Currently, home loan lenders are in a great position – interest rates are low, house price growth is creating strong demand, default rates are at a historically low level and loan loss levels are acceptable.
However, the increase in higher risk loans has become a concern because of what might happen to lenders’ balance sheets should house prices stagnate or fall, and/or should defaults increase from this group given that interest rates will inevitably start to rise.
High risk loans are generally deemed those given to borrowers who have less than a 20% deposit, or loans given to people with credit, savings and/or employment history problems.
The Australian Prudential Regularity Authority (APRA), which is responsible for overseeing all the banks, credit unions and building societies, has expressed its concern over the increase in higher risk loans in the face of growing competition between lenders, paying particular attention to lending with a loan-to-value ratio (LVR) of higher than 80%.
According to the APRA, more than a third of new lending had a LVR higher than 80% in the quarter ending March 2014, while 13% of bank loans and 17% of loans from non-bank lenders had LVR’s or 90% or more.
This indicates the growing competition in the home loan market, and the targeting of borrowers with lower deposits to grow market share – especially from non-bank lenders.
Loans sourced from the broker channel has not contributed to the growth in home lending in recent years.
Broker lending has in fact declined -0.2% in the last five years due to reduced volumes and flat house prices, according to recent reports from IBISWorld.
However, this trend is expected to reverse significantly in the next few years and it would be a good bet that a large portion of growth will come from the riskier end of the market.
Lending from brokers is forecast to hit around 5% per annum next year and beyond, and reach the $2.0 billion mark by 2018/2019 (it reached $1.5 billion in 2014).
So, lenders may have to rethink how they deal with brokers, and what types of loans they will accept from this channel to ensure compliance with APRA guidelines.
Mortgage lending accounts for around half of the credit exposure of the major lenders. While I don’t think the situation is serious yet, the APRA is not taking any chances and it has made it clear that it wants the industry to take a less risky approach to new lending activities.
The APRA is currently seeking feedback from the industry on how to best lift lending standards and reduce exposure to high LVR loans without unduly limiting access to finance or damaging lenders profit and growth targets.
If a consensus can’t be reached, the alternative is to impose lending restrictions or quotas on these types of loans (similar to New Zealand), but I don’t expect it will come to that.
Lenders are being encouraged to avoid increasing their loan books by lowering their lending standards, which could have a flow on effects to prospective home buyers and investors as mortgage providers may tighten their lending guidelines, especially for loans above 90% LVR.
With this in mind, I have come up with some tips to help ensure you have the best chance of getting your home or investment loan approved.
Tips to help you secure your loan
- Focus on your deposit
If you can’t manage to get a 20% deposit, try to get into a lower band.
For example, if you have a LVR of 87%, moving the loan down to 85% will reduce your Lenders Mortgage Insurance (LMI)* premium and give you a better chance of getting your loan approved.
- Go over application forms and guidelines
Going over application form and guidelines set by lenders you will give you an idea of what sort of information you need to supply.
This will also highlight any gaps you may have. Having an informal chat with the lender’s customer service team is also a good option as they will be able to guide you through what’s required throughout the process and they may be able to indicate if there are any changes to lending guidelines on the horizon.
- Get advice from an independent mortgage broker
Good mortgage brokers will be on top of any proposed changes among their lending panel and will be able to help you with your application. Brokers can provide guidance on the sorts of evidence and documents you’ll need.
- Conduct your own research
Research what’s available in the market. Implementation of any APRA guidelines may have different impacts on different lenders, so you should cast your net as wide as possible. For example, only deal with brokers who have a large lending panel, and go online and search for mortgage comparison sites to find the best deals that suit you.
Also watching out for relevant magazine, newspaper and online articles that provide useful information on possible developments in the lending market is a good idea.
This can help you form questions that you can ask lenders and brokers when discussing your home loan needs.
- Fix your bad credit history
You may hit a wall with lenders on certain matters where a higher LVR is involved. Have a credit reference check done on yourself to make sure you’re not hit with any surprises and make sure you pay all of your outstanding bills.
If you have any bad credit history, make sure you have a full and plausible explanation for anything that might adversely affect your loan application – like gaps in your employment history.
* LMI protects the lender in the event that the borrower can’t meet the loan repayments and the net proceeds of an enforced sale of the property would not be enough to cover the loan. LMI is required when the borrower cannot provide a 20% deposit.