Yes, it is a lot, it may seem ridiculous the sheer amount of info and supporting documents you need to get together just to ask the bank for a loan, but the banking industry is heavily regulated and inherently risk averse for pretty good reason after 2008. I have compiled a list of some typical requirements and reasons behind them to help you get comfortable with what is being asked and why, and break down the stigma behind what feels like nosy banks asking too many questions.
They need to understand your income.
This seems straight forward. They are lending you money, asking you to pay an amount back each month, and they want to make sure you are earning enough money to pay. Evidencing to the bank what you earn isn’t always a straightforward endeavor and this is when engaging a mortgage broker shows great dividends.
Payslips
If you are a salaried employee, you know your gross annual salary figure and you get paid the same amount every cycle, that is excellent, simply providing your three most recent payslips should do the trick, and you likely won’t have to provide any of the below.
IRD Summary
This is the next most common piece of income evidence and is used for a few different reasons. Obviously the IRD has knowledge of all the income you’ve earned (assuming you’ve paid tax on that income) and so they can provide you with a summary of your income over a specific period of time. This is often used when you are paid more variable forms of income (overtime, bonuses, commissions or fluctuating hours).
Employment Contract
The bank might also ask for your employment contract for one of two reasons. If you are new into a job and can’t provide three recent payslips, the contract can cover off what they need, and if your hours fluctuate it is often detailed in your contract what your minimum hours are, which becomes an important part of assessing your income as this is the guaranteed portion of your earnings. In some instances a letter from your employer could be used to cover off these questions as well.
Accountant prepared financials
For those that are self employed, your income becomes harder to confirm and harder to evidence. For that reason, the more the merrier is what I say when asking clients to provide documents. Accountant prepared financials are the most concrete and accurate assessment of your earnings and so this is the preferred document for all banks. That being said, they do sometimes take a bit of time to prepare, and getting the most recent financial year to your accountant isn't always easy, let alone getting their completed work to the bank. For this reason, this is often supported by…
Draft Financials
Or in other words, the information you download from your system (xero or the like) and send to your accountant for them to complete your annual accounts. This is usually what is provided in conjunction with the above to prove that the most recent few months have been as fiscally successful as the finalized accounts provided.
They need to understand how you’ve been spending your money for the last three months, and how you will for the next 30 years.
Bank Statements
This is the bread and butter, and goes a long way to showing how you are with your money. They will want to see the most recent three months statements for ALL of your accounts. So your transactional account, the savings you have at another bank that you don't look at, the bills account just for your insurance and your account you have for other… expenses. The idea being that they need to understand every fixed cost you have, and so these costs could be in any account, and therefore they want to see statements.
Other statements
It’s worth noting that there are other ways you can spend money than just bank statements. For much of the same reasons as above, if you have credit cards, store cards or available credit lines available, statements need to be provided no matter how often you do or don’t use them.
They need to understand who you are.
Photo ID
This is straightforward. For anyone to open a bank account there are pretty set in stone requirements the bank has to follow for AML purposes (Anti Money laundering). Photo ID is the first port of call, and a copy of a valid passport (including the signature page) is the best way to tick this off. If not, both the front and back of your driver's license should suffice.
Proof of Address
For the same reasons as above, evidence of where you live and the fact that you do in fact live there is another AML requirement. Bank statements are the best to show this, as they are needed for other reasons too. If unavailable, an insurance, phone, internet or power bill will also do the trick.
Trust Deed
This is only needed if you are borrowing in a trust, but gives the bank an understanding of the people involved in the trust for which the above AML requirements will need to be met.
Company Shareholders
Similar to a trust deed, if you are borrowing under a business, the bank will need to complete AML for all people who have a shareholding greater than 20% or people who are both directors and shareholders.
They need to understand what you are buying.
Sale and purchase agreement
Banks will always want to know what you are buying, mostly for two reasons. Firstly, they need to confirm that the reason they are lending you a rather large sum of money is legit for their own legal requirements. They also need to ensure the property they are taking as security is acceptable to them.
Valuation
In some instances, the price you pay for the property alone isn’t sufficient enough evidence of a value of the property, and an assessment by an independent valuer may be required.
Pre-contract disclosure statement
When purchasing a property with a body corporate, residents association etc, included in the info pack provided by the real estate agent should be a pre-contract disclosure statement (PCDS). This will explain the rules the body corp etc, including fees to be paid and any encumbrances over the property to enforce said rules which the bank needs to be aware of to ensure they won’t run into any issues registering their mortgage.
They need to understand what assets you have, if you have any liabilities, and your overall credit history and position.
Kiwisaver, savings account and term deposit statements
Understanding who you are, how you spend money and the risk profile of you as a borrower has mostly been clarified by this point. The last step on this is what you own and what you owe. In some instances, proving your assets to the bank isn’t necessary, but when these assets are funds to be used to make up a deposit when purchasing a home, evidence that they are accessible and obtained legally is a requirement of theirs.
Loan Statements
In much the same way a bank will want to know your fixed expenses, debt is a factor they need to consider as a fixed amount expected to be paid that they need to account for. Understanding your appetite for debt, current equity position and conduct on current loan facilities goes a long way to proving to future lenders that your character is worthy of further lending.
Buy now, Pay Later accounts
This one falls by the wayside quite often, but afterpay, Zip, Humm, Ping, Zarna, Zapp, Starr and Zig Zag (Yes… some of those are made up), are all forms of debt. They work the same (in a bank's eyes) as credit cards, and give you, the client, access to funds that you don’t have and therefore need to pay back later. The less you use these, the better you look at a potential debtor to the bank.
If you have any other questions or concerns, reach out to our team for help!
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