What has Changed in Getting a Home Loan or Refinancing?
Following the raft of changes that have happened after the Royal Banking Commission. I thought I would just wright a little piece on where we are currently with regards the residential loan market and what has happened of late, reason being is that changes are being made so quickly and regularly that it is hard to keep up. With a bit of luck this brings you up to speed before the finance world moves off again at the substantial clip that it has been trending.
Now I will talk from a Mortgage Brokers perspective and keep it light as there is some heavier reading material on this out there, if that’s your thing and you like being put to sleep by all n the finance jargon.
Post Royal banking commission there has been a strong clamping down on the living expenses side of the finance application. One of the big things coming out of the commission, is that banks were relying on, or even going straight to HEM (Household Expenditure Method) to assess the applicant’s income. This is based on the number of applicants and their dependents in that household as well as that household’s income. The issue here is that HEM can often be a lot lower than what a family might spend(Although I have seen families genuinely well under HEM too) The result of this is some families actual living expenses were not taken into account, and loans were approved that were not affordable to those clients. As is always the case a few rotten apples spoil the bunch.
This has led to the volume dial on living expenses scrutiny being dialled all the way up to the max. Most lenders now wanting 3 months, and in some cases more of all applicants’ main transactional accounts. They then go through them line by line and determine what your living expenses are. At present there are stories going around the mortgage broking world, of clients having to explain cups of coffee on their bank statements. Now as you can imagine what this has done is decreased the loan amount that your average Australian family can borrow. This in turn has put downward pressure on the housing market because there are fewer buyers per price category for homes, as most people have just received a lending amount downgrade. To date that is where we sit now with the country in a finance crisis so to speak. Now there are other contributing factors as well and I am oversimplifying a bit, but remember I am also just giving an opinion from a brokers perspective and what I see on the coal face.
In my humble opinion it is a good thing that lenders are paying attention to living expenses, however as stated before it has probably gone a bit into overdrive. I believe and hope there is a more common-sense approach that will hopefully be adopted down the track which might again responsibly improve lending capacity again. Call me cynical but I do not think that most Australian families live like they have fallen on hard times and are now going to lose the house imminently. Most families try to have a little fun every month and there living expenses show this. There is already a lender out there who has been using a more common-sense approach and will only look at the following things on the transactional accounts to determine living expenses. Food, transport, insurance, utilities and clothing. I think this is more realistic and would be what you would shave living expenses down to if times got tough. In saying that though I still feel people would be overspending on these and there must be a way of more accurately depicting what a family would be able to get by on.
To try and give the economy a kickstart from the recent housing slump we find ourselves in and to find a way to counter the new scrutiny of living expenses. APRA have recommended that lenders ease their serviceability floor rates on their home loans. In the past if you were to apply for a home loan the lender would put that loan through it servicing calculator and dial up the interest rate to a rate of 7.00%, most would be at 7.25 and above though. So basically, this was a safety buffer to make sure that if interest rates ever did go up from the late 3% mark that they were at you would be able to afford the loan still. Floor rates have now been lowered to between 5.5% and 5.75% by a few lenders and we are waiting with bated breath for others to follow suit. Now even though these have dropped, loans are still being assessed at a slightly higher rate than this. The buffer rate on a loan is a second buffer that is added to the actual rate of the loan you are paying. Lenders have increased these from 2.25% now up to 2.5%. What this means is that if you now have a good rate of let’s say 3.5% a buffer of 2.5% will be added to that rate bringing your assessment rate to 6%. Lenders will apply the higher of the two rates to your loan calculation.
Looking at this a 1-1.25% decrease in assessment rate will go a fair way into increasing a families borrowing power. So it would appear that there is a silver lining to the current black Cumulonimbus hanging over the Australian housing industry , in that lending with better scrutiny of household spending and a easing of servicing criteria may rebound a bit, giving our economy the much needed kick that it needs. Although this added scrutiny has added a lot of time and workload onto a home loan application, the overall result will be a lot better. We will have stronger loan applications making it through, and less households going into debt stress or claiming financial hardship. If a common-sense approach is kept moving forward it may even be streamlined and get better with regards to assessing living expenses. However, the whole apple cart can also be tipped by one silly rule or regulation coming in. Overall, I think we are headed in the right direction and the future is looking brighter, we just need a steady hand on the wheel. All we can do is hope.
Written By Nolan Parodi
This article is purely my opinion, and in no way constitute financial advice or other professional advice.
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