When you are refinancing a home loan, why will one lender approve one loan and another lender decline the same loan? And what do you do when you can’t tick the lenders’ boxes?
Over the last two months I have been meeting with various lenders risk assessment and the credit teams behind them. And I can tell you that for the first time in many years the credit pendulum is starting to swing ever so slightly away from conservative lending and back to a responsible but slightly more aggressive lending outlook.
Now not everyone is comfortable with this and just this last weekend top NAB exec Joseph Healy, head of the NAB’s business banking and Asia operations was quoted in the Australian taking a swipe at the bank’s competitors for “aggressive” tactics designed to gain market share. While not mentioning names, Healy hit out at one competitors tactics. “One particular institution has been very aggressive, and that aggression is evident in the market share and the growth they’ve seen.”
This change in lending policies is opening up some fantastic opportunities for investors, if you know how to access it.
Many of you will know that I often speak about how to improve your prospects of securing a loan when you approach the major lenders. And I base my presentations around the four C’s of Credit. The Four C’s being Character, Capacity, Collateral and Conditions.
The Four C’s
This change in lending policies as the pendulum moves away from Collateral is opening up some fantastic opportunities for investors but brings more sharply in focus the Capacity of the borrower to afford the loan repayment, their Capacity is now the highlight.
For example many of you will know that the asset protection built into many Hybrid Trusts can sometimes make obtaining a loan from a lender slightly more difficult. Here at Awesome Lending Solutions we have been experiencing the change in credit availability with one lender approaching us in the last month with an exciting offering for clients with Hybrid Trusts. So not only is the lender now happy to lend to a hybrid trust structure but they have been able to offer and extremely competitive interest rate. If you have a Hybrid Trust like a Investors Property Trust, Property Investor Trust or Property Investment Trust why not call us for details.
Also in the past Granny Flats or small developments were often in the too hard basket with lenders devaluing the end product so as to reduce their risk but in actuality putting these options out of the reach of all but the most cashed up investor. So some lender are now instructing their valuer to consider the actual construction costs of the granny flat. This small change is putting the possibility of adding a granny flat onto a property within the reach of most investors.
For first home buyers the 95% loan to value ratio loans are also starting to become available again for those who can qualify.
So, how can this be responsible lending with even APRA warning last year in the Insight issue two 2013 that they had concerns about high LVR lending and loosening lending standards?
In APRA Insight they pointed out: “sustained low interest rate environment poses further risks to lending standards. It is important for ADIs to ensure that new borrowers are able to service debt and afford higher repayments when interest rates rise from current record low levels. APRA expects ADIs’ serviceability assessments to test borrowers’ capacity to meet higher repayments through adequate interest rate buffers and floors, applied to new and existing loan commitments.”
So even APRA give us the answer: CAPACITY, as lenders relax their lending criteria on the back of the record low interest rate APRA is encouraging lenders to test borrowers at higher interest rates than would be typical
What does this mean in practical term? Previously lenders would build a buffer into the interest rates offered of between 1.5 ~2% when testing serviceability. This meant that in terms of being able to afford loan repayments borrowers would have to undergo large rates rises before the interest rate increases would begin to hurt household budgets. What APRA is now encouraging lenders to do is to set a floor, a lowest limit for testing of interest rates. With one lender this has meant that regardless of interest rate reductions all their loans are tested with a hypothetical interest rate of 8% which is nearly 3% higher than the actual interest rate offered by the lender on their discounted variable interest rates.
What is interesting though is that while we have seen the easing off of lending standards, particularly with Collateral and Character we are only just starting to see these harsher testing interest rate criteria filter through.
But be warned though, we have seen one lender move this month to move the testing interest rate on their fixed interest rates to a higher level than previously, most likely on the back of pressure from APRA.
So now is a great time to review you property portfolio and to review your borrowing capacity before the new APRA regime begins to really take hold.
For your free portfolio review please contact us.
Disclaimer: This article contains general information. Before you make any financial or investment decision you should seek professional advice to take into account your individual objectives, financial situation and individual needs.