The banks and lenders are concerned about stability or employment and income with impacts from COVID-19 and now lenders main focus is income and stability of that income.
The lenders servicing tests have become even tougher during the Covid-19 crisis, with banks and then non-bank lenders testing borrowers on the virus-constrained current income rather than what they will return to. Some banks are not accepting past earnings, or projected future earnings but when calculating serviceability they are using the actual income right now…
The approach has made it difficult for borrowers to complete home purchases, pay for new-builds nearing completion, or refinance mortgages during the Covid-19 lockdown.
The issue was highlighted by economist Tony Alexander in a recent survey of the lending market.
Alexander reported: “For debt-servicing ability, current virus-constrained income levels are being used, not expected income levels in the future when things are expected to be better. In some cases, anticipated bonuses, overtime, commissions are not being considered for income projection and therefore debt-servicing ability purposes.
“In other words, ability to get a mortgage has been cut for anyone out of work clearly, but also anyone experiencing an income drop or reliant on other than base wages and salaries,” Alexander added.
How has your income been impacted?
Of course, some people are in very stable occupations so employment is not an issue.
But for many sectors of the economy things are on shaky ground, and that means employment and income is no long certain.
The Importance of Income
Of course income has always been important when lenders are looking at an application for finance, but with COVID-19 and the potential impact on both income and employment the focus has intensified.
Over recent years in New Zealand people have always felt secure in employment, but that has changed.
Employees are being asked to take wage cuts and there have already been redundancies with more forecasted – possibly many more!
Things could get even more difficult for self-employed borrowers. For self employed the banks are not going to just take last year’s income, but are looking now at the industry and borrowers will have to justify what their income is going to be and explain how it has been affected by Covid-19.
This is different to the Global Financial Crisis and while COVID-19 wasn’t a financial crisis to begin people are now getting to understand that there will be a huge financial impact.
Lenders are being prudent and the lenders main focus has shifted so income and stability of that income is critical.