Policy – Income and employment requirements
The following is a policy guide on appropriate employment and income evidence requirements to support personal lending:
PAYE – Full time
100% of the gross monthly income may be utilised for DTI calculation purposes subject to:
Borrower must be employed by current employer for twelve (12) months or more, alternatively a borrower may be employed by their current employer for six (6) months or more provided they have been consistently employed within the same industry for twenty four (24) months or more.
Applicants must provide two of the following to support their income
o Two of the most recent consecutive payslips or employment contract
o Most recent bank statements evidencing a minimum of 2 months worth of income being credited to the account
o Most recent PAYE tax summary
PAYE – Additional Income (Overtime, Shift allowance, Commissions, Bonuses, Car allowance)
The average gross monthly additional income received over the past 2 years may be utilised for DTI calculation purposes – However, if the additional income has been available for more than 12 months but less than 24 months, only 50% of the average gross monthly income may be utilised for DTI calculations; subject to:
Overtime is considered to be additional income to a standard 40 hour working week.
The income must be consistently received over the assessed period and be a condition of their employment.
Applicants must provide all of the following
o Two of the most recent consecutive payslips or employment contract
o Most recent bank statements evidencing a minimum of 2 months worth of income being credited to the account
o Last two year’s PAYE tax returns for each applicant
PAYE – Casual (Part time, 2nd Job)
The average gross monthly casual income received over the past 2 years may be utilised for DTI calculation purposes – However, if the casual income has been available for more than 12 months but less than 24 months, only 50% of the average gross monthly income may be utilised for DTI calculations; subject to:
The income must not be the primary source of income – it must be supplemental to other incomes
Applicants must provide all of the following
o Two of the most recent consecutive payslips or employment contract
o Most recent bank statements evidencing a minimum of 2 months worth of income being credited to the account
o Last two year’s PAYE tax returns for each applicant
Contract
100% of the gross monthly contractual income may be utilised for DTI calculation purposes subject to:
Borrower must evidence a minimum of 2 years within the same industry and the employment contract must be for a minimum period of 12 months – A copy of the executed contract must be provided to verify income
Must be supported by 2 years tax returns.
Rental Income
Calculated at 75% of the Gross Rental Income (50% for High Density apartments).
The policy will need to either recognise or not recognise Negative Gearing tax advantages for investment properties
When the property is situated within an area of tourism, care must be taken to ensure the rental income is not seasonal but is consistent over a 12 month period.
Rental needs to be confirmed by receipt of documents such as bank statements showing rent being deposited, tenancy agreements, financial statements, taxation returns, etc.
For Investment property purchases where rental income is not yet realised, a letter must be provided from a Real Estate agent, addressed to the Bank, confirming the rental value of the property and to also comment on the maximum period expected to successfully let the property – this must be no-longer than 4 weeks.
Self employed
Applicants must have at least 2 financial years trading in the current business and be able to produce the most recent 2 years business and personal tax returns
Where taxable income has increased over the last two years by less than or equal to 20%, then the latest year’s income is to be used.
Where taxable income has increased over the last two years by more than 20%, then a maximum of 120% of the previous year’s income must be used
Servicing is calculated by adding net profit before tax to the allowable add-backs, which are:
o Directors salaries (where not already included in income calculations)
o Directors Superannuation (where applicable)
o Interest paid on debt being refinanced
o Non-recurring expenses
Self Employed – applicants must provide the following
o Last two (2) years Financial Statements – signed by an Accountant
o Last two year’s PAYE tax returns for each applicant
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Hello, what kind of statistical models are used to develop, test and refine these credit policies?
Also, how is income from boarders treated?
@David Hillary – Im not sure if any NZ banks use terribly sophisticated models on this data, mainly because they haven’t had great data warehouses to store this kind of info. However, overseas Banks more commonly use “application scorecards” where time in employment, employment industry, level of salary, marital status and DTI etc are all indicators used in automating a decision. Each Bank obviously validates these models against performance, but from my experience, they are good indicators of future performance.
@David Hillary – Re Boarder income. Each bank would have their own requirements, but for me, any borrower reliant on boarder income to service debt is probably to high a risk.