Australia banks tighten mortgage checks amid government inquiry

Discussion in 'Loans & Mortgage Brokers' started by Kangabanga, 16th Feb, 2018.

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  1. Kangabanga

    Kangabanga Well-Known Member

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  2. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Yawn

    Ore click bait

    The average single ppor buyer servicing isn't mich worse off than any other time over the latst 20 years


    Ta

    Eolf
     
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  3. Otie

    Otie Well-Known Member

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    What about those with portfolios? How much tighter?
     
  4. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    I used to use the concept of lending and rope

    having enough rope to get tothe bottom of the cliff

    Worked well ............ till apra cut the rope

    on average, a previoyslwell structured investorcould have got say 2.5 mill , that same person now models out at about 1.5 ish.

    ta
    rolf
     
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    NAB have introduced a Loan to Income ratio - LTI
    Most banks are now requiring proof of terms remaining on other financial institution loans too - statements - whereas before they just asked how long was left - before that they didn't even ask.
     
  6. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Nab
    nab and abl. Have had lti for a while.

    In the old days. 35 %. dsr was a common measure too

    Ta
    Rolf
     
  7. euro73

    euro73 Well-Known Member Business Member

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    For this exercise lets assume you have $ 1million debt at 4.5% IO for 5 years ....

    $1 million is now generally calculated @ 7.25% P&I over 25 years ie @86.7K per annum . Pre APRA that same $1 Million would have been calculated @ 4.5% (actuals) ie @45K per annum. That's a 41K NET difference, or @ 48.5K GROSS /taxable. So its just like a 48.5K "pay cut" on the post APRA servicing calcs.

    For $ 1 million borrowed at 4.5% and for 10 years IO you'd be serviced at @95K per annum versus the pre APRA treatment of 45K per annum... thats a difference of 50K net, or @ 62K GROSS. So there's a 62K "pay cut" for that $1 Million.

    So if you are using 5 years IO , you need @48.5K GROSS extra income just to be able to restore your pre APRA borrowing capacity..... and for those using 10 years IO they will need 62K GROSS extra income to restore their pre APRA capacity.

    Thats not the end of it though. I havent accounted for the HEM's that have replaced the old living expenses, yet. Depending on the lender, they are generally $1000-1500 more per month whether you are single, single +1, couple, couple +1, etc... so add another 12-18K "pay cut" there

    Combine the two ( assesment rate + HEM) and you start to get the picture...

    Still, that's not the end of it.... if you rely on secondary income sources such as bonuses, commissions, overtime etc, it can get even worse at some lenders as those sources are shaded now. But this doesnt happen everywhere, so I will exclude it from this exercise.

    Hopefully this makes the picture very clear... at best, looking at only the impact of the 7.25% P&I assessment rate and the new CPI indexed HEM's, and based on 5 years IO you are looking at the equivalent of 60.5 - 66.5K "pay cut" for the first million, and 48.5K "pay cut" per million thereafter.... or thereabouts ...


    For 10 years IO the figures are 74-80K for the first million , and 62K per million thereafter


    We can argue about the semantics of it .ie how bank A treats things v Bank B... and the impacts of shading etc.... and yes there are some modest variations between lenders, but for the most part this is how it is now ( Pepper and Liberty aside)

    And this is why CF+ properties that aid with debt reduction should be a priority choice of investment strategy for the next generation, who are faced with trying to accumulate in an era where servicing calcs punish debt and give diddly squat value to equity. They reward one thing only - debt reduction. You need only look at the scenario above to conclude that it requires a different approach to the pre APRA generation. CF+ yield used for debt reduction is king now, unless of course you make huge coin or have very large pay rises coming your way. But those options aside, there is no other solution to a 60.5K-68.5K pay cut if you have plans to grow a portfolio beyond 2 or 3 properties.....
     
    Last edited: 17th Feb, 2018
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  8. Lucky Lad

    Lucky Lad Active Member

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    It’s down to 7 from 8.

    Interesting. My employer’s discounted staff home loan benefit LTI max is 4.5 for low rates, above that they charge 0.80% extra interest.
     
  9. Redom

    Redom Mortgage Broker Business Plus Member

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    The LTI metric is still very high though and barely captures anyone. There aren't many situations where you have an LTI above 7/8 & a green pass for serviceability, so its not like its weeding out a material % of borrowers (i.e. it doesn't really impact many people). Others use sense test buffers too, e.g. Qudos previously liked to see a $1k surplus for every $1mill in debt.
     
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  10. mickyyyy

    mickyyyy Well-Known Member

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    @euro73 has the service calculator been tightened for owner occupiers in the last 3 yrs? I noticed for myself as an investor that borrowing capacity has dropped a lot from 3yrs ago and my income is actually higher now...
     
  11. euro73

    euro73 Well-Known Member Business Member

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    The answer is - it depends. But basically there are two broad answers.

