2018 has been full of ups and downs in our industry, but rather than focusing on the doom and gloom we thought we’d stay positive, and prove our worth as Mortgage Brokers, by sharing our knowledge around the changes the banks have been making over the last year and how it will affect your experience when getting a loan in 2019.
In the good old days getting a home loan was easy… these days it can be a slow and frustrating process. This is principally due to changes forced onto the banks by our Government. The government has implemented these changes to ensure Australia’s financial system remains resilient, however there has been a knock-on effect for consumers.
The good news is, once the the teething issues from the changes settle, we should expect things to become more streamlined and go back to status quo. However in the meantime, here are our key takeaways for what you should expect when applying for a loan in 2019 :-
- Banks will want more supporting documentation
- You will be asked more questions
- They’ll want to know what you spend your money on
- You probably won’t be able to borrow as much as before
- The whole process will take longer
- You’ll have to pay more for an investment
- Interest only loans are harder to come by
- They’ll want to know your retirement plan
- If you live overseas getting a loan will be more difficult
How can a Mortgage Broker help?
- We know what the banks are looking for and we stay up to date on credit policy changes
- We make your application watertight – ensuring every box is checked to ensure a smooth process
- We do all the chasing for you!
- The regulators have affected almost every stage of the application and approval process. This has drastically slowed up the process for the banks. Where mortgage brokers really shine is the ability to speak with the key decision makers to speed things up whenever things are slowing down
- We also know exactly what the banks are looking for in an application, so we always ask for all of your documents upfront to avoid delays
Divitis mortgage brokers are finance specialists, providing tailored advice to help you create a strong loan application, apply with the right lender for your situation and ensure you settle! Contact us on 02 8412 0009 or at [email protected]
Keep reading for our top tips on dealing with these changes and avoiding the pitfalls!
1. Banks will want more supporting documentation
In the past, banks would accept whatever you indicated on the home loan application form.
Today, they need to verify everything. This often includes providing statements for all liabilities, main transaction and salary credit accounts.
Banks can also ask for further documentation even after the application has been pre-approved. This going back and forth is very frustrating for everyone.
What can you do? Provide as much information as possible up front. The more honest your conversations are with your mortgage broker the better they can assess your situation and ensure all the required documentation is supplied on application.
2. You will be asked more questions
Banks are required by the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) to justify their assessment of your application.
Even after you have provided all the required supporting documents the bank may come back and ask further questions about particular transactions.
For example: – a regular payment of $600 is shown on your transaction statement but you haven’t included this in your living expenses. The bank will ask you to justify this spending and include it in their servicing assessment. This will also delay your application.
What can you do? Declare all liabilities and regular spending upfront so your broker can include them in their servicing calculations which avoids nasty surprises later on.
3. They’ll want to know what you spend your money on
These days banks ask you to estimate your living expenses but if they don’t meet their benchmarks, they will use a higher figure in their assessment.
If you have a high household income, they’ll scale your living expenses to be appropriate for your income. This greatly reduces your borrowing power compared to a few years ago.
If you currently have high living expenses and you plan on purchasing or refinancing you should consider budgeting/changing your lifestyle to improve your borrowing power.
It makes sense to do this several months before you take on a new commitment like a home loan as then you will have a higher borrowing power.
What can you do? Get your expenses in order. Banks are particularly sensitive around ‘buy now pay later’ purchases any any undisclosed regular payments such as gym memberships or subscriptions.
4. You probably won’t be able to borrow as much as before
APRA has been putting restrictions on the way that banks assess your borrowing power for the last two years.
This has had the biggest impact on high income earners, due to changes in the way their living expenses are assessed, and property investors, due to the way interest only and investment loans are assessed and a new ‘debt to income ratio’ which prevents you from borrowing more than 6x your income.
They’ve been doing this because interest rates are low and if people borrow too much now then they may be unable to make their mortgage repayments later if interest rates rise.
However, there are many people who have a good reason to borrow to their limit and it would not put them at risk of future rate changes.
For example, a property investor may plan to sell one of their properties if interest rates increase significantly.
