Employment Requirements

Banks are always keen to establish whether or not an applicant has a good employment history. Over the years banks have developed profiles, backed up by experience, that describe the best quality applicants. Quite simply they have developed these profiles by examining which loans have caused problems to them in the past and the characteristics of each of those borrowers are profiled in computer models that flag potential problems in the credit assessment process.

One of the hallmarks of better quality borrowers is that they have had a long continuous record of employment either as an employee or in their own business. But in order to quantify this banks have come up with the following requirements that have been traditionally applied.

A borrower should have been in their job for at least two years, preferably within the same industry and with the same employer.

A borrower should have satisfactorily completed any probationary periods.

Any job changes should be explained especially when the type of employment has altered significantly.

Moving to alternative employers within the same industry is acceptable if it is consistent with an upwards progression.

These days however banks are prepared to be quite lenient when it comes to employment, mainly because of the changing nature of the workforce. More professionals are employed under a contractual arrangements rather than traditional full-time employment and many employers make extensive use of casual employees.

In the past, contract employees had a lot of explaining to do to get their loans approved and casual employees had to establish a longer working history before their income would be satisfactory to the bank.

The bottom line is that, provided an applicant can demonstrate continuity of employment, they will have little trouble satisfying this part of the application process.

One thing to bear in mind is that banks become more flexible when the overall application looks stronger. For example, where an applicant has a very strong savings history, or a very high valued asset position, but has only been employed in his or her current position for two months, the application may still be favourably regarded.

Similarly, the lower of the loan to value ratio, the easier it becomes to satisfy a banks employment criteria. That's why first home buyers who are looking to borrow 95% of the house's value have to cross all the t’s and dot all the I’s.

The role of mortgage insurance companies.

Lenders Mortgage Insurance companies only influence the banks’ lending policy when the loan to value ratio is more than 80%. This is the point at which banks want to insure themselves against the increasing risk of default and mortgage insurance policies can dictate terms the higher the loan to value ratio gets. For instance a bank's internal policy may dictate that they will accept an application where the applicant has been in his or her current position for only a few months. Mortgage insurers however may require a minimum of six months employment with the current employer and two years in the same industry.

A mortgage broker can be of great assistance when it comes to tricky points like this because they are in a position to argue your case on your behalf directly with the assessor. The overall strength of an application weighs heavily when arguing these individual points.

Why are banks so interested in employment history?

It's easy to understand the bank's position when you consider that they are bound by legislation that demands them to act responsibly when it comes to granting credit. There have been occasions in the past where a bank has exercised some flexibility only to find a borrower defaulting on loan because they lost their job.

Some of these applicants, acting on the advice of their solicitors, have argued their way through a court case claiming that the bank had acted irresponsibly and should never have granted credit in the first place. The courts have found in favour of these arguments and where this happens the mortgage contract is determined to be null and void and is therefore unenforceable, meaning that the bank loses the deal completely.

This type of experience has led the banks to review their lending policies, requiring assessors to exercise great care before granting credit to any applicant.

Another reason that banks placed a lot of emphasis on employment history is that it is part of the overall picture as to borrowers’ credit worthiness. Stability is generally regarded as a good sign of a quality borrower and banks always have a view to the long-term. After all, a bank wants to write business that will last a long time and a home loan is one of the key products in establishing long-term client relationships.

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