Refinancing in 2019: Getting approval in a tougher credit environment

By Linda Santacruz

February 25 2019
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Strong credit scores and loan-to-value ratios will be crucial this year for investors looking to refinance, as investors continue to grapple with tougher lending conditions in this post-royal commission environment.

With loan rejections on the rise as a result of tightened lending standards, investors hoping to apply for a refinance this year will need to have a closer look at their credit reports and equity.

According to recent research from Digital Finance Analytics (DFA), the home loan rejection rate is up 32 percentage points year-on-year. A survey of 52,000 households found that approximately 40 per cent of home loan applications were rejected in December 2018, up from 8 per cent in December 2017.

When divided into segments of the lending space, the highest rate of rejection was for refinance applications (48 per cent), followed by investors (11 per cent) and first home buyers (5 per cent).

However, there are a few steps that property owners can take to lower their chances of rejection.

Credit check

According to Nicole Cannon of mortgage broking firm Pink Finance, lenders typically require six-month bank statements when considering a refinance application. All debt – including credit cards, personal loans and home loans – must have perfect conduct, she says, and credit reports must show few enquiries in the last 12 months.

“If there are many enquiries, this may cause a lender to think there is an issue and question why they did not proceed,” she said.

“Credit reporting is now based on good and bad conduct. If you are over 15 days late [on a payment], a mark may go against your name and how late payments. This is not a default but it stays on your file for two years. Your credit score is important.”

Equity is key

As property values across Australia fall, more mortgage holders are beginning to worry about falling into negative equity. According to a new survey by ME, over 60 per cent of home buyers who purchased their property over the last three years are worried about owing more than their home is worth.

Many lenders will not approve a refinance application if the loan-to-value ratio is too high. In other words, if the mortgage loan is too large a percentage of a home’s current appraised value, or actually exceeds it, finding a lender for a refinance may be difficult without mortgage insurance.

Before applying, investors should check their equity, Ms Cannon said.

“As we are in an era where property values have dropped across the country, making sure you obtain a valuation upfront ensures that we have enough equity available to refinance, and ultimately stay under 80 per cent,” she says.

“Paying additional mortgage insurance can sometimes negate the benefits of refinancing.”

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