What can you do? If you do need to borrow the maximum amount possible then we may use a multi-lender strategy or apply with non-bank lenders that are not affected by APRA restrictions. We believe in responsible lending and will not assist you to borrow more than you can afford.
5. The whole process will take longer
As a result of the banks asking for more documents and asking more questions, each application takes longer for them to assess and they may go back and forth several times with questions before they approve it.
Lenders that have pricing specials are particularly affected by this as they get inundated with large numbers of applications.
What can you do? Get pre-approved before you start looking for a property. If you’ve found a property and now need a home loan in a hurry, then don’t apply with the cheapest lender. Instead, apply with a lender that is fast and has a competitive rate.
6. You’ll have to pay more for an investment
In recent years, APRA put a cap on the growth of investment lending for the banks.
As a result, the banks are discounting rates for home loans and putting up the prices on investment loans.
You may find some banks make it hard to get approved for an investment loan or stop doing investment loans altogether.
In these cases, it’s best to apply with another bank or non-bank lender.
The investment cap is being replaced by a debit to income ratio cap which is designed to limit lending to highly-geared investors while leaving home owners and investors with minimal gearing untouched.
What can you do? This is something that one of our mortgage brokers can assist you with so complete our free assessment form and let us know about your situation. We have access to lenders that have lower investment loan rates than the major banks.
7. Interest only loans are harder to come by
Interest only loans actually cost more in interest over the term and can lead to borrowers not paying off their property before retirement.
APRA requires the banks to limit interest only lending and, as a result, the banks have put strict qualifying criteria in place and increased interest rates. In a recent speech by the Reserve Bank of Australia (RBA) too raised concerns about interest only loans.
Interest only loans are unsuitable for most home buyers but may be suitable for investors depending on their strategy.
What can you do? We strongly recommend that you consider paying principal and interest (P&I) instead of choosing an interest only loan. It is quite possible that within a year or two, interest only loans could be banned altogether.
8. They’ll want to know your retirement plan
Only a few years ago, the banks would approve a 30-year loan to a 60-year old!
Now, they consider your retirement age and whether you can repay the loan before retirement.
Again, this comes from the guidelines set out in the National Consumer Credit Protection Act 2009 (NCCP act), which is managed by ASIC, and in the responsible lending changes instigated by APRA.
What can you do? We recommend that you discuss your home loan plans with your mortgage broker and work out how you are going to pay off your loan before you retire or pay it out from superannuation fund or by downsizing. Some non-bank lenders are more likely to accept a borrower closer to their retirement age.
9. If you live overseas getting a loan will be more difficult
In February 2016, several instances of fraud were uncovered which eventually led to the banks discovering billions of dollars of fraudulent loans for borrowers with false income documents.
As a result of this, many lenders stopped lending to Australians living overseas, put significant restrictions on their expat lending policies, or asked for many additional documents to verify your income.
This has adversely affected the more than one million Australians living overseas who often want to buy or refinance a property back in Australia.
Foreign citizens are often unable to get a mortgage in Australia at all, or they’re required to pay a significantly higher interest rate than Australian citizens.
What can you do? We’re specialists in lending to Australians living overseas and can help you to apply with a lender that takes a common-sense approach.
How can a Mortgage Broker help?
- We know what the banks are looking for and we stay up to date on credit policy changes.
- We make your application watertight – ensuring every box is checked to ensure a smooth process.
- We do all the chasing for you!
- The regulators have affected almost every stage of the application and approval process. This has drastically slowed up the process for the banks. Where mortgage brokers really shine is the ability to speak with the key decision makers to speed things up whenever things are slowing down.
- We also know exactly what the banks are looking for in an application, so we always ask for all of your documents upfront to avoid delays.
- Where appropriate, we can help you to apply with a non-bank lender that is not affected by APRA’s restrictions.
Divitis mortgage brokers are finance specialists, providing tailored advice to help you create a strong loan application, apply with the right lender for your situation and ensure you settle!
Contact us on 02 8412 0009 or at [email protected]
Content credited to Otto Dargan – CEO of Homeloan Experts