My experience with getting a home loan a number of years ago (before the GFC) was bizarre. My husband and I had 85% of the total price (including stamp duty) of the property and could not get a home loan with one of the regular banks. Why not? Neither of us had permanent, full-time work. The fact that we both had long-standing contract work that was extremely well-paid did not seem to count.
So, how do lenders conduct their risk assessment of potential customers? My brief but wide-ranging research on current practices in Australia yielded the following key criteria:
- Employment status – those who have a “steady” employment record are a better risk than self-employed or those who don’t;
- Income– undefined
- Overall credit history – savings record including deposit, money management and repayments record over the past twelve months i.e. a positive credit history
Furthermore, on the issue of employment, the self-employed are singled out as particularly high risk “Typically, traditional lenders see the self-employed as a credit risk and are hesitant to approve them for a loan. This is a consequence of the banks risk assessment being primarily based upon income serviceability…Despite this, many people who are self-employed are very solvent and some are among the wealthiest people in the country. That said, most money lenders still prefer you to be on a stable salary income than to be listed as a sole trader or partnership structure.”*
In addition, the latest statistics (ABS November 2010) indicate that Australia has a total working population of 11.417 million of which 8.033 million (70%) are full-time workers and part-time employment is 3.384 million (30%).** And of these numbers, it is estimated that 18.5%*** are self-employed, approximately 2.112 million people, which is about 10% of the current total population.
In these times of change, fluctuation and uncertainty, the notion of permanent, full-time work as the key to approving home loans seems to me to be asking for trouble. It’s also quite ironic that banks are looking for stability- obviously their own work practices didn’t prevent the banking system falling into crisis, creating their own set of additional instabilities to world economies. It seems that they are looking from others what they are unable or unwilling to create for themselves. They are not really setting a great example of leadership. So why do they have so much power? And what are some solutions for employers and employees so we can all get what we reasonably want?
Why do banks have so much power?
* Source: www.debtrelief.com.au
** Australian Bureau of Statistics November 2010 issue of Labour Force Australia
*** Independent Contractors of Australia Update May 2010
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