With falling house prices in Sydney & Melbourne for the last 12 months, consumers are seeing more challenges than any time before with getting their loans or refinance approved. So what should you be focusing on?
As a Mortgage Broker one of the most common questions I get asked is – “what is the best rate currently on the market”?
And my response would be – “It depends. They ranges from X to Y, but you need to be qualified to be able to get it”.
Why do I say “qualify”?
Prior to 2015 where lenders have implemented credit tightening policies based on APRA’s direction loans have been easily approved. If you ask any broker they’ll tell you those were probably the “best time of their life”, as literally any loans would get submitted with absolute confidence they’ll get approved by lenders.
But the good old days are now behind us. A bit like Quantitative Easing, you never know when the music is going to stop but when it does it’s long behind us.
Nowadays brokers have multiple challenges to get a loan approved, including but not limited to:
- Serviceability assessment i.e. how much you can borrow
- Household Expenditure Measure (H.E.M) i.e. your living expenses and what should be used for assessment
- Borrower’s “character”
- Valuation challenges
Serviceability, or commonly known as your borrowing capacity, is probably the biggest challenge for anyone who is seeking a mortgage today. Lenders have now built in various mechanisms, such as assessing existing debt at 7.25% interest rate with loan amortised across remaining P&I period to ensure they are comfortable with your capability to repay the loan. The consequence? Your borrowing capacity goes right down.
And we’re not just talking about purchasing new properties here. Let’s say you’ve been paying Interest Only (IO) repayment on a $600,000 mortgage on your home for the last 5 years and you didn’t have to pay any principal down. Now you’re at the end of the 5 year IO period and want to look at extending IO, or even refinance your existing loan to another lender just to get a new 5 years IO period. Because of the way lender now assess your serviceability, or because of their current policy with Interest Only on Owner Occupier homes, there is a chance that you may not be able to extend or refinance the $600,000 home loan anymore. And you may be forced to roll onto P&I and start paying down the principal within 25 years. That’s a consequence of credit tightening.
So before we can even talk about products, rates, features & benefits, the first thing would be to ensure you can pass the lender serviceability assessment. If the assessment turns out that you cannot service (the loan), then no matter how good the product is or how sharp the rates are – it’s all irrelevant.
P.S. to give you an idea on how pedantic lenders were on serviceability, last year I’ve had an assessor asking me what I want to do due as the application failed servicing by $2. To me, that’s simply going a bit too far.
If the assessment turns out that you cannot service (the loan), then no matter how good the product is or how sharp the rates are – it’s all irrelevant.
Now, Household Expenditure Measure (HEM) or commonly known as minimum living expenses to be used for assessment. Lenders have established a baseline living expenses (HEM) for various different family compositions – singles, couple, couple with dependent and if your stated living expenses is lower than HEM, then brokers will need to use the HEM as part of serviceability assessment.
Why is this a killer? Let’s run through an example – say if you and your partner spends $2500 a month on basic living expenses and you follow it to a tee (because you are proud that you budget your household expenditure :)). So in theory we should be able to use your declared $2500 that you even have proof on, right????
Well let’s just say the lender’s HEM might be $3000 per month based on your income, which means during assessment we as brokers will need to use $3000 as living expenses, not $2500. And that, is an extra $500 per month shaved off your repayment capacity and reduces your borrowing capacity even further.
If your stated living expenses is lower than HEM, then brokers will need to use the HEM as part of serviceability assessment.
Thirdly, let’s talk a bit about borrower character. Now you’ve proven that you can service the loan, and also living expenses is reasonable and in expectation. Lenders will want to see that you have been paying all your bills on time, no overdue credit card debt, or outstanding loan payments etc.
Once that’s all ticked, they will also check your credit file and see how you score. So if you have the habit of checking borrowing capacity with different banks yourself I would suggest you stop because you’ll be racking up a whole lot of credit hits in a short period of time. And that will lower your credit score significantly, which could lead to auto-decline with some lenders down the track. At that point not many people will be able to help you.
If you have the habit of checking borrowing capacity with different banks yourself I would suggest you stop because you’ll be racking up a whole lot of credit hits in a short period of time. And that will lower your credit score significantly, which could lead to auto-decline with lenders down the track. At that point not many people will be able to help you.
At this point, I’m really hoping you’re starting to get a sense of what I meant by “qualify” earlier, and why it’s very dangerous to seek credit by yourself in the 2019 lending environment.
Last but not least, when you have passed all the above assessments from lender, we have one last hurdle to jump through – valuation! And this is usually one of the hardest hit too if your property is in Sydney/Melbourne today.
Valuers are very conservative people, and in a declining Sydney/Melbourne market the valuation result may come in lower than what you expected. This could mean that the existing loan you’re looking at refinancing may have exceeded 80% of the Loan to Value Ratio (LVR) and you’ll need to take on Lenders Mortgage Insurance (LMI) to refinance as is with a crappy interest rate. Alternatively you pay principal down to 80% LVR before refinancing and that could easily means taking a hit on tens and thousands of dollars on your available savings – and that’s assuming if you do have that available.
With so many hoops and so many variables to overcome, that’s where a good Mortgage Broker comes into rescue:
- If you’re concerned about whether you can service a loan – either a refinance or purchase, find a good broker and reach out for help. Based on your information provided we’ll be able to work out which lender & product to consider. And most importantly, get your loans structured correctly so that you’ll be able to service any refinance or upcoming loans down the track.
- For living expenses – brokers have tools that can help validate your stated living expenses via your bank/credit card statements. As such we can cross reference with the living expenses you have put forward, and potentially clarify with you on some areas which we feel may be understated so that by the time it gets to lenders the risks have already been mitigated and save you from the nasty surprises!
- For character – we ask you for a whole heap of statements to validate your repayment history, spending habits in order to mitigate the risk of lenders rejecting your application based on character. So in other words, brokers would be able to pick up if there is a character/conduct issue during our assessment (before lender does), and may want to check with lenders before submission to see if these potential issues could be a deal breaker. It’ll save you from a wasted credit hit and time (knowing the application won’t fly)
- As for valuation – well unfortunately this is something even as mighty as brokers cannot control. However we can run some desktop valuations to help you get a feel of what the valuation could be like, and to discuss and plan with you before hand on the feasible options should full valuation come in low. The silver lining here though is that some lenders do accept desktop valuation so we’ll have more certainty with some lenders in comparison with others. Remember, one of our goal is to make sure we help you get your loan approved and settled!
I hope the above provides you some perspectives and directions on what to consider in the broader 2019 lending environment. The way I see it, lenders will continue to qualify potential customers on these criteria and unfortunately a lot of people will fail on serviceability. It will remain to be one of the main challenges of 2019 and onward as this becomes the new norm. So if you cannot get that super low rate next time from your broker, my suggestion would be to have a think about how you can further improve your income, review your living expenses and ways to reduce your debt.
As always, contact us for a 15 minutes obligation free finance review – we are here to help start you off in the right foot in 2019!