Navigating lending during the COVID-19 period
We’re currently in an unprecedented territory – a health/hygiene issue sparked strict social distancing protocols and lockdown. The consequence? All those businesses deemed as “non-essential” are now forced to shut shops/hibernate and employees were let go due to business revenue getting hit hard.
Whilst government is diving into Quantitative Easing territory (like never before!) in order to assist people & businesses experiencing financial hardship, it is still impacting everyday Australians in terms of their ability to repay their mortgage – especially those who have had high leverage with little cash buffer on hand. I feel for these people as it can cause quite a bit of stress in this uncertain times.
But does that mean lenders/banks simply don’t lend during this period? No! Lenders are businesses as well and they make money through mortgage/lending money. It is important for them to continue generating revenue even in this tough time – so contrary to what most people think, they’re still open to new lending!
The tricky part here is that due to the impact of COVID-19, we are looking at some temporary headwinds or restrictions/challenges in the short term if not adopted by some lenders already. In this article I’ll run through a few examples on the current headwinds so potential borrowers can understand what they may need to look out for prior to visiting a lending advisor.
1. Stricter income assessment
Whilst a small handful of lenders have applied more of a blanket approach to stricter income assessment, most lenders still prefer a flexible appraoch whereby each scenario is being assessed on a case-by-case basis.
The biggest losers in the current COVID-19 environment really are the people who are on casual or contract income – these are the people that most lenders may not consider their income at all due to the uncertainty nature and most likely being let go first when times are tough. Casual income earners can be let go easily and contractors can be cut loose with very little notice. From what I hear, a lot of IT contractors have been cut loose and even if they managed to find another gig they are getting a massive pay cut of up to 50%.
Permanent full time employees can be considered however are being assessed closely based on their industry – are they currently working in the field where they could potentially be impacted by in the next 3 months or so? If so then more evidence may be required from the employer – such as a letter to state that their hours will not be reduced, or impacted moving forward.
Also the professions earning bonus/commission – the income with some level of uncertainty may be reduced from being used at 80% for servicing previously to something lower such as 50%. This is to reflect the expected business slowdown and economic uncertainty in the next 6-12 months. Again different lender applies different level of shading to the uncertain income so for those who are commission/bonus heavy it may worthwhile seeking lenders who are shading the uncertain income as much as others.
Last but not least – the small business owners or self-employed. Lenders are now starting to develop a list of the industries which are being impacted by COVID-19 and as such, any businesses that falls under those lender specified industries may be excluded from servicing no matter how good the previous figures look. As for rest of small businesses lenders may ask for latest Business Activity Statement (BAS) to show that the business is not being impacted and are still on track to hit similar profit as previous years in order for the business income to be considered.
2. Rental income is reduced
Few weeks back our Prime Minister has put a ban on evicting tenants with no further clarificatoin and this has caused quite a confusion between landlord & tenants front. The directive has now become that both parties need to sit down and in “best effort”, work out a middle ground that both parties can accept but I feel it’ll still be a challenging time for both tenants & landlords.
So what does this mean to the rental income that landlords have been getting? The trend we’re seeing is a negotiation and then eventually an agreement in reduction of rental income of some sort between the tenant & landlords. Because of this, some lenders have decided they may review how much rental income can be used realistically towards servicing the loan and complicates the equation. Note previously rental income is accepeted at 80% – so if you get $400/week then $320/week can be used from lender’s perspective.
Also to confirm the continuity of rental income payment, some lenders may want to see the most recent rental payment – within 30 days to ensure it’s continuity. Again this is all being precautionary but it is adding additional hoops for borrowers to get through.
3. Lower LVR
Because of the weak economic forecast lenders have also revised their risk appetite and we’re seeing some lenders pulling out of lending in the 80%+ LVR space. This is also partly due to the Lender Mortgage Insurance (LMI) provider QBE tightening down on types of income accepted so lenders who are using QBE as their LMI provider had to pull back to 80% LVR instead.
Lower LVR means lower risk for the lender, however it also means borrower will have to come up with a bigger deposit in order to purchase the property they want and we all know it can take a while to save up a sizeable deposit.
4. Cashout/Equity Release Policy
Few months back there has already been early signs that the cashout/equity release policy will tighten especially with bigger cashout amounts. And now with COVID-19 being the final blow, some lenders have gone ahead and cracked down on this policy.
Which means lenders who allow large portion of cashout/equity release are now limited. And for those limited lenders, chances are they will be enquiring in much more detail on what the fund is intended for and they may want to see evidence such as signed contract of sale, accountant letter before they are willing to release the funds to customer.
Previously most lenders allow up to $100K cashout without much evidence however some lenders have taken the front foot and reducing it down to $50K. And what about those who would like to release more than $100K? Chances are you need to pick your lender carefully and be prepared to jump over more hoops in the current lending environment.
5. Construction Loan
Again due to the uncertainty of overall economy and construction industry with social distancing enforced, some lenders have quietly pulled back on offering construction loans so if you’re looking at building in the next 6 to 12 months, best to double check with your broker/lender to ensure they still offer construction loan in this unique period of time.
As you can see the upcoming months will be tough to obtain credit approval and that’s why working with a mortgage broker who can understand your goal and are staying on top of the latest credit policy changes around COVID-19 period is absolutely essential. The way assessment is being done by different lenders today can means a $100K+ difference in your borrowing capacity between going to your usual bank versus visiting a mortgage broker! Now that’s a HUGE difference don’t you agree?
Putting aside the lender challenges I’m seeing it’s currently a fantastic opportunity for those who are looking at upgrading their home. It’s amazing how the market has turned from a complete seller’s market to buyer’s market in a matter of few weeks and this presents a fantastic opportunities for those who have a steady job and are well prepared.