Nick Bruining Q+A: What do banks look at when assessing home loan applications?

Question

My partner and I are about to apply for a home loan for the first time and I am wondering what will be included in assessing our application. We have student loans, credits cards and have purchased items on buy now, pay later schemes.

I was told that because they are not loans, they are not included. Is this correct?

Answer

No. Lenders are interested in two things when assessing a loan application.

Your ability to repay the loan, sometimes referred to as serviceability, and what happens if you don’t repay the loan, called a default.

Many loans will require security in the form of an asset which the lender can seize and then sell to recover the outstanding debt if it’s not repaid.

With respect to serviceability, the potential lender will want to know all outstanding liabilities and the associated payments relating to them.

Credits cards are usually assessed at the credit or “maxed-out” limits, irrespective of the balances. In some cases, you might be better off closing some credit card accounts or reducing the credit limits.

Whether there are formal loan agreements in place is irrelevant, it is still money that needs to be repaid. In addition to these repayments and all other regular outgoings, the lender is obliged to include the proposed mortgage repayments, based on an interest rate 3 per cent higher than the loan you are applying for.

The lender will also look at bank statements to identify your ability to maintain the discipline required to service a long-term debt like a home loan.

That’s why showing regular commitments to meeting rent payments and ideally, a regular savings plan can improve your attractiveness to potential lenders.

Question

I am 80 years old and would like to gift my children $50,000 each from my savings. Would that be classed as income for my children, and would they have to pay tax on it?

Answer

I am quite sure your children would welcome such a wonderful gift. Helping out your loved ones while you’re still with us has many benefits.

You’ll get to see the impact of the gift on their lives with your own eyes and hopefully, they will be able to thank you for your generosity.

None of this can happen if the distribution is made from a deceased estate. The good news is that a gift such as this is not regarded as taxable income and they don’t need to declare the gift to anyone unless they are in receipt of Centrelink income support payments themselves.

While not counted as income by Centrelink, it will lift their own financial asset position. If you are in receipt of a full aged pension and Centrelink are already aware of the money you will use for the gifts, your age pension will not change.

Remember that you will need to notify Centrelink of your changed financial circumstances within 14 days of giving them the money.

If you don’t qualify for a pension or are in receipt of a part aged pension, making a gift like this could see your part pension rise immediately.

That’s because your financial assets will immediately be reduced by $10,000 and the remaining amount will be assessed as though you still have the money for five years.

It is a common misunderstanding that you will be penalised if you give money away. That’s not the case.

Your loss is the loss of the use of that money that has been gifted. If ineligible for an age pension because of means testing, five years after you make the gifts, the full amount gifted will no longer be factored into any of Centrelink’s means tests.

You might then qualify for a part pension for the first time. This can also have other flow-on benefits with respect to fees and charges that might apply if you have future aged care needs.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association