What you should know
Over the past 12 to 24 months, mortgage lending has tightened up significantly. This is due to the regulators getting nervous of the heated Sydney and Melbourne property markets. Banks have increasing pressures on them to stay in certain thresholds, such as a maximum of 30% of their loans being interest only and no more than 10% year on year growth for investment loans. The changes have made an impact to lending and are here to stay. Some of the major changes are as follows:
Borrowing capacity: The amount of mortgage available to you is dependent on numerous factors, i.e. your income, expenses, number of children, your age etc. Each individual lender calculates this in a similar way, however some lenders can be more generous than others. Some lenders scrutinise certain incomes, such as overtime and bonuses and won’t take some incomes into consideration. i.e. Centrelink income, though other lenders will.
Most recently, banks have tightened up how much of a loan they will give you. This is mainly due to lenders increasing their ‘assessment rate’ and ‘living expenses’.
An assessment rate is a buffered interest rate and allows for increases in interest rates, i.e. although you will initially get a rate of 4%, the bank will make calculations on the basis that the rate is say 7.5%. Most recently banks have increased their nominal amount of living expenses for a borrower and some banks are now requesting bank statements to check your spending habits.
Deposits: Although there are certain banks that are offering 95% loan to value ratio (LVR) mortgages, most banks prefer a 10 to 20% deposit. As always Lenders Mortgage Insurance is payable on all loans above 80% LVR and generally can be capitalised onto the loan amount to a maximum of 98%. There are products available where parents can use their property as security in order to reduce or mitigate the requirement of a deposit on a child’s property purchase.
Interest only: The availability of interest only mortgages has reduced due to industry regulators APRA. Banks are hesitant to give interest only mortgages over an 80% LVR – this is for both owner occupiers and investors. If you are approved an interest only mortgage, you will have the pleasure of paying approx. 0.50% to 1% higher than if you were on principal and interest.
Investor loans: Probably the worse hit to date! As mentioned, banks have a quota on how many investor loans they can provide. A number of banks had to pull out of this space once the new threshold was put in place. Other banks are managing control by playing with interest rates. Once they are getting towards maximum, they will increase rates to slow down demand. Investors are also struggling to get the loan amount they require due to lenders tightening up borrowing capacity – this is due to lenders now buffering existing debt with higher assessment rates, taking reduced rental income(s) and higher living expenses. For those lucky enough to get their investor loan approved, similar to interest only, they will be paying a higher rate than owner occupiers, especially if going onto Interest only.
With these new thresholds put in place to the lenders, it comes across as if the credit teams to some degree aren’t entirely sure what should be approved and declined. Credit officers are asking for a ‘shopping list’ of further documents and information outside the norm.
With a combination of increased property prices in both Sydney and Melbourne, requirements of higher deposits, not being able to structure your loans to suit you with some banks, and reduction in some banks’ appetites for certain applications, speaking with a mortgage professional with access to a range of lenders can pay dividends. __________________________________________________________________
Raj Ladher from Tomorrow Finance is a mortgage expert with over 11 years’ experience both in the UK and Australian mortgage markets. Accredited with the Mortgage and Finance Association of Australia (MFAA) and access to numerous lenders, Raj specialises in all types of mortgages, from first homeowners to investors increasing their portfolio. For more, email raj@ tomorrowfinance.com. au