AMP Tightens up a bit further

An excerpt:

• Properties located in Zone 3 or zone 4 postcodes (as per the AMP Bank Security Location Guide), regardless of whether or not AMP Bank holds the property as security, will be assessed to a maximum of 70% of the verified gross rental income (previously 80%) for servicing purposes.

• The Bank will no longer consider lending to any applicant that has 5 or more investment properties AND the property related income represents more than 50% of the total declared income.

• Borrowers Approaching Retirement (aged 50+) must include a detailed written ‘exit strategy’ as part of their supporting doc.
  ie: at age of 70 of oldest applicant (being the deemed retirement age OR earlier if the applicant/s declare an intention to retire before age 70) and should include:
  - the proposed loan balance (based on standard repayments) at the benchmark rate (not accelerated)
  - superannuation position (utilise the Money Smart website Super calculator as a guide)
  - downsizing opportunity
  - anything else pertinent to the exit strategy.

• Borrowers already retired and/or aged 60+ that wish to provide their owner-occupied home (principal place of residence) as security will be subject to a maximum loan term of 10 years (P&I) regardless of the exit strategy.

 

Great post. What are Zones 3 and 4?

I doubt that APRA would be setting a number on properties. That’s not how they usually work. However they are restricting access through more indirect ways.

 

Are banks moving towards "Total Debt to Income" Cap?
ultimately total debt capped at 6/7x of income irrespective of asset's built-in equity? as mentioned by @euro73 in many of his posts

 

Income at 6/7 is tied into the in built equity - more built in equity, the better looking income-debt ratios will look (as debt is lower in these cases).

Australia runs servicing in absolute figures in the main. That is income less expenses. This calc ends up working out to be a 'debt to income' cap of around 6-7. That is, only in rare instances will one achieve a servicing pass with most lender calculators with a debt to income ratio above this. The Australian method of running servicing weeds this out. This is because debt is an implied expense at a sensitised rate.

 

thanks for the reply @Redom

just curious,
Can built-in equity based on increased valuations alone (debt/income remains same), make Debt-2-Income ratio look better?

let say total income is 200k (salary, rent minus expense),
total debt (IO loans) is 1.4mn on properties valued at time of purchase 1.8mn
let say in 3 yrs property valuation is increased to 3mn and income remain same-ish at 200k,
DTI is still 7x, (1400k/200k = 7),
Can built-in equity of more then a million help this investor is there is a totalDTI cap of 7x?

 

Those numbers are correct @SackedWiggle - its just rare that values more than double while rents/income stay constant. Yields definitely crunch during growth cycles, but not because rents are falling but its unlikely to have a property price more than double & rent stay the same.

In terms of servicing, if you failed servicing at 1.4mill val, you'll fail servicing at 3m in that scenario.

The difference in the current marketplace is that there's lenders filling the gaps for high equity investors (Bluestone, Latrobe, Liberty, Pepper) and want this type of low risk business. So there's shadow banking options for this type of scenario that allows the DTI income ratios to be pushed in these cases - usually need to have the equity piece in place to access.

 

I've yet to see an application declined due to exceeding the debt to income ratio. A couple have gotten close, but usually other serviceability factors eliminate the deal long before this is breached.

 

I think some of the announcements on these fronts were more timely/to appease rather than bear any actual change. When they announced, there was serious regulatory pressure on containing lending, so some of this just seemed like a smokescreen (we'll announce something specifically on investment loans, that actually only weed out 1/10000 applications).

Its the kind of thing internationals like, given its a good comparator metric across countries. So someone like the IMF like ratios like this. May flow through to lenders here via our own regulators. They picked a number so high it doesn't really mean anything (hard to pass servicing and be above the DTI ratios).

Summing up, the DTI ratios aren't very useful when you've already got mandated assessment rates for all debts. They both do the same thing in different ways. Assessments rates are typically better at doing it (better capture of expenses than DTI's).

Were starting to enter a different climate. Behind closed doors regulators are actively encouraging the government to ensure the flow of credit. Thats a different environment to 2015/16 where it was about slowing the flow. Most of this is in preparation for what the RC findings do to lending and fear that there'll be an overreach that causes credit availability to weaken further.

 

How much of this type of stuff is driven by the need to just control or manage sales rather than being the product of considered prudential judgements. Let’s say you want to reduce your lending book in a particular area or just slow growth, well, you need a policy to achieve that. Let’s say the bank’s book is growing at 10% per annum and the Board says, let’s drop that down to 7.5% per annum. So, to achieve that, you could have a policy which says ‘I am not lending to first home buyers unless they have a 30% deposit’. That reduces sales. Alternatively, you could introduce a policy which says ‘I am not lending for IPs if the borrower has 5 or more existing properties’. At the end of the day, this is all just judgment calls about which levers you pull to get you to where you want to be (from the 10% growth rate to the 7.5% in this example).

 

Are you suggesting, Regulators (RBA/APRA?) are batting to ease credit tightening on the back of RC findings behind close doors? If so.. will it be credit environment back to 2015?

 

No, 2015 was a mistake, largely born out of regulator slowness to pick up on bank greed. It wasn’t regulators who created this policy set, banks just got a bit naughty and interpreted prudential practice guidelines as it suited them to ramp up business. If the RC had an actual nose for what matters to systemic risk, than the regulators would’ve coped a hiding here for being too slow (probably unfairly, regulators are always reactors to markets). PC community won’t like that, but actual OFI repayments and IO policies is just not prudent lending frameworks from lenders. Hence why we have many overleveraged investors today who are feeling a squeeze from banks. It may be ok for some who are disciplined and good at risk management/capital allocation, but history shows humans aren’t very good at this left to their own devices.

Im saying that lenders are now doing exactly what @Harry30 suggested, just more in reverse. Investment lending is growing at near 0%, no where near 10%. It’s possibly moving backwards (Once more data comes out). Simply, that’s unsustainable for lenders who want to grow their books. Either rates go up (net interest margins) or they write more loans. So we’re beginning to see some lenders push the boundaries again. Small stuff really. Nothing for the PC community to rave about, but tweaks to policy to get more business through the door from healthy borrowers.

 

Some help please?

Borrowers already retired and/or aged 60+ that wish to provide their owner-occupied home (principal place of residence) as security will be subject to a maximum loan term of 10 years (P&I) regardless of the exit strategy.

Would the above apply to an existing loan 30 year, we would like to extend 5 year interest only due in November 2018???..... Our income meets servicing criteria... .?????
Or will this be treated as a new loan????

 

Yes

 

Thanks Terry Damn

 

I can understand all these tightening happening specifically in the (resi) properties lending.
Do such restrictions exist in, say business lending with someone at age of 50+ wanting to start
a new small business and that the lender asking for such details and/or imposing such restriction?

Thanks,
FXD