Given the ongoing regulatory changes that have affected the way lenders have rated borrowers in recent years, another problem has spread beneath the surface, which many people don’t 39 have not taken into account: the impact on the privacy of borrowers.
Card payment has become the norm. Online shopping and portable apps that can get us places and serve us meals at the touch of a screen have gotten us to the point where few of us spend cash.
However, such transparent account activity in a tight credit climate begs the question: does the composition of your monthly bank statement affect your chances of being approved for a home loan?
"We live more in a society without cash, and I am no different from others. I just swipe my card because it's easy; it's practical, ”says Tracey Sofra, partner and financial planner at Sofcorp. "But the fact is that by now [lenders] you have no doubt checked how you spend."
Lenders have digged a lot more to ask questions – but according to Philippe Brach, CEO of Multifocus Properties and Finance, the pendulum has "gone from one extreme to the other".
"The lenders have actually pushed the envelope too far in my mind because we are now in a situation where even discretionary spending is taken into account," says Brach.
"They even take investment property expenses as part of your living expenses, so if you have a large portfolio of properties, suddenly instead of [having] living expenses of $ 5,000 a month, you could end up with $ 15k a month – and that immediately kills your borrowing capacity. »
In addition, even if previously only basic living expenses were taken into account, lenders did not pay as much attention to restaurant bills and vacation bookings.
This is because these are discretionary items on which you can suspend spending if the money gets tight.
"You can tighten them if you start to feel financially stressed, so they didn't take them into account – but now they do," says Brach.
"So if someone diligently saves on a $ 30,000 trip around the world, and spends that money on a trip, it will suddenly affect their borrowing capacity massively, simply because he is going on vacation. "
As banks begin to look for ways to regain consumer confidence while respecting borrowing regulations, Brach says lending terms will eventually "come back to a more reasonable place in the middle".
How to put your best foot forward
Instead of typing and billing all expenses on fantastic plastic, you could be better served by withdrawing money and making old-fashioned transactions.
"Paying in cash is certainly a way of not having to report what you do. If it's on your credit card, then everyone knows, but if you pay in cash, then you increase your level of privacy, ”says Brach.
However, it also suggests that borrowers should put themselves in the place of a loan appraiser for a while.
"[When lenders] look at someone's transaction account, all he can see with ATM withdrawals is $ 500 here, $ 400 there. That will match that because the borrower will always have to declare their expenses, so he will match the amount withdrawn from the ATM with the amount that the person declares, "explains Brach.
Sofra also reminds borrowers that they should be aware of their bottom line, regardless of their spending habits.
"I'm not sure if the banks are interested in knowing if you are having a wine, a gin and tonic or if you are buying 10 pairs of shoes. I just think that it is rather what comes in and what coming out, "she said.
"I would focus on the end goal: make sure you have good habits."
A model at play
Full disclosure of where we choose to spend our money, how much we spend and how often reveals a lot about our overall financial behavior. This includes how we manage money, how we perceive it and, in turn, how we will eventually be able to handle a loan when the time comes.
When a lender assesses your expenses, what he is looking for is how much a borrower earns and if he puts some of his income aside in each pay cycle, explains Sofra.
"We live more in a society without cash … the fact is that now [lenders] have verification of how you spend"
"As a lender, if they wanted to go that far, they could see income coming in and spending going out and asking the question: do their earnings justify where they eat?" However, if they see at the same time a direct debit from a savings account within the same bank, and that is a pretty good percentage of the borrower's overall income, so that indicates a very good pattern, ”she says.
Understanding the cash flow is fundamental and will put a borrower in a solid position when he or she requests a loan, adds Sofra.
The impact of credit cards
Having a credit card in your name and never having used it can be financially disciplined, but just opening one can potentially reduce some of it. the ease of servicing your loan.
However, the ideal management of credit cards depends on the goals of the borrower and whether he is already comfortable enough with its ease of maintenance, says Brach.
"With your credit cards, if your borrowing capacity is $ 500,000 to buy a house for $ 700,000, you will obviously not get enough [financing] so you will have to start tightening your debts and expenses somewhere – and one of the things you can do is close credit cards that you are not using, "he explains.
This allows for peace of mind in the event that life presents an unforeseen financial expense, there will be redraw available on an existing home loan. But from a lender's point of view, Sofra asks: "If you withdraw the money, where does that leave you in terms of the ability to repay the new loan?"
She explains how a client had to close his redraw option in order to obtain approval for a refinancing from his new financier.
"The new financier said:" We will consider this as money to which you already have access, which you can withdraw at any time, so we will count it in the equation when 39; evaluation of your refinancing "," Says Sofra.
Being aware of the characteristics of the loan and the access to credit that you really need is an important step, so it is advisable to consult an experienced and qualified financial broker.
"Debt is a beautiful thing, well done and well done, so we must respect it so that we can continue to borrow"
A return to normality?
Asked about the direction in which access to credit is going, Brach replies: "We are always coming back to something reasonable, but we must simply go through this phase."
The change has already started to happen, he explains, with some lenders lowering their appraisal rates.
"It automatically gives people more borrowing capacity," he says.
Sofra adds: "Where there is a roadblock, there will be a certain evolution around this."
Throughout her years of counseling, she has seen reluctance from some borrowers when it comes to taking out a loan. But she encourages them to look through a different lens.
"Understand and know the income that comes into your household, and be comfortable with the level of debt you want to assume," she said.
"Debt is a beautiful thing, well done and well done, so we must respect it so that we can continue to borrow, in order to be able to create wealth and live rich. Because debt is a lever to bigger places. »