In the previous update, we looked at the impacts of COVID Government financial assistance on existing borrowers and homeowners. In this update we will answer some common questions about how government assistance might impact first home buyers or those getting ready to apply for a loan.
There is one common thread to the questions from both existing homeowners and new buyers around how government assistance is assessed in terms of income. Sadly for many planning to apply for a loan, or existing buyers looking to refinance, government COVID payments do not count as acceptable assessable income, so your plans may need to be pushed back a bit. However, the good news is it will only be by three or so months after you stop receiving payments.
Mortgage Brokers and Lenders usually require two months' payslips or three months' bank statements when applying for a standard home loan where applicants are considered "employees".
Lenders don't consider lockdown payments an acceptable form of income when assessing a home loan application. Therefore, it is better to wait until at least three months after you stop receiving government assistance to apply for a home loan.
The criterion differs for sole traders and self-employed people, who often need to provide the last two year's completed tax returns and accountant-verified financials. If you’re business was impacted significantly in the last financial year, some lenders will also take into consideration your most recent trading quarter and the previous years return.
If you have been able to meet your existing financial obligations while being supported by Government assistance packages, accepting Government financial assistance shouldn't alter your credit score.
According to Equifax, one of the main credit reporting bodies: "Loan repayments are reflected in consumers' credit reports as part of the repayment history information (RHI). If repayments are made on time each month, this is reflected in a credit report and considered as part of an Equifax Score. Making repayments on time each month has a positive impact, and several missed repayments can have a negative impact on an individual's Equifax credit score.”
Equifax also suggests that to minimise the impact on your credit score and avoid late payments on your credit report, you should aim to meet your minimum repayments on credit cards and loans, or an amount agreed between you and your lender.
Because you need to provide payslips or bank statements, lenders will assess the source of your income. As we mentioned a little further up in the piece, government assistance is not typically an accepted source of income for the purposes of a loan application.
While I know this will come as bad news for many, if it's any consolation, take comfort that you are not alone at this difficult time. Services Australia reported it has processed more than 1.5 million claims for COVID Disaster Payment to workers whose employment has been hampered by recent public health orders.
While postponing your plans to apply for a loan and enter the housing market is frustrating for many, think of it as an opportunity to keep saving for a larger deposit, which may ultimately help you in the long term by reducing the amount you will need to borrow.