In the wake of the Royal Commission the industry is expecting big changes to the way banks approach lending. In short, getting a loan will become harder. So how can investors continue to thrive when lenders keep changing the goal posts?
Banks are certainly very reactive when they get exposed to scrutiny and this creates a climate of uncertainty for borrowers. Before the GFC bank lending policies were stable and reliable and, funnily enough, they were very similar among major lenders. Nowadays, lenders change them almost daily and have markedly different policies from one another.
To give you an idea of the scale of changes, a typical client can currently borrow around half of what they could borrow back in 2014. Of course this changes from person to person, but it is quite a striking change.
In addition, when calculating a client’s borrowing capacity the range is amazingly wide depending on which lender you go to. For a given client it can range from a borrowing capacity of zero, with one of the majors, to $1 million with a secondary lender. In the past the same client would have been within a much narrower range of perhaps $700K - $900K.
So what do investors need to do to optimise their chances of investing wisely in such an environment? Here are a few ideas:
Given the current complexity of the lending landscape, any borrower going directly to a bank for a loan must have rocks in their head. They will be sold that bank’s product, and due to the widening gap between bank offerings it may not be the loan that is in their best interest.
The smarter option is to go to someone who can canvas the entire lending landscape daily and come up with optimum solutions: a good mortgage broker. It is no fluke that since the GFC mortgage brokers have increased their share of total loan origination from 45% to 57% in 2018.
In the past lenders used static matrices about borrowers' living expenses and they covered only basic items such as food and clothing. Nowadays, everything a potential borrower spends must be declared: including takeaways, holidays and even expenses on investment properties!
A lot of expenses are discretionary or not strictly ‘living expenses’ but these are the new rules and it can seriously affect an investor’s borrowing capacity. So it pays to be watching these carefully as they can make the difference between being granted a loan or not.
It used to be no big deal to buy off the plan apartments. In fact it was a common strategy among investors. Today it’s wise to be more wary of units sold off the plan, as an investor has no clarity regarding what a bank’s policy will be in the future.
Banks can easily decide to blacklist a postcode, exclude some types of apartments (high rise, large blocks, heavily built up areas, etc.), restrict loan-to-value ratios (from 90% to 70% for example) and even ban some types of borrowers (typically foreigners and sometimes expats). Keep in mind that valuations on apartments tend to be volatile, especially in an oversupplied market.