    1. Yes, by a relatively modest amount. compared to investors
    2. Yes, by quite a lot - same as investors .

    Why a relatively modest amount. ? Well, firstly, its important to understand that while new debt has always been assessed at a sensitised rate, the mandated assessment rates introduced by the regulators are generally higher than the sensitised assessment rates they replaced..... for example, pre APRA, some banks simply added 1.5% or 2% to the rate you were borrowing at when they assessed your ability to repay the debt , which might equate to an assessment rate of say 5.5 or 6% if you were borrowing at 4% , rather than 7.25% ( or thereabouts) that you'd experience at most lenders today. So there's a decent sized reduction to capacity right there. By the way - this also means that even if your rate dropped to 3.8% for example, where it might previously have improved your capacity ( pre APRA) because the 1.5-2% "buffer" was a floating figure, it no longer assists at all ( post APRA) In fact, no matter how low rates get, borrowing capacity isn't improved. Affordability is improved for sure if rates fall , but borrowing power is not. 7.25% is 7.25% whether you actually pay 3, 4 or 5%

    The other change is the higher HEM's. These have an impact on every borrower- whether O/Occ or INV.How much they affect you depends on how much you earn and where you live. But everyone takes a decent whack ....

    And the third change is the treatment of secondary income sources by some lenders. But not all lenders do this, so you would have to consider that only the assessment rates and HEM's affect everyone. Those two changes combine to have a relatively modest impact compared to what investors are copping.


    RE quite a lot . If they already hold other debt then they have the same problem investors have. As we all know by now, in the Pre APRA world only the new debt was assessed at a sensitised rate . Existing debt used to be treated at actuals. No P&I. No buffer...just the actual rate you paid. Now, every dollar of debt you carry is sensitised ( except at a couple of non banks) Of itself that hits borrowing capacity quite hard, and hurts more and more as you accumulate more debt ... Add the CPI indexed HEM's into the mix and under these circumstances an O/Occ borrower may well have significantly lower borrowing power and be affected quite a lot.

    Once again this only serves to demonstrate how valuable stronger CF and debt reduction will be to borrowers /investors moving forward
     
  12. mickyyyy

    mickyyyy Well-Known Member

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    @euro73 it was about 2yrs ago the big four and tier two assessed at 7.25% if im not mistaken?
     
  13. Lucky Lad

    Lucky Lad Active Member

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    Even the non-ADI homeloans.com.au is tightening LTI
     
  14. equityma

    equityma Well-Known Member

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    Yes they've been tightening credits to investors based on government policy and that hurt their revenue and one of my lender told me the bank needs to review its policy otherwise people will shift to other banks but she also mentioned other brokers were doing the same that could trigger a sell off with off the plan purchases if valuation comes to play and investors cannot find extra money elsewhere.

    I wish I have more money to buy more
     
  15. euro73

    euro73 Well-Known Member Business Member

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    Everyone started in July 2015 when APRA and ASIC started getting into the lenders about stricter this and tighter that... the mandated rate is 7% minimum but some use 7.2, some use 7.25, some use 7.4 etc etc....
     
  16. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Homeloans dont have a product per se.

    they mortgage manage OTHER lenders

    eg, advantedge ( NAB) ABL, Maq bank etc

    ta

    rolf
     
  17. euro73

    euro73 Well-Known Member Business Member

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    As @Rolf Latham has said, they arent a non ADI. They are a mortgage manager. They dont manufacture their own products and dont have their own funding.

    Non ADI's / non bank brands include the likes of firstmac, resimac, liberty, Pepper .... they have their own money - raised via securitisation. - and they manufacture their own products and policies.

    Brand names most people may be familar with such as homeloans.com.au ( not to be confused with loans.com.au who are owned and operated by firstmac) Aussie, Wizard (previously) Yellow Brick Road, Virgin Money and others, are mortgage managers.

    They are referred to as non banks but they arent. They get wholesale pricing from other lenders - CBA in the case of Aussie, and Macquarie ( via their PUMA channel ) Adelaide Bank and Advantedge( NAB's wholesale channel) in the case of just about everyone else.... ING and ANZ ( Origin ) used to play in the wholesale space as well but dont these days... then they whack their brand on it and deal with the post settlement service as well - ie call centre, online banking etc ... but they absolutely do not have any money of their own and do not manufacture their own products or policies.

    Basically, everyone except Pepper and Liberty are playing ball with APRA regarding much tighter servicing ...
     
  18. Foxdan

    Foxdan Well-Known Member

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    @euro73 if people are receiving such harsh treatment to their ability to get loans, how do you see this affecting housing prices?
    It sounds like the ability to get a 600k loan for a standard family of 2 with children would be very difficult if they have a normal income.
    Can you see APRAs adjustment effectively causing a 10-20% correction purely due to people having limited funds to play with?
     
  19. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    I'm sure euro will have his reply shortly

    I don't believe this is much worse than it was in say 2000.

    Back then the average debt to service ratio for a cleanskin borower ws about 35 debt to service ratio.

    The big difference is that in 2000 wages were I dunno say 60 % of what they are today versus house prices in syd and Melb being like 150 %. Higher ?

    $ for $. Affordability for variable loans generally hasnt been smashed forsingle ppor

    So that aspect I don't believe will do much to house price growth.

    Investor lending - different animal

    Investor treatment by tax and other controlling bodies - diff animal

    Pray and hold is done for a while...

    Ta

    Rolf
     
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  20. Redom

    Redom Mortgage Broker Business Plus Member

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    Hearing some of the communication thats come out of late, I think APRA may be OK with this (to a point). Having the non banks have some servicing lee-way essentially provides options to anyone caught in payment shock territory. In general, given the relative strength of these calculators and treatment of OFI debt, its quite likely anyone who's having their debt mature will have these options available to them (assuming no backward movement in situation since origination date).

    It may not be the best option, but it is still a significantly lower cash flow hit than a movement to P&I in most cases (depends on LVR, lender, repayment type, etc).