You’ve done all the maths and checked that you can afford the repayments on the mortgage you need to buy your first or next property. You confidently head down to your local branch to then leave confused and frustrated because they’ve rejected your mortgage application. How can that be?
Keep reading or watch the video to find out one of the behind-the-scenes reasons why the bank has rejected your mortgage application.
Why Your Mortgage Application Was Rejected Pt.1
Banks don’t use real interest rates
What the bank won’t tell you is they use test interest rates when they are calculating affordability. A test interest rate is an interest rate that is higher than the current, more realistic interest rates. The bank uses this higher interest rate to check serviceability and if you pass with the test interest rate, then they’ll consider you for a mortgage.
Why do banks use test interest rates?
Banks are always looking to cover their bums. If you can show you can still afford the mortgage using an interest rate that is much higher than the current interest rate, the bank feels confident that you’ll still be able to afford the mortgage if and when interest rates go up.
Imagine you could only afford a particular mortgage up to 5.99% interest. You’d be at a much higher risk of defaulting on your mortgage if interest rates when into the sixes. The bank gets paid when you pay interest, so test interest rates provide an extra layer of protection for their revenue.
How do test interest rates work?
Test interest rates fluctuate at the same time regular interest rates do. When interest rates are low, the test interest rate is lower than when interest rates rise. They are usually about 2% higher than advertised rates.
Every bank has their own policy about what their test interest rates are and how strict they are with them.
How do I get my mortgage application approved even with high test interest rates?
If you’re wanting to purchase a house, even if test interest rates are high, check with your mortgage adviser. A good mortgage adviser will know which bank’s test interest rate might work for your situation and how to present your financial situation to the bank, so that it increases your chance for an approval.
Be aware, though. In order to get a pass from the bank, you’ll need enough income to service the mortgage at the higher test interest rate.
If you’re finding your current income isn’t cutting it, a Futurebound mortgage adviser will be able to tell you ways to make your same income work for you by using our mortgage debt reduction advice. By paying down your debt, you’ll have more disposable income which can be used to service the new mortgage you’re looking for.
Keep in mind this article is providing general information and not individual financial advice.
If you’d like a review of your situation and customized advice for building wealth to reach financial freedom and live a fulfilling life, please book a free 15-min chat.