How is COVID-19 Affecting Lenders’ Credit Policies?

As the economic impacts of COVID-19 bite harder and longer, we are seeing most lenders exhibit far more caution when assessing new loan applications. Well aware of the impact on certain industries, they are at a minimum requesting a statement of financial impact from prospective borrowers, and in the case of self-employed borrowers, increased levels of qualifying documentation.

PAYG Income

If you earn PAYG income lenders are still largely relying upon the information shown in your current pay slips. But you can expect to answer a few additional questions and in some cases provide more information with your loan application:

1. Borrowers are required to make a statement about how COVID-19 is affecting their working arrangements. Are you working from home or are you office based? How is this being decided?

2. At this point in time, are you aware of any changes to your broader situation that may impact on your earning capacity?

3. Have you been advised of any changes to your employment circumstances or income levels that will affect your ability to meet any existing debts or expenses?

4. Where a wage or salary earner is receiving Jobkeeper payments, only the lesser of that income, or your previous base employment income can be used.

5. If part of your income is provided in the form of bonus or incentive payments then some lenders are discounting this income by up to 40%.

At this stage there have been no significant changes to how contract and casual employment are assessed. But note the eligibility of this income varies widely between lenders.

Self-employment Income

All borrowers who do not receive payslips and are paid based on invoices for their services are classified as self-employed. This applies equally to sole traders, partnerships, trusts and companies. Historically self-employed borrowers establish their income by providing one or two years income tax returns as evidence of the stability of their ongoing income. Depending on where we are in the income tax cycle these documents could be up to 21 months old.

This has changed. Lenders are now requesting some or all of the following additional information:

1. At this point in time, are you aware of any changes to your broader situation that may impact on your earning capacity?

2. Have you been advised of any changes to your employment circumstances or income levels that will affect your ability to meet any existing debts or expenses?

3. Your Business Activity Statements (BAS) for all of the quarters between your most recent income tax return and the date of application

4. Your business trading account bank statements for minimum period 3 months (these are particularly relevant for businesses below the $75k trading threshold which may not be submitting BAS.

5. A statement from your accountant to verify that your business trading has not been materially impacted by COVID-19, or stating the percentage variance in your business performance as a result of COVID-19.

Overall where your income is now lower, that income and not your historical income will be used in assessing your borrowing capacity. Some lenders are also limiting borrowing capacity of all self-employed applicants to 80% LVR.

Rental Income

If you are receiving rental income from an investment property there are a few potential issues to consider:

• Evidence of this rental income must be less than 30 days old at the time of application

• Where your property is either untenanted, or your tenant is paying reduced rental you may be required to show that you have sufficient savings to cover up to a 12 month shortfall in rental income.

If you are looking to borrow funds for a purchase, renovation or finance it pays to be aware of lender’s requirements before you apply. You must be confident about the security of your ongoing income and not simply relay upon a strong equity position to qualify for a loan. Each lender has its idiosyncratic policies and this is where we can help you structure and direct an application that best fits with your individual circumstances.

More questions? Then contact our office and we will be happy to help you answer them.

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