I can afford a loan repayment, why can’t the bank approve the loan?
What else impacts Loan Affordability
Loan Affordability is based on your ability to show that you can afford the loan repayments of the new loan based on your current financial position. To do this, lenders assess your recurring income and debts to meet a ratio known as Debt to Service Coverage Ratio (DSCR). The lender also generally factors the below items:
Household Expenditure Method (HEM): This is a minimum benchmark that the bank assumes that the household of an applicant would be paying to meet their monthly living expenses. Several factors such as the amount of adults, dependents and the area where the applicant’s reside in play a factor here,
Buffer/Sensitized Rates: Lenders for long term loans such as mortgages apply an additional buffer on the rate that they use to assess your loan. This is to account for fluctuations in rates over a long period time, an example being the numerous rate rises which occurred in 2023. The impact this has on loan affordability is that you need to show a lender that you can afford the buffer rate which can range from 1-3%+ the actual rate that you would get for a loan product.
Assessment of Existing Liabilities: Not all Liabilities are assessed the same. Some liabilities, such as flexible credit facilities such as a Bank Overdraft or Credit Card, are assessed higher and on the limit of the facility, not the amounts owing or an applicant showing that they consistently clear any owing balances on a monthly basis.
Debt to Income Ratio: Lenders do not only rely on a client’s ability to meet their loan repayments to form an opinion of the risk of a client. A common factor is the Debt to Income Ratio, where many lenders have set benchmarks on the amount of times the debt held covers the income made by an applicant, and have stricter requirements/no appetite to provide funds if you exceed the lender’s threshold
Types of Recurring Income: Not all types of income are treated equally. An example of this is commission/overtime income, rental income and Airbnb income. Many lenders may reduce the amount of income they take when assessing loan affordability depending on the type of income received.’
At Loan Central Hub, we can help you navigate finance by matching you with the right loan product based on your finance requirements. Our diverse lender panel and experienced brokers allow us to provide a seamless process by matching you with the right lender if your bank declines your loan with other lenders that have better policies suited towards your financial situation.
