It’s really easy to bash the banks. Trust us, we know. The major lenders are an obvious target and often they’re the easiest people to blame when you’re on the highway towards getting your home loan approved and suddenly the road turns scenic. But sometimes – just sometimes – blaming lenders is not really the right response (plus it turns out it’s generally not that productive).
As a result of APRA and more recently ASIC conducting analysis of the mortgage industry, lenders have made a whole host of changes to strengthen their internal processes and the way they assess loan applications. The regulators want to ensure loans are only granted to people who can afford to pay them back and this in itself is not a bad thing.
Whilst there’s always repercussions that result from wide spread changes, we feel there’s been positive flow-on effects. Mainly due to the fact that the underlying objectives the new measures are trying to achieve are ideas we’ve supported all along.
It’s no longer all about the rate
There are many variances between the rates/ discounts offered by different lenders and the goal posts keep moving. A variable rate is anything but standard these days; the interest rate you pay on your home loan can now be affected by few different factors – as we talk about here.
The interest rate should never be the sole reason you choose one lender over another, because ‘the cheapest loan’ changes from one week to the next. The rate is always something you need to consider as part of the overall decision, but never the only thing.
For us, it’s ALWAYS been about so much more than the interest rate. Now that lenders are using a range of factors to determine what rate of interest you will pay, it’s become more important than ever to look at the bigger picture and understand how a particular loan structure is going to help you achieve your longer term plans (as well as save you money).
Paying off your loan is the priority
It’s always a good idea to pay down your home loan as fast as you can and lenders are now offering borrowers added incentives to do this. By increasing the rates for Interest Only repayments, lenders are strongly encouraging you to select Principle & Interest repayments and therefore commit to making regular principle payments to pay down your loan.
You have always been able to pay down your loan – regardless of the type of repayment. However, with Interest Only repayments, it’s been completely up to you as to how much you pay off and/or how much of the net debt you reduce (by building up cash in a linked offset account).
Paying down your owner occupier debt is something we’ve always strongly supported. Because reducing your net debt and putting yourself in a strong position financially – it’s something we’re all working towards, right?!
Borrow what you can afford
In times when interest rates are low, there’s always speculation that when rates will rise, borrowers will lose their homes due to an inability to meet higher loan repayments.
But in reality, the situation is not quite as extreme as the headlines would like you to believe.
Lenders have been conservative with their servicing calculations for quite some time now.
But what does this actually mean?
Well, it means a lender can add a buffer – which can be up to 2% – to the rate on your home loan. They will then use this higher rate to conduct a serviceability assessment. Only if you can meet repayments calculated at this higher rate, will they agree to lend you money – along with a whole host of other things.
Servicing rates and buffers vary between lenders, but the tightening of lending policy across the board has seen an overall reduction in borrowing capacities – particularly for investors.
Making sound investments decisions; being strategic with your money; and doing what you can with what you have – they’re principles we stand for. The notion that you only borrow what you can afford and are comfortable with (regardless of what a lender will lend you) is something we’ve always strongly supported.
There’s an argument some lenders have gone too far in this regard and are knocking back low risk quality borrowers, particularly when it comes to investment lending. We have seen some of this. But we’ve also seen that potential borrowers are now working harder – and making sacrifices along the way – to save bigger deposits.
Let’s do this thoroughly
Lenders are requesting more documentation than they did previously. They want to check bank statements to ensure there aren’t any liabilities that weren’t disclosed. They may want a letter from your employer clarifying any pre-tax deductions that are slightly “non-standard.” They may also want your identification verified to ensure you’re actually who you say you are.
And that’s fine, it makes complete sense. It’s good that a lender wants to be thorough. We want our lenders to be strong and robust and we want to make sure loans are only going to people who can afford to pay them back.
Being thorough and crossing the t’s and dotting the i’s is exactly what we’ve been doing for years. We ask you to complete a Borrowing Assessment Form and then we ask you lots of questions. It’s all so we can have a completely thorough understanding of your financial situation and get to the bottom of what you’re trying to achieve before going into solution mode.
We have no issue with the lenders assessing your loan application thoroughly – that’s what they should be doing! – providing the requirements remain consistent and clear. There have been instances where we feel there’s been more dollars than sense applied to a lender’s assessment processes. However we’re hopeful and quietly confident the frequency of these instances will lessen as the industry changes stabilize and everyone settles into the “new norm.”
