You’re looking to buy a home. What is the lending policy of banks?

Here’s what you need to know about the lending policy of banks.

Article summary

  • Looking to buy a home? Find out what the lending policy of banks is.
  • Check what you might qualify for in terms of home loan finance and associated repayments by using O-YES’s range of home loan calculators.
  • Make sure you request your credit score from a credit bureau as this will affect the success of your application.
  • Find out if there’s a penalty clause.

If you’re in the market to buy a new home, chances are you’ll be looking for some level of financing help from the banks. To make the home-buying process that much easier, O-YES offers a range of home loan calculators, including those that determine bond affordability and bond repayments.

How does a client’s credit score link to bank lending practices?

A common method that banks use for predicting credit risk is their credit scorecard, a statistically based model for attributing a number (score) to an applicant that predicts customer behaviour. In calculating the score, a range of data sources is used, including that from the home loan application form, from credit bureaux and, where applicable, from products the client already holds with the lender. The rules and regulations for banks’ individual credit policies are also included in their credit scorecard results.

Do banks tighten their lending criteria in times of economic downturn? If so, in what way?

Banks will lend more cautiously when the economy is showing negative growth. They are less likely, for instance, to offer homebuyers a 100% home loan due to the risk of negative property price growth linked to lack of demand for property during an economic downturn. Banks may also require homebuyers who purchase property in an area that is more exposed to the risks associated with a downturn in economic growth to put down a larger deposit. They will be more cautious about lending to homebuyers who derive their income from industries who are reporting significant job losses as a result of an economic downturn.

How do banks’ credit policies differ with regard to affordability and credit risk?

Banks are required to comply with National Credit Act regulations when assessing an application for finance. Their credit policies therefore have the same fundamental principle of ensuring that the applicant has a good history of responsible debt repayment behaviour and sufficient net surplus income after monthly household expenses and contractual debt payments to afford the home loan instalment. However, banks do have different appetites for risk in terms of their respective credit policies and will apply their individual credit and pricing policies accordingly. A homebuyer may therefore find themselves being turned down by one bank for a 100% loan but approved by another or being approved for the same loan amount by different banks but at different interest rates, due to their different credit risk and pricing policies.

What do banks cover with regard to penalty clauses?

Banks may include a penalty clause that forces the homeowner to pay 90 days’ interest on their current home loan if they cancel it before the stipulated notice period has passed. Banks will only implement the penalty interest clause when a borrower fails to provide them with 90 days’ notice of the intention to cancel a bond that has not yet reached the end of the original loan term for which finance was acquired. The penalty interest is charged on the remaining outstanding balance of the home loan, not on the original loan amount granted. It is calculated on the difference between the required 90 days’ notice period and the actual date of the bank receiving the notification of the borrower’s intention to cancel the bond. Most banks will waive or refund penalty interest in cases where the borrower is cancelling the bond, but simultaneously registering a bond with the same bank on another property purchased.