Bank Australia Servicing Calc changes

@Realist35, it's getting tuffer.

 

Throughout the coming weeks and months you'll see

Lower LVR's for I/O loans
Higher rates for I/O loans - NAB are about to lift I/O fixed rates again on Thursday night
Reduced I/O terms

For P&I borrowers - times have never been better
For I/O borrowers - I dont really understand why there is still any resistance to the benefits of injecting cash flow. If it isn't obvious by now how helpful ( one might even say "necessary" ) cash flow will be in the coming years, I dont know what else the regulators and banks need to do to convince investors.

Perhaps it will require banning I/O altogether for some investors/forum members to realise the unlimited, never ending I/O party is over? Not that I'm suggesting I/O will be banned, but I do expect I/O rates to be at least 50 bpts higher by years end most lenders to have reduced LVR's to 80% or less, and I/O terms to 5 years maximum...

 

Damn it! Just when I started building my portfolio

 

Sounds like a minor change. What will this do to someone who was able to borrow 550k prior to the change? Just a minor reduction in the borrowing capacity?

Also would this affect someone who has already lodged a pre-approval with the bank?

 

Today Adelaide Bank reduced the maximum LVR for interest only loans to 70%.

 

Yes its certainly quite minor when measured against a single deal. But as you build a portfolio, several minor changes become a significant change...

Bank Australia arent an INV friendly lender anyway... I posted it just so the forums knew the change was happening. The more significant announcement today is ABL reducing I/O LVR's to 70%. If more lenders follow suit, that will be significant

 

How long until RBA cuts rates again? Sep?

 

They usually honor pre apps if activated within 3 months.

Already happening as got this on Monday form TMB (Teachers Mutual Bank)

 

Now it's getting serious. Higher servicing calculators, lvr changes, higher interest rates...game over?

 

Nope. I predict a lot more collaboration between individuals (JVs) to pool resources and incomes to overcome them pesky regulators. Thats where I will be heading

 

It's only very small brands making LVR reductions so far.... TM and Bank Aus are tiny tiny players so they could cancel I/O lending altogether and it would barely register a blip on the overall radar.

Its the majors and the larger tier 2 lenders and non banks that we will need to keep an eye on. If they all dropped I/O LVR's to 70% for example, that would be felt. With respect to Adelaide Bank, I guess ABL does fund a number of mortgage managers and they have a self declaration lo doc product as well, so it has the potential to have a little impact I suppose, but not too much I wouldnt have thought.... maybe they are getting too much I/O business through their wholesale arm, from mortgage managers? That could explain their decision today... I cant imagine they are writing much volume in their retail channel. Their servicing and rates arent really too attractive. Great product though - fixed rate with 100% offset.

Anyhoo... just further tightening as a result of the 30% I/O limits ... the various lenders wont all move at once. But it will only be a matter of time before we start to see various lenders take whatever steps they deem necessary to get under that 30% quota. You would have to imagine the majors are way above 30%, so it must surely only be a matter of time before they start making some announcements...

 

70% of rental income now, is that an APRA requirement?

 

No. The only APRA requirement is that lenders write no more than 30% of all loans as I/O, and stay under 10% year on year growth for I/O loans. How they do that is at their discretion.

Some will use pricing initially to create a "disincentive" to investors .
Some will use policy - such as tighter servicing to create a "disincentive" to investors - and they might do that by lifting their assessment rate or by reducing the % of rental income accepted, or by increasing their household expenditure measures, or by a combination of some or all of those things... basically, they make the cost of doing I/O business higher, and the barriers to entry for I/O higher.

Some may do all of the above, all at once.... most will do it incrementally.... so as to gain as much market share as possible from other lenders who investors and brokers abandon... Its a strategic game for the banks....they know they need to stay within a certain quota, but they arent going to necessarily try and do so from day 1.....they want to maximise profits as long as they can.

Expect to see lots of killer P&I deals so they can fatten up the volumes on that side of things. This will help them write more I/O volume than they would be able to write if their P&I volumes were low... as long as they dont breach the 10% speed limit along the way

In the end, the reality is that APRA has said lenders are averaging something around 40-45% of all loans as I/O. Thats an improvement on the 53% that started APRA's intervention in 2015, but obviously APRA wants it lower. Some lenders may be a little higher than that, some may be a little lower...but if you use that as a guide, it means that as a general rule, banks have to cut roughly 25% of current levels of I/O lending to get from 40%(ish) to the 30% target. So one way or another, you would have to conclude its likely I/O rates will rise, LVR's will fall , cash out will get more difficult and I/O terms will get shorter.