Dancing in the Dark
There is a sensory experience (in the Docklands) called Dialogue in the Dark that allows visitors to navigate a journey through Melbourne in pitch black. It is designed to get participants to use all their senses and challenge their problem-solving skills. In effect it allows them to experience, in a safe controlled environment, what it is like to be vision impaired.
I mention this not just because it is an awesome holiday activity for the kids but because organising your own finances in 2019 will be a very similar experience – just without the fun.
Lending has been tough before (most recently during the GFC in 2008/9) but it has never been THIS tough and you need all your wits about you…and a very good mortgage broker if you are looking for finance in the next few years.
To give you an idea how much tougher things are than just 5 years ago, consider this:
- The max amount that a customer can borrow is down somewhere between 20%-50%
- The number of loan applications being declined has soared from 8% to 40% (refinance applications are most affected with 48% of these applications being declined)
- The average length of time it takes to get finance approved has doubled with many lenders
- Lenders want to see more documents to assess a loan application
- There is greater scrutiny of the documents provided to lenders
- Brokers report spending between 25-40% more time to get deal approved and settled.
There are 2 primary causes for this shift:
- Regulators have sought to slow down the property market
Concerned about property price increases in Melb & Sydney, regulators sought to dampen the market by placing caps on interest only and investment lending by lenders. This has lead to lenders moving from having one variable rate to now having 4 different variable rates;
- Principal & Interest (P&I) home loan rate
- Interest only home loan rate
- Principal & Interest investment rate
- Interest Only investment rate
While P&I Home Loan rates have remained relatively stable over the last 3 years, all the other rates have increased as lenders sought to put a handbrake on these types of lending to satisfy reglulators. The gap between a P&I home loan rate and an Interest Only Investment rate can now be up to 1.5%.
When combined with the impact of the other changes outlined in this article the impact has been to push property prices into reverse with price falls of up to 20% reported this year.
- Regulators have sought to reinforce the strength of our banking system by stronger enforcement of responsible lending practices.
Greater focus on responsible lending by the regulators has seen lenders implement a raft of changes to lending practices, including:
- Banks no longer use standardised tables of living expenses when calculating a consumers’ borrowing capacity. Consumers must now provide a detailed breakdown of their actual living expenses and many lenders verify the figures against bank statements. This new approach slows down lender processing of applications AND is leading to smaller loans being approved in about 75% of applications.
- Lenders have always taken into account a borrowers’ credit card limits (even when a consumer clears their cards each month). Recently lenders have increased the weighting of credit card commitments further reducing the borrowing capacity of consumers.
- Getting an Interest Only term on a home loan is now very difficult without a strong reason and the applicants being on a strong financial footing.
- Previously it was relatively easy to roll over an interest only loan for another interest only period when the first term expired. Few lenders will now allow a subsequent Interest Only term for a home loan and will not allow more than 10 years interest only on an investment loan. Lenders also now do a full loan assessment to ascertain that you can afford the loan over the remaining term.
- Age is now a big consideration in lending and it is increasingly difficult to get a loan as borrowers get older. From the age of 37 up borrowers need to show how they will pay off a loan by retirement age (67). Banks will take into account super balances, other assets and plans to down size. They will not consider expected inheritance (under any circumstances). This change is particularly hard for borrowers that are looking to refinance existing debts and would benefit from being able to move to a cheaper rate but cannot demonstrate an “exit strategy” that the lender will accept.
We expect more changes to credit practices and policies in 2019. While the regulators have removed their cap on interest only lending, they are requiring banks to report and demonstrate on their practices that keep interest only lending in check.
Another change that will have an increasing impact in the next few years is a move to positive credit reporting. Until recently credit reports only captured basic information; credit applications made by a consumer, and credit defaults (typically more than 3 months in arrears on a facility). The reports did not show if credit had been approved or declined. Nor did it reflect the payment conduct of the consumer on their credit facilities.
Starting in October and rolling out over then next year credit reports will start to show the repayment history on home loans, credit cards, car loans and all forms of credit accounts (NOT utilities or phone accounts). A repayment is deemed to be made “on time” if it is made within 14 days of the repayment date. If you pay later than this then this will be reflected on your credit file and will start to hinder your ability to get credit.
I expect over the next year or two that account conduct on credit facilities will increasingly impact the ability to borrow money and the rate at which it is lent. That is a big change to the way lending has been provided till now.
Generally, the non-major banks are easier to deal with in the complex world that is lending these days. The demonstrate more common sense than the majors. These lenders are often cheaper than the majors too so you do not pay more for your loan. But no two lenders are the same which makes it increasingly difficult for consumers to take charge of arranging finance themselves
So if you need finance in 2019 here are a few tips to keep in mind;
- Call us! Don’t try doing it yourself unless you like tripping over in the dark. Think of us as your financial guide dog. Always trustworthy. Always there.
- Talk to us well in advance of when you need/want the money. The process to get finance approved, whether it just be a pre-approval or a full refinance from one lender to another is taking significantly longer than before
- Get to us all the paper work we ask for in one go. Neither Hatch nor the lenders can assess an application in the current environment based on only half the documents
- Disclose everything to us, we are your partners in finance. Your chances of getting finance will be hurt just as much by what you don’t disclose as what you do
- Expect lenders to come back to us with more questions (legitimate and absurd). The lenders are being extremely cautious.
We look forward to talking to you when you need us!