Directions in lending – APRA driving change in 2017

directions picHome loan borrowers are enjoying record low rates. And the predictions on interest rates are that they might drop further. So surely all the news on lending is good, right?

Not so fast. Low interest rates cause headaches for banks and regulators alike. Both are concerned with how people borrowing “cheap money” are going to fare with paying back loans when interest rates do eventually rise.

If rates increase from 4% to 5% that is a 25% increase – so it might not take many rate increases for borrowers to feel the heat. And if rates head closer to 7% that could cause major problems for borrowrs.

The regulators (APRA) are acutely aware of this. As a result, most if not all of the trends in lending on 2017 reflect various attempts to slow down lending. But first lets deal with a popular misconception about finance.

Contrary to popular expectations, banks lending rules are not carved in stone. They may be presented like the 10 commandments but they are not immutable. Changes are common at the moment they are frequent

Some changes are self administered but in the last 2 years, many of the changes have been “encouraged” by government regulators (using a carrot and stick).

So what changes can we expect in 2017?

Interest Only loans

Reserve Bank figures show that about 24% of borrowers are not paying down their home loan debt. This figure has remained steady over the last 3 years despite interest rates falling through this period.

Regulator and banks want to see lenders paying off their home loans.  Some banks have in recent times started to charge a higher interest rate on interest only home loans compared to standard principal & interest home loans.  Expect this trend to continue in 2017. In fact if we predict that only a handful will be offering the same rate for both loan types by the end of the year.

Interest Only loans will also be harder to get with lenders expecting good reasons for approving interest only terms, especially for home loan lending. In the current low interest environment the regulators (& banks) want to see borrowers paying down their debts and not just covering the interest charges. Their thinking is if consumers can’t repay debt while rates are so low, how are they going to manage when rates do go up.

Investment lending

In 2015 investment lending was turned upside down when the regulators made it clear to lenders that this category of lending was growing too fast and the banks had to slow it down.

There were really only 2 options to the lenders. Put a freeze on investment lending or increase the rates. Most lenders did the latter and now investment lending rates typically sit between 0.25-0.75% above home loan rates. That “gap” may widen further through this year.

Recently we have also seen AMP, CBA & Bankwest put a freeze on refinancing investment lending from other banks.

We predict that by the end of the year all lenders will charge higher rates on investment lending than home lending. The only exception will be a few lenders offering you the same rate if you give them all your lending.

Restrictions on lending in postcodes or on new apartments

Lenders are reducing the maximum lending they will consider on off the plan apartments – especially in the inner city areas of Melbourne and other capital cities. This will cause real headaches for people who bought of the plan 2 or 3 years ago when lending policy was more flexible and now have to get finance sorted now that completion of the property approaches.

And the belt tightening does not end there

Every lender is navigating the current landscape differently as they chose which market segments they want to play in or avoid.

Many lenders have reduced their maximum lending limits from 95-97% of the property value down to 95% or even 90% of the property.

Another change is that the majority of lenders are now requiring apartments to be at least 50sqm (in the past they would accept apartments that were 40-45sqm).

What this means is that borrowers need to select carefully which lender they seek finance from and a rejection from one lender might not mean that they cannot obtain finance at all.

In recent months we we have seen lenders:

 

  • increasing the benchmark rates used to determine loan affordability,
  • including any existing loan repayments at benchmark rates (not actual repayment amounts),
  • shading income (e.g. using only 80% of variable income like commissions/bonuses)
  • excluding negative gearing benefits from calculations

 

All of the above has had the effect of reducing the amount a lender will loan to any given applicant. We estimate client’s borrowing capacity is down between 10-25% on what it was at the start of 2015.

And we expect more of the same in 2017, with a particular focus on clients actual living expenses, which brings us to the next point…

Lenders looking more closely at applicants circumstances

Lenders are requiring greater verification of the information provided in loan applications. If an applicant says they have a car loan with repayments of $352 pm, more lenders wants proof that this is the case – they won’t just take your word for it.

Similarly, we have had banks query the living expenses declared by an applicant after reviewing credit card and transaction account statements

We expect more lenders will ask to see 3 months statements for a clients’ transaction account and compare the living expenses declared by the client with what it can see in the statements and querying discrepancies.

With this in mind, if you are a “spender” you might like to consider going on a spending “diet” for 3-6 months before you apply to a lender for finance.

Closing thoughts

While all these changes are making it harder for borrowers to get finance we think that mostly the changes will produce good results and hopefully protect borrowers from the dangers that will come when interest rates start to rise.

There is no doubt that in the current environment the role of brokers is more valuable than ever in helping borrowers find finance but also in ensuring that the amount borrowed is affordable – now and into the future.

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