm this is happening. That’s where loan serviceability comes in.
Loan serviceability is a calculation designed to see whether you’ll be able to make home loan repayments, in line with the size of your loan, your income, and your expenses. Different lenders calculate serviceability in a number of often complex ways.
Types of income assessed in home loan serviceability include:
Types of expenses assessed in home loan serviceability include:
Living expenses (groceries, utilities, phone plan, internet, insurance, clothing)
Private health cover
All lenders are required to add a ‘buffer rate’ to the home loan interest rate you’re applying for, after taking into account your income and expenses. This is done to see should interest rates rise, whether you’ll still be able to make your repayments. Previously, APRA and ASIC required all lenders to assess borrowers' capacity to service a home loan with an interest rate of 7%. But in today’s record low-interest environment, this was amended in July 2019, so lenders were required to only add a 2.5% buffer.
For example, if a borrower applied for our Smart Booster Home Loan, a 2.5% buffer would be added to the 1.99% p.a. variable rate to see whether they could service the loan.
Online shopping would be considered an expense and as a result, included in the home loan serviceability calculation, affecting your serviceability.
If you’re not a regular online shopper, or have made only very cheap purchases, it won’t affect it greatly. Inversely, if you’re a shopaholic and are spending a great deal on online shopping, it could stop you from getting a loan.
Lenders won’t ping you for one expense. But if they can see a consistent pattern of online shopping splurging, they may have doubts you’ll be able to make repayments.
What about buy now, pay later?
Buy now, pay later (BNPL) services like Afterpay and Klarna conduct credit scores on users, so missed repayments on these platforms will hurt your credit score. A poor credit score will greatly hamper your ability to get approved for a loan.
As lenders look at your expenses when deciding whether you can service a loan, they’ll also look at how you pay for these expenses. If you’re using a debit card and aren’t going out of your means, they’re likely to look at this favourably. But using BNPL services frequently, or having multiple payments on the go at once, is likely to cast doubt on whether you can service the loan.
BNPL is essentially a line of credit and lenders don’t like potential borrowers who frequently use credit services, as it’s easy to get into financial trouble with them.
Tips for applying for a home loan with regards to expenses
If you’re planning on spending big on Black Friday or Cyber Monday, don’t fear; there are ways you can improve your serviceability.
One such way is increasing your income. Of course, this is easer said than done.
Arguably the easiest way to improve your serviceability is to reduce your expenses. You can do this by:
Reducing or stop use 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 just had a big shopping spree, consider waiting a few months and taking the above tips into account. Lenders look favourably on people who display consistent good financial behaviour. If you apply for a home loan a week after a big online shop, it may affect your ability to get a loan.
If you’re looking at buying a home, apply for pre-approval with us.
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