Borrowing money should be easy right?
You have a good paying job, your debts are under control, you rarely use your credit card(s), and you have clean credit history.
But you’ve just been knocked back to borrow money?
‘How can that be?
The current lending environment is challenging, across the board.
You may recall a number of years back, Australia’s banking watchdog APRA was worried about the housing market overheating and exploding.
To counteract this perceived risk, APRA changed the game and introduced rigor around credit which banks and lenders had to adhere to when assessing loan applications.
The main changes were…
- Capping IO lending
- Limit borrowing for LVR loans >80%
- Limit borrowings to investors
- Restrain lending in riskier segments of the market with higher LVR loans
Earlier this year, in April 2018 in fact, APRA announced that one of the handbrakes it introduced would be removed as of 1 July 2018.
The 10% investor loan growth benchmark mandated back in December 2014 had “served its purpose” and was removed.
This was a positive sign for borrowers.
Then the Royal Commission (RC) raised its ugly head and all a sudden a new tsunami hit sending borrowers back to square one, or even worse.
Don’t get me wrong, I’m all for the RC as it has a purpose.
The RC will result in better consumer outcomes when it comes to financial and credit advice.
The issue is that lenders are ducking for cover since the RC findings have been revealed, and to say credit policy has tightened significantly is an understatement.
Who’s impacted and how?
We are seeing many mortgage borrowers impacted from the current stringent lending environment.
Here are the most common ones I’m seeing right now and how it’s having an adverse impact financially.
Some of these may resonate with you and also impacting you.
1. Existing mortgage customers wanting to refinance to a better home loan deal
– Just because you qualified back then, doesn’t mean you qualify now
– This is resulting in being stuck on a higher interest rate
2. IO home loans with expired terms wanting to roll the IO term further
– Lenders don’t want IO loans right now, as APRA is watching closely
– The result is higher loan repayments as repayments are amortised on a P&I basis on the remaining term of the loan (usually over 25 years remaining)
3. Property owners wanting to release their available equity (cash out)
– This is like pulling teeth right now (actually worse), for both owner-occupiers and investors
– Opportunity cost is the most obvious cost if you’re unable to release your borrowing equity, particularly for investors
4. Investors wanting to leverage their available equity into more property
– As your loan portfolio grows, your ability to raise more borrowings is much harder
– Opportunity cost is the most obvious cost if you are unable to release your borrowing equity as you have untapped equity wasted
5. Home owners wanting to upgrade their suburb (location) or upgrade their home
– The lack of borrowing capacity means you’re stuck where you are, at least for now
6. Borrowers aged 50+ without a sound exit strategy
– If you’re over 50, you need a strong balance sheet and a sound exit strategy if you want a 30 year loan term
– If the lender won’t give you 30 years, your loan repayments will be much higher as well as your borrowing capacity much lower as the amortised loan term is shorter
7. First home buyers wanting to use mum/dad’s home as security guarantor
– Some lenders in this space have tightened the rules (significantly) making it less appealing and less achievable
– A delayed purchase will cost in the long run as property prices don’t usually wait for anyone
There are probably others, but the above are the main issues we’re seeing right, and how they’re impacting mortgage customers.
What can you do about it?
As you’ve heard me say before, stop worrying about the things you can’t control.
No point stressing over changes to credit policy which are out of your control and which you have no influence over.
This cycle will pass.
Banks and Lenders are money shops.
Most of their profits are generated from lending money, and I am yet to see a bank or lender go backwards in profit.
I hope the above helps you better understand what’s currently going on in the world of finance, how it is impacting you, and what you can possibly do about it.
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