Lending Marketplace Changes
19-Nov-2018
The lending marketplace has experienced a vast amount of change in the past 3 years – it is the tightest credit marketplace that we have seen in the industry. To give you an idea of what has changed since December 2014 – refer below:
• Investor loan book growth hand brake - Banks had a 10% limit imposed on the growth of their investor loan book. We are used to the banks throwing money at people but these days this is not the case (a day I never saw coming). This hand brake has been removed but the banks are still generally edgy around approving investment loans.
• Investment vs owner occupied - Three years ago, there was just one loan interest rate. There was no difference in interest rate for a home loan or investment loan. Now investor loans can be 0.2-0.6% higher.
• Interest only vs principle & interest – As with the prior point, banks did charge the same rate for Interest Only or P+I. After APRA got involved, they now charge more for Interest Only. Sometimes it is a small amount like 0.1% but sometimes it is as high as 0.50%. Like Investment loans, the gap is getting bigger. Bank borrowing capacity models are making it harder for interest only loans now and you can borrow more as principal and interest.
• Investor loan max loan to valuation ratio - Some banks will not lend on investment assets more than 80%. This is far cry from days of 97%.
• Certain postcodes or property sizes aren’t acceptable to some banks – Lots of the banks have a larger blacklist of postcodes that they are not comfortable with at all or at reduced loan to valuation ratios. Anything less than 50 square metres can also be an issue.
• Interest only harder to have approved & you cant just extend the interest only period – In the past you could get 15 years interest only. Most of the time we are now capped at 5 years interest only. Also, previously you could extend interest only with one form or a call to the bank (no new reassessment) but now if you want to extend interest only then you need to go through a whole new assessment/refinancing process.
• A focus on living expenses – In the past the banks used the Household Expenditure Measure (HEM) or the Henderson Poverty Index (HPI) in loan calculators to work out a client’s living expenses. The same living expense figure was used for a family in Dubbo as they did for a family in Vaucluse. These guides are still around but they have increased significantly and now look at income levels and location more closely. Some lenders are even reviewing your bank account statements to confirm the amount you declare in the various categories of expenses is what you are actually spending.
• The way the banks look at extending home or investment loan debts - This is one of the biggest changes from previously. Bank borrowing capacity models used to use the actual repayment of mortgages you had elsewhere (or even with that bank). So if you paid $2,000 per month that is what the bank used. These days no matter what your repayment is, above 7% is used for the interest rate (& even if the repayment is interest only they use P + I as the repayment amount). This makes a huge difference to investors. If you are paying $2,000 per month the bank is using $5,000 per month or more.
• The rate the banks assess the new loan – Banks use what are called assessment rates. Most of these are now over 7% (normally 7.25%). So even though rates are as low as ever before, banks are making sure you can repay the loan at 7.25%. Before this assessment rate could have been 5-6%. This has a significant impact on borrowing capacity.
• Ex Pat or foreign income Loans – This style of lending tightened overnight. Some banks wont lend to certain VISA types and only permanent residents. Some also tax foreign income at Australian tax rates even when the foreign location has a much lower tax rate. Some no longer accept foreign income at all or shade the amount of income they will use in the servicing models. This part of the market is as difficult as it has ever been in our memory.
• SMSF lending – Very few banks still operate in this space these days. An indication that their risk appetite is decreasing.
• Retirement or exit strategy - Borrowers in their late 40s & 50s, now need to have a clear exit strategy to repay their debts. This previously wasn’t needed.
Even though all of the above has changed, it is still possible to find a solution in amongst all of the confusion & change. You just need to:
• Plan your property purchasing journey more carefully
• Get in touch with an expert mortgage advisor who can assist you in navigating this complex credit environment
SOURCE - Smart Move Home Loans
• Investor loan book growth hand brake - Banks had a 10% limit imposed on the growth of their investor loan book. We are used to the banks throwing money at people but these days this is not the case (a day I never saw coming). This hand brake has been removed but the banks are still generally edgy around approving investment loans.
• Investment vs owner occupied - Three years ago, there was just one loan interest rate. There was no difference in interest rate for a home loan or investment loan. Now investor loans can be 0.2-0.6% higher.
• Interest only vs principle & interest – As with the prior point, banks did charge the same rate for Interest Only or P+I. After APRA got involved, they now charge more for Interest Only. Sometimes it is a small amount like 0.1% but sometimes it is as high as 0.50%. Like Investment loans, the gap is getting bigger. Bank borrowing capacity models are making it harder for interest only loans now and you can borrow more as principal and interest.
• Investor loan max loan to valuation ratio - Some banks will not lend on investment assets more than 80%. This is far cry from days of 97%.
• Certain postcodes or property sizes aren’t acceptable to some banks – Lots of the banks have a larger blacklist of postcodes that they are not comfortable with at all or at reduced loan to valuation ratios. Anything less than 50 square metres can also be an issue.
• Interest only harder to have approved & you cant just extend the interest only period – In the past you could get 15 years interest only. Most of the time we are now capped at 5 years interest only. Also, previously you could extend interest only with one form or a call to the bank (no new reassessment) but now if you want to extend interest only then you need to go through a whole new assessment/refinancing process.
• A focus on living expenses – In the past the banks used the Household Expenditure Measure (HEM) or the Henderson Poverty Index (HPI) in loan calculators to work out a client’s living expenses. The same living expense figure was used for a family in Dubbo as they did for a family in Vaucluse. These guides are still around but they have increased significantly and now look at income levels and location more closely. Some lenders are even reviewing your bank account statements to confirm the amount you declare in the various categories of expenses is what you are actually spending.
• The way the banks look at extending home or investment loan debts - This is one of the biggest changes from previously. Bank borrowing capacity models used to use the actual repayment of mortgages you had elsewhere (or even with that bank). So if you paid $2,000 per month that is what the bank used. These days no matter what your repayment is, above 7% is used for the interest rate (& even if the repayment is interest only they use P + I as the repayment amount). This makes a huge difference to investors. If you are paying $2,000 per month the bank is using $5,000 per month or more.
• The rate the banks assess the new loan – Banks use what are called assessment rates. Most of these are now over 7% (normally 7.25%). So even though rates are as low as ever before, banks are making sure you can repay the loan at 7.25%. Before this assessment rate could have been 5-6%. This has a significant impact on borrowing capacity.
• Ex Pat or foreign income Loans – This style of lending tightened overnight. Some banks wont lend to certain VISA types and only permanent residents. Some also tax foreign income at Australian tax rates even when the foreign location has a much lower tax rate. Some no longer accept foreign income at all or shade the amount of income they will use in the servicing models. This part of the market is as difficult as it has ever been in our memory.
• SMSF lending – Very few banks still operate in this space these days. An indication that their risk appetite is decreasing.
• Retirement or exit strategy - Borrowers in their late 40s & 50s, now need to have a clear exit strategy to repay their debts. This previously wasn’t needed.
Even though all of the above has changed, it is still possible to find a solution in amongst all of the confusion & change. You just need to:
• Plan your property purchasing journey more carefully
• Get in touch with an expert mortgage advisor who can assist you in navigating this complex credit environment
SOURCE - Smart Move Home Loans