‍The lending space has changed lately and there is a lot of talk about who can and who can’t get a mortgage. But are things as dire as the media makes them out to be? And are there ways to adapt to the current market?

Is what the media saying about lending true?

There has been a lot in the media lately about how we have been overspending, and that the banks have been under-lending. How a simple upsizing of your KFC combo, or some late-night Kmart purchases could be the difference between getting a yes or a no from the bank for your loan.

Is this the truth, or simply attention-grabbing hyperbole?

Dr Phil knows best – do past behaviours predicts future behaviour?

Here’s the thing, banks have always investigated our spending habits through our account conduct, and they should. As Dr Phil says, “past behaviour is the best predictor of future behaviour.” Therefore, how we behaved financially in the past may be a good indicator of how we will behave in the future.  If we weren’t great handling our finances then, chances are we won’t be in the future, either.  Therefore, demonstrating a tidy and managed financial record is super important when it comes to appeasing the bank for your loan applications.

The difference today is that banks are now looking beyond non-discretionary spending, as well as into everyday spending on non-essential items. And yes, that means they will be noting exactly what we spent at KFC and Kmart in the weekend.

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This is called Non-Discretionary and Discretionary spending.

The former being, your regularly deducted, fixed expenses (e.g. power, insurance, rates.) The later being, ‘fun money’, or the things we spend our money on, because we want to.

Historically, the bank would account for our fixed spend, as well as adding their own 'extras’ as a buffer to protect us, to ensure they are lending responsibly. They would view our discretionary spend as just that - things we could stop spending our money on if we chose to.

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Now, the rules have changed, and so must we.

How will banks look at my spending today?

Banks now see no difference between Non-discretionary and Discretionary spending, and they treat them as one.

Quite simply, what you spend is what you spend, whether it’s a locked-in expense each month, or avocado on toast at the café.

Banks will look at your last three months of transactional accounts and average this out over the year, as evidence of your annual spend. Putting aside how good avocado makes your skin look, many of us will have to make the choice to reduce our spending now, or find out that the banks will not lend us as much as we believe we can pay back.

How can I better my chances with the bank?

Live like you already have the bank’s money – cut back on your spending, today

When we have money available, whether a lot or little, there is potential to spend it. Being able to show that you can already live and put money aside each month, before you ask the bank if you can borrow it, will go a long way to show that you could cover future mortgage payments.

Choose your financial snapshot wisely, to make yourself look good

Sometimes we have just needed to purchase things that we would not usually buy. For example, you may have started a new job, and they require you to come into the office more than your previous role. So now being ‘Teams-ready, business-up-only' is not enough, and you need to saddle up with some pants and shoes and go public. Therefore, presenting the bank with your usual three months of account transactions, including complete new wardrobe purchase, may go against you. Instead, you may wish to show the bank your last six months of transactional account information, and explain the anomaly, to get the truth of your real spending habits.

Discover the truth of your borrowing potential

I meet with many clients who are really concerned that the bank would not even look their way, when considering if they should lend. There are certainly times when I would advise them to peg back their spending to be successful.

The thing is, there are also a number of people who are pleasantly surprised that they can in fact borrow what they wanted to, as they generate enough income despite how they spend their money.

The best way to figure this out is to investigate and discover your true borrowing potential, whether it is to purchase your 1st, 2nd or whatever property you are up to. Not knowing and understanding your true potential will stunt your progress and have you miss out on purchasing that property or getting money for those renos.

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Confirming your lending options is something you can use us for here at Velocity. We love to help our clients discover their true borrowing potential and realise opportunities that they thought they never had. It is especially rewarding to help our clients realise their dreams in tougher times like these.

L.

About Lance

 Hi, I’m Lance a Financial Adviser here at Velocity Financial. People in Finance love to make it all seem too complex. I see my role as removing these barriers, opening your opportunities, and connecting you with the sharpest and most helpful professionals Wellington has to offer. I am interested in people and enjoy being part of key (and often the most stressful) stages in their lives. From my background in heading up large social development projects, finding finance and resource to bring about change for some of our most vulnerable New Zealanders, to my role as a marriage celebrant helping organise one of the most dramatic, stressful, wonderful, precious days of people’s lives. Now as a Financial Adviser I'm able to help people reach their financial goals and help provide security by insuring them against life's challenging times. I love being active, boxing, running, surfing, basically if there is a chance of some form of activity I am on board. Music is extremely important to me, and I have been privileged to travel around many parts of the world playing drums.

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Disclaimer: Lance Shearman (FSP431426) is a Financial Adviser with Velocity Financial (FSP95466). No investment decision should be taken based on the information in this blog alone. Please see Lance’s disclosure statement on our website.

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