We all know divorce statistics can sometimes look a little scary to those about to head down the aisle.
They tell us a resounding ‘yes’ at the altar can easily turn into a ‘no’ down the track – perhaps when the rose-coloured glasses come off and all those imperfections are revealed.
Unfortunately, borrowers in Australia are now finding the same thing applies to lenders. Thanks to regulatory measures throwing a bucket of cold water over finance relationships once entered into in passion, borrowers are now under much more scrutiny before lenders agree to tie the knot.
Whether they’ve been an existing bank customer for some time, or explored their finance options with pre-approval success six months ago, it seems market conditions heading into Spring can turn hope into rejection. And that – as all jilted spouses or lovers know – only ends in tears.
The same old partner?
In the past, borrowers who went to their existing lender could see the result as a given. With all that history, payment data and loyalty, there was rarely a problem in stretching the friendship.
In mid-2018, this is no longer true. Since 2014, banks in Australia have been encouraged to be much stricter guardians of credit chastity, through a range of measures like a 10% annual speed limit on investment credit growth, tightened serviceability requirements and metrics, less lending in the interest-only and higher LVR lending segments, and an overall reduced appetite for risk.
The decisions banks are making today are focused purely on loan serviceability and lending policy.
The result? The rules of the courting game have changed.
Anecdotal evidence suggests banks are currently knocking back existing client applications in droves. Likewise, any clients that looked at their maximum borrowing limit six months ago might need to readjust their expectations heading into Spring, as the new figure may be lower.
New divided loyalties
Banks are not very interested in the fact a borrower has dutifully slaved away for 10 years to pay their mortgage on time. Nor are they focused on customer loyalty, even if a close relationship has been developed with a banking institution in good faith – kids’ bank accounts and all.
The decisions banks are making today are focused purely on loan serviceability and lending policy. If the client doesn’t fit that policy, their finance application won’t be approved. Simple.
In practice, this means living expenses are being put under a microscope. Yes, you may be asked for six whole months worth of bank statements and three months worth of credit card statements and these are currently being ticked off line-by-line to make sure a client is a rolled gold risk for the many years to come.
Is a client not declaring some of their actual expenses? Are living expenses high enough to raise questions? This may be enough to ensure they are not even a good fit for their own lender.
Looking in the mirror
Regulatory action in Australia has seen investor housing commitments come off 27.5% since their peak in April 2015, and owner-occupier refinancer commitments come down 13.1%, according to Australian Bureau of Statistics data. Likewise, house prices have been falling, with major capital cities hardest hit. Sydney prices are down 5.4% from their peak, while Melbourne is down 3%.
Heading into Spring, these trends are set to continue. Many economists are predicting further falls, and it is clear the hard-to-get approach from lenders will continue for some time to come.
The best thing borrowers can do to prepare themselves for the new rules of the game is to pay attention. First of all, borrowers should ensure they keep up to date with fixed and variable rate offers. In some cases, fixed rates are coming in lower than variable in Australia. In July, RateCity said the average three-year fixed rate was 4.12%, while the average variable rate was 4.28%.
They should also be realistic about how banks are likely to view things like current lifestyle and spending habits. When they look in the mirror, what do they see? Ensuring they have cleaned up their budgetary act, got any bad financial habits under control, and are presenting as financially fit over an extended six month period will make accessing the credit they desire much more likely.
About Louisa Sanghera
Louisa Sanghera is a multi award-winning mortgage broker and owner of Zippy Finance http://zippyfinance.com.au/ specialising in home loans, property investment, commercial lending and vehicle and asset finance. Also a recognised industry expert commentator she contributes to a number of prominent industry blogs, podcasts and finance publications. You can contact Louisa on T: 0414 083 522 or via email here email@example.com