Purchasing a house is typically one of the most substantial investments you will ever undertake.
When applying for home loan approval, your lender will seek comprehensive information about your financial situation to assess your borrowing power and subsequently approve your home loan application. This may entail a thorough inquiry into your bank statements.
Why do mortgage lenders in Australia specifically look at your bank statements?
When you apply for a home loan in Australia, you must supply several documents integral to the application procedure. These documents include recent bank statements, evidence of income, and documentation for any existing loans.
Lenders are legally obligated to check that are in a financial position to meet your mortgage instalments, even if interest rates increase. Your bank or lender scrutinises your documents, including your bank and credit card statements, as a fundamental step in gauging your level of risk of default and evaluating your eligibility. They want to determine that your debt to income ratio (DTI) is low enough to meet monthly mortgage repayments without causing financial strain.
What are mortgage lenders in Australia looking for in your bank statements?
When looking at your bank statements in particular, lenders assess your spending habits to determine how financially responsible you are. Your previous financial conduct plays a vital role in a lender's eligibility assessment.
Lenders use your bank statement to understand your:
- Expenditures/spending habits - both essential and frivolous
- Current liabilities like car loans or any other personarl loans
- Credit history
- Cash flow
- Capacity to save
Lenders typically primarily care about your income sources and payment patterns, savings and expenditure patterns, credit history, and assets and liabilities, as well as the property you're purchasing and its valuation.
When you submit a home loan application, you’re usually required to provide three months of bank statements. Here are the specific aspects a lender may scrutinise when reviewing your bank statements.
Your bank statements play a crucial role in confirming your consistent income stream. Mortgage lenders usually do not grant approvals to individuals who are unemployed or do not meet the minimum income criteria. The lender will analyse your bank statements to evaluate your earnings' regularity and net amount.
Income doesn't come in a one-size-fits-all package. The most reliable source is consistent regular PAYG salary, which can be verified through consecutive payslips. Each lender has its own method for evaluating supplementary income like commissions, bonuses, overtime, shift allowances, and other extra payments.
If you are self-employed or a business owner, get ready to undergo a more thorough evaluation to ascertain the sustainability of your income. The most favourable outcome is usually obtained when two successive tax returns show a consistent or slightly increasing income.
Rental income and its associated expenses will be assessed differently, potentially influencing the choice of the right lender for your situation.
Income generated from stock investments is typically disregarded unless it has been received consistently over an extended period of time.
Cash flow history
Your lender will classify the debits and transactions within your bank accounts to build a monthly income and expenditures profile. This process is undertaken to ascertain whether you have adequate funds to cover your mortgage payments.
Banks and lenders utilise your bank statements to verify your ability to cover essential expenses like insurance or childcare once you've obtained the mortgage. Additionally, they will look for for undisclosed liabilities, such as scheduled automatic debits from your account for personal loans or a car loan.
If your account balance consistently reaches zero or becomes overdrawn shortly before your next salary arrives, or if your recreational expenditures are substantial, lenders might conclude that you won't be able to manage mortgage repayments comfortably.
To improve your cash flow, it is advisable reduce unnecessary living expenses, like takeout meals, shopping splurges and gambling, in the months preceding your home loan application .
If you have any pre-existing loans, try to repay them or opt for debt refinancing to reduce your loan repayments.
Every lender will examine your credit report to assess your past credit utilisation and repayment habits. There are certain red flags, such as defaults, unpaid debts, bankruptcies, multiple unsuccessful mortgage applications or overdrafts, that can make it into your credit file and potentially result in a rejection.
The higher your credit score, the more appealing you are as a customer. Consistently paying your bills on schedule and steadily reducing your debts contribute to an elevated credit score.
If you have a sub-par credit score, it will hinder your ability to get financing. That said, fixing a low credit score is absolutely possible.
While sources such as a work bonus, tax refund, or inheritance can contribute to your savings, lenders prioritise genuine savings that have been accumulated gradually over time. During the home loan application process, lenders generally require applicants to exhibit genuine savings from over at least three months before considering loan approval.
Before pre-approval, lenders will also examine your three months’ worth of bank statements for any dishonoured payments or credit card debts. Such charges could raise a red flag in the lender's assessment, suggesting potential difficulties in managing expenses, affecting your mortgage approval prospects.
Large and irregular deposits
Substantial and irregular deposits in your bank statement may provoke suspicion in lenders, unless you can convincingly clarify the origin. Lenders might question whether the funds are coming from sources deemed unacceptable.
Whether you can provide collateral
When securing a loan, offering collateral is a necessity. For a lender, collateral serves as security for a loan or any other debt, enabling the lender to take possession of that property if you default on the loan payments.
Australian banks, financial institutions and lenders generally favour borrowers who can provide a home deposit of 20% or higher of the purchase price. Whether you are contributing precisely that sum or more or less, your lender may prefer to observe the presence of this amount in your bank account or savings account prior to granting loan approval.
If you do chose to use a deposit below the usual 20%, your lending will likely require you to pay Lender’s Mortgage Insurance (LMI), which can be costly over the full term of a mortgage.
Determining a loan-to-value ratio
Lenders often reduce the assessed value of the collateral, such as investment property, ensuring they don't lend the full 100% of its highest market worth. The determination between the loan amount provided by the bank and the value of the collateral is termed the loan-to-value ratio. The kind of collateral employed to secure the loan will determine the lender's acceptable lvr.
For instance, undeveloped real estate will result in a lower LVR when compared to developed or occupied real estate. The LVR assessment may differ from lender to lender.
Determining the debt-to-income ratio
The ratio of your debt-to-income ratio is gaining significance in determining your borrowing capacity. This will significantly affect individuals with investment properties that generate rental income, as it contributes to their overall debt load.
What options are available if your bank statements do not align with the lender's requirements?
You've applied for a home loan, but the lender has declined it. In this situation, your bank statements (along with other documents) may have suggested that you do not meet their eligibility criteria for a home loan applicant. Before you consider applying for your next home loan as a prospective homeowner, it's advisable to demonstrate to lenders your responsible borrowing behaviour by:
- Clearing any outstanding debts, which includes all existing loans.
- Accumulating authentic savings or maintaining them in your bank account for at least three months.
- Eliminating unnecessary expenditures as you approach your application.
- Ensuring prompt bill payments, possibly by setting up upfront debits to prevent late fees.
- Lowering limits on credit accounts.
Providing bank statements is a standard procedure in the mortgage loan application process. Therefore, it's essential to be prepared and ensure that your bank statements corroborate the details you provided in your loan application.