If you’re planning to buy a new home or an investment property, chances are you’re going to be talking to the banks or a mortgage broker about how much you can borrow.
However, the changes in lending policy for our big banks seem to be making it harder to get a loan today.
To get a better understanding of what’s happening watch this sky news interview where I explain what’s going on and how to make yourself more attractive to the banks.
Here are some of the questions we discuss:
I’ve heard you say real estate is a game of finance with some houses thrown in the middle – what do you mean by that?
Recently Westpac cracked down on home buyers and investors trying to weed out “liar loans” – can you please explain these changes and what they mean for those applying for a loan
- Banks are already applying greater scrutiny to the living expenses declared by customers in loan applications, after the royal commissionrecently highlighted shortcomings in the industry’s underwriting standards.
- Major lenders have in recent weeks told mortgage brokers to gather more detail about the living expenses customers provide in their home loan applications.
- Westpac this week wrote to brokers informing them it will require customers to hand over more detail about their spending when applying for a mortgage, by breaking down their spending into 13 different categories, up from six today.
- Westpac was committed to responsible lending practices, and the new process would allow customers to be reminded about expenses they may have forgotten, such as gym memberships, pet insurance, or streaming services.
- The extra scrutiny may not necessarily have reduced how much a customer could borrow, but it probably will. And it definitely will make the process of getting a home loan more complex.
- Some analysts believe the trend will further put the brakes on housing credit growth and slow our property markets down
- Anyone bidding on a property at an auction without pre-approval of their financing was taking an “enormous risk.”
- Those who bought off the plan should be worried as they may have much more difficulty obtaining finance than when they entered their contract because of the tighter lending conditions and at the same time valuations of their property on completion often fall below the contract price. Both these mean investors need a much bigger deposit than they originally envisaged.
Recently the RBA expressed some concerns that $480 billion in interest only loans will reset to principle and interest loans – what are they worried about?
- Almost half a trillion dollars in interest-only mortgages will convert to principal and interest loans over the next four years – jacking up monthly repayments for almost 5 million borrowers by as much as 40% and creating a fresh threat to house prices.
- Around 30% of all outstanding national mortgage debt will be subject to the reset, which has been likened to the wave of adjustable-rate loans that triggered the 2008 US subprime crisis.
- While the Reserve Bank downplayed the likelihood of a US-style disaster, it admitted the resets are an “area of potential concern”.
- Officials noted that while many households should be able to manage the adjustment given they are ahead with their repayments, one-third of mortgages have less than one month’s prepayment in their accounts – a figure that has surged from around 16 per cent of mortgages a decade ago.
- With 46 million outstanding interest-only mortgages, even if a relatively small proportion of borrowers struggle – say 10 or 15 per cent – that may imply as many as 220,000 households could soon be in strife.
What can a borrower do to make themselves more attractive to the banks to increase their chance of the banks saying yes to their loan applications
- They look for a deposit – need to prove a savings history- spend less than you earn.
- Prove serviceability – monthly expenses can’t outweigh your income
- Get your paperwork in order, have your payslips ready, tax returns, bank statements
- Clear unnecessary loans and cancel any unused credit cards or lower your credit limits
- Buy the right type of property – avoid certain post codes (blacklisted) and certain properties – too small, student accommodation, off the plan
- Bad credit score – fix it up – my credit score
- Get lenders mortgage insurance – can increase your LVR
- Borrow from the “Bank of Mum and Dad”
With the controversy around mortgage brokers are they best avoided?
Most brokers are honest and work hard for their clients – some are very knowledgeable, and others aren’t, but they protect you from the banks.
Here’s some things the banks won’t tell you but a finance strategist will:
- They can only offer you limited options. Obviously, they won’t tell you about loan products offered by other banks which may suit you better.
- Bankers are sales people. They are incentivized to “sell” you a specific solution including credit cards and insurance. The more products or services they get you to “buy” the more money the bank makes. Sure, finance brokers also get paid by the banks for the services they offer, but this income must be declared.
- There are 3 doors into the bank: The front door where most retail (mum and dad clients) enter.
- The business branch available to larger accounts – the bankers here are more investment and business savvy and…
- The institutional branch – where the “big boys” go.
- Mortgage rates are negotiable. If you ask them, they can usually give you a better deal, because the bank would rather drop the interest rate a little than lose your business.
- Bank fees are a big money maker. It’s unlikely your banker will tell you that fees are amongst the biggest money maker for the banks.
- Some fees can be waived. You bank won’t tell you this, but sometimes certain fees can be waived, just because you asked.
- They are not financial advisers. Some borrowers assume bank employees are trained to help them make financial decisions, but that’s not the case.
- The “system” will decide on your loan application. Many people think that their bank manager or the loans officer will decide, but in reality “the system” will assess your loan application. All your information will be fed into a computer and your application is reduced to a number.
- You should shop around for the best loans or financial products. Many people just go to their bank for loans and other financial products. It seems easier and more convenient to keep their financial accounts with one bank and they assume that, because they have been loyal customers, they will get a good deal. Unfortunately, this is not always the case
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