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Rejected for a “phantom child”: It’s harder than ever to get a home loan

Home loan eligibility feature and content

We spoke to mortgage brokers and banks to find out why borrowers are getting rejected and how you can tighten up your application.

The media is full of stories of borrowers having their home loan applications rejected as lenders tighten their lending requirements in the wake of the royal commission.

There are stories of borrowers being rejected for spending too much on takeaway, or simply for spending a little extra on their pet.

And these stories aren't just extreme, one-off examples. They're actually becoming the norm.

Mortgage Choice CEO Susan Mitchell says, "Getting a home loan has become harder than it was a few years ago given the heightened scrutiny loan applications are being subjected to."

The "phantom child"

Some of the real life examples Mitchell gives are quite shocking, like the borrower with no children who correctly declared "no dependant children" on their application.

However, "The lender questioned a purchase at a childrenswear store on the client’s credit card statement. The client had purchased a gift for a friend’s child at the store. The lender asked the client to prove they did not have any dependants."

The RSL gambler

Another applicant had lunch at an RSL club and withdrew some cash from an ATM inside the club. According to Mitchell, "The lender declined the loan application because they saw the withdrawal at a club and concluded the client had a gambling problem."

The supermarket "splurge"

Even careful spenders can end up hurting themselves. Mitchell knows of one case where a lawyer made a large, one-off supermarket purchase in bulk in order to save money.

But the lender "insisted the expense be multiplied by 12 (each month of the year) to indicate that it was an ongoing expense". And so a careful purchase is magnified into a reckless purchase.

With lenders going through applicants' spending line by line, these cases are far from unique.

What are lenders looking at?

Every lender has their own criteria when assessing mortgage applications. Bank of Melbourne confirmed that they have increased the applicant spending categories they examine from six to thirteen.

These spending categories now include education, clothing, groceries, transport, utilities, recreation and entertainment, childcare, insurance and media/streaming subscriptions.

According to the bank, "It can be difficult for customers to provide a complete picture of their expenses and the enhancement of our expense categories means our staff and brokers can prompt customers about expenses they may have forgotten, like pet insurance, gym memberships and media streaming services."

Bank of Melbourne Chief Executive Michelle Winzer advises borrowers to "supply all the relevant paperwork upfront, including payslips, bank statements, and other statements of debt with other institutions, like credit cards or personal loans".

Whatever you're spending money on, the evidence is clear that lenders will go through your spending line by line and query almost anything.

How can you maximise your chances of getting a loan approved?

You can increase the quality of your loan application by:

  • Cutting down on your expenses
  • Justifying your expenses with documentation
  • Paying your bills on time
  • Applying with a mortgage broker
  • Getting your credit score (now)
  • Doing your home loan homework


Marissa Schulze is the director of Rise High Financial Solutions, a mortgage brokerage in Adelaide. She has seen similar scrutiny with her clients.

Her advice? Cut down on your living expenses.

"The number one thing people can do to improve their borrowing capacity right now, which is completely within their control is to reduce their living expenses. The lower their living expenses the higher their borrowing capacity will be."

And the sooner you do this, the better.

"In the worst case scenario lenders are looking for up to six months of living expense history," Schulze says, "Which means whatever you've spent in the last six months is potentially going to impact your loan application."

Justify your expenses

Not every expense has to be a problem. And not every expense can be avoided.

Schulze notes that irregular expenses, such as spending on a wedding, aren't always a problem. "We can normally exclude those discretionary extra spending outside of the living expenses. But we need to have a good reason and it needs to be documented."

Receipts help. And some lenders are even requiring hopeful borrowers to sign statutory declarations to show that some expenses are one-offs.

Pay your bills on time

Lenders are getting stricter at their own discretion, but broader changes are coming to the market.

As comprehensive credit reporting becomes the industry standard over the next few years, lenders will have access to a lot more of your financial information.

Schulze says that "people who are not managing their cash flow correctly and not paying their bills on time will potentially suffer". This will be true even if they're in a financially healthy position.

"If people want to get better interest rates they'll need to be squeaky clean."

Consider a mortgage broker

At Finder, we think it's possible to do the research and do it yourself. But mortgage brokers can really help. They handle home loan applications every day.

And their role is not just to find you a suitable loan but to make sure your application is as strong as possible.

"The lending landscape is tighter than ever before," says Mortgage Choice's CEO. "Having an expert you can rely on to guide you through the process is going to give you peace of mind that you are getting the right deal for your needs."

"It really is a matter of sitting down with a mortgage broker," says Marissa Schulze, "and letting them in to understand every aspect of your personal situation so they can find the best loan and lender for your situation."

Get your credit score

Getting your credit score ahead of time means you can get a snapshot of your financial position. You might find debts or liabilities you weren't aware of, or errors on your report that you can challenge in order to increase your score.

You can get a "soft" credit score via Finder for free, and it won't impact your credit in any way.

Do your home loan homework

You can make your life much easier by getting the right paperwork together and applying for a loan you're actually eligible for.

If you only have a 5% or 10% deposit, lenders will scrutinise your application more closely. Consider saving a 20% deposit before applying, getting a parent to go guarantor or making sure your expenses are as low as possible.

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