Top Reasons a Bank Says No
In my role as mortgage broker, I often deal with clients who’ve tried to get a mortgage with their current bank directly and have been declined.
I wanted to share some of the reasons why this happens, but first - a word of encouragement: if this has happened to you, don’t lose hope. Being declined by one bank doesn’t necessarily mean you’ll be declined by every bank. There have been plenty of occasions where I’ve been able to get an approval for someone who had previously been declined.
Remember, different lenders have different criteria (and different products they have access to), so what’s a deal-breaker for one lender may be acceptable to another.
Now, onto some of the common - and not so common - reasons why your mortgage application might be declined.
1. Insufficient Deposit
Different banks have different minimum deposit criteria. For first home buyers seeking a mortgage, most mainstream banks will require a 10% deposit - although there are certain circumstances where you could potentially get away with as low as a 5% deposit.
The Kainga Ora First Home Loan product allows you to have just a 5% deposit, but this product isn’t available through all lenders. We do know of one mortgage lender who’s currently allowing 5% deposits and isn’t affiliated with Kainga Ora. So, if you only have a 5% deposit, you may still have options.
Most mortgage lenders are not currently doing pre-approvals. So if you don’t have a 20% deposit, and you don’t qualify for the First Home Loan product, you have to apply on what’s called a ‘Live Deal’ basis. This means you’ll have to find the home you’re interested in first, make a conditional offer that’s subject to finance, and then apply for the mortgage. But if you’ve approached a lender who doesn’t have access to this, and you have less than 10% deposit overall, you will be declined.
2. How your deposit is made up
Regardless of who you approach for your mortgage and how much deposit they require, there’s a criteria that 5% of your deposit must be from genuine savings. But - a bit of good news here - your KiwiSaver balance qualifies as genuine savings!
They don’t want to see your deposit is made up of another borrowings, unless its an informal loan, from family, that’s repayable only if you sell the house.
3. Having other finance
If you have the genuine savings you need but also have other debts, you may still be declined. Most lenders won’t give you a mortgage if your other finance is too high. The maximum is around $10,000 - $20,000 (depending on the size of the mortgage you’re going for, your income, and other factors). Car loans are a good example of existing finance that could prevent you from getting a mortgage.
4. Buying an Investment Property
If you’re buying a property for investment and that property is a new build (or has had code of compliance issued in the last 12 months), then you’ll need a minimum of 20% deposit.
And if the property is older than 12 months, then according to current criteria you’ll need a 30% deposit.
If you have your own home and want to purchase an investment property, you’ll need to have at least 20% equity in your own home, as well as sufficient deposit or equity to fund the 20% or 30% deposit on the proposed investment property.
5. Bank Thresholds
Banks have restrictions on how much of their total lending they can extend to people who don’t have a 20% deposit. (These restrictions are usually due to Reserve Bank rules, which change from time to time.) You may have approached your bank just as they have exhausted their allowance for lending with a less-than-20% deposit. Another bank may happily give you the mortgage!
6. The experience level of the bank staff
A not so common reason for a mortgage decline may come down to the experience of the person you are dealing with. Bank lending roles have a fairly high turnover, with the average length of time in that position being only two years. A lot of knowledge (and therefore, ability to ‘make things work’ can be lost when the experienced staff move up the banking ladder or change jobs.)
7. Issues with the property you’re looking to buy
You could be a model candidate for a mortgage yourself, but the property you’re interested in simply may not be suitable for security. An obvious example of this is a property that has significant risks, such as being a ‘leaky home’.
A property that isn’t (or isn’t ‘yet’) residentially zoned can also be deemed unsuitable for security. Sometimes banks will look at a new subdivision, for example, and decide they don’t want too much exposure to (risk taken on by the bank through essentially ‘investing in’) the development, and decline a mortgage application for this reason.
8. Affordability
Mainstream banks need to assess whether you can afford the repayments. They undertake an assessment based on your income(s) and household expenses, and factor in the mortgage repayments with an interest rate that’s higher than what interest rates currently are, called a ‘test rate’. If they believe you can’t afford the proposed mortgage repayments on this basis, they’ll decline you.
Non-bank lenders are more lenient when it comes to their judgement of affordability - working with a mortgage broker like us can oftentimes get you an approval from non-bank lenders when the mainstream banks have said No.
9. Being self-employed
Banks are very cautious if you’re self-employed and have been trading less than two full financial years - because they need to see your business’ profitability.
Sometimes they’ll look at one year of trading, but they’ll discount how much of that income they would use in their income assessment.
There are some lenders we work who sometimes assist self-employed people who’ve been trading for just 6 months. These lenders aren’t banks, and their interest rates will be higher than banks by comparison, but these options do suit some people - you may be happy to use a non-bank lender as a ‘temporary parking spot’ until you can qualify for main bank lending and thus cheaper interest rates.
An extra note here: Self-employed people often put a lot of their household expenses ‘on the business’ to reduce their tax liability. This can sometimes be a detriment to a lending application. Any mortgage broker worth their salt (ahem - that’s us!) should be able to help you re-configure this.
10. Being new to a job
If you’ve not long started a new job and you’re still inside the trial period on your employment contract, just hang fire a month or two - you’ll have better success with your bank once you’re outside your trial period.
11. Credit History
Having a low credit score (caused by things like having bad debts in the past) will count against you on a mortgage. Banks also have access to more comprehensive credit reporting as well - including things like how well you pay your household bills. Just being late in paying with household bills can deteriorate your credit score.
There are some lenders we work with at WealthHealth who are a bit more lenient on credit history. Contact us to discuss - our mortgage brokers can investigate if this is an option for you.
12. Poor bank account conduct
Banks will look at whether you’ve been operating your bank account within arranged limits. Things like exceeding your balance without having an overdraft and/or spending in excess of your overdraft limit are considered poor account conduct. It’s best to make sure you have ‘clean’ account conduct for at least 6 months leading up to a mortgage application.
In my 20+ years’ experience as a mortgage broker, the main cause of this is simply not having enough money in your account when a direct debit payment is deducted - insurance premiums, gym memberships and bank fees are the usual culprits. Having a payment dishonour is not a recipe for success here.
There’s a plethora of reasons you may get declined by your own bank when applying for a mortgage. But don’t be discouraged, some of these reasons, as we’ve outlined above, could be specific to that bank - another lender could very well give you an approval.
Your best course of action is to talk it all through with a mortgage broker - someone who knows how to present your application in the best way, and someone who has access to different lenders (we work with over 16!) with different criteria. We’d love to help, so contact our mortgage brokers today and let’s see if we can get you that approval!
"We had applied directly through our bank
of 10+ years and were declined.
We decided to use a mortgage broker
and Craig came highly recommended.
Within days we had our approval -
and it came from our own bank!
I highly recommend WealthHealth."
Our blog is not intended to be taken as personal advice and is for informational purposes only.
Before acting on this information, contact our mortgage broker to ensure it is suitable for your circumstances.