Borrowers Beware: Interest rate sensitivity buffers @7.75%

ANZ`s credit department has been keeping me up at night stressing, with its sensitivity rate @ 7.75% and even up to 8% with my loans from the other majors. That`s around 3% of all borrowings magically added to serviceability requirements. The resultant nightmare being, as each loan approaches the end of its fixed term, the credit department now demand P+I repayments, severely eroding our cashflow. It seems the APRA directive from last year is really starting to impact established PI`s ability to finance portfolio expansion or general access to loans for development, renovation, value adding.
Options? Just pay P+I(sacrilege)? Hang on till policy change (when)? Go to the other majors(diversity exposed)? Anyone else dealing with this problem?
ps Apologies if this topic has already been covered but this issue consumes me, when the banks stop playing the game, we`re in trouble!

 

ANZ has been doing this well before APRA. Their matching of interest only periods to their fixed terms are a frustration - you can always just put it on variable or utilise a different lender who looks at things differently.

Every lender does a serviceability buffer for new debt, and many have always done servicing on any other debt they hold or other lenders hold.

The big APRA pain was that some lenders would look at other lenders debts at their actual repayments, this has for the most part stopped or reduced - but that's just another challenge.

It is fairly far from reality of course, with a loan being assessed almost 90% higher in repayments than real repayments under 25 years P&I @7-8%.

 

ANZ is using 8% for all our loans with the other banks, its impossible under that criteria, and the P+I adds about $60k p.a. to our repayments with ANZ, severely debilitating maintenance funds and shortfalls on the newer acquisitions. Funny thing is they leant us $670k last year and now its done... No more loans and P+I on all the existing roll overs. Is this just how it is now?

 

It kind of is 'just how it is now'...

ANZ has always had this assessment policy in place, which is why they've always been one of the more conservative lenders for investors.

Over the last 8 months there's been a lot of changes resulting from APRA reviews. Quite a few lenders have adjusted their assessment policies to reflect the conservatism of ANZ policies. ANZ actually didn't really do much through all this. Their assessment rate when up a little, but not dramatically. Like I said, they were already very conservative.

I suspect part of your problem is they're now assessing at a 20 year P&I repayment schedule, whereas when you set up the loans they were using a 25 year P&I schedule. This can make a significant difference. The APRA inflences haven't changed this.

Another trap I see people falling into is they start with a low servicing lender like ANZ, then progressively move onto more generous lenders for later aquisitions. Invariably the time comes to access equity from the early properties or to roll over an I/O period with the first properties only to realise that you no longer qualify for a loan with those initial lenders.

The solution to this is simple, get a more comprehesive analysis of your borrowing capacity with a broker that has a good understanding of how servicing truely works and also has the experience to be able to forsee these types of problems.

 

One of the many reasons we all see the value in teaming up with brokers who "get it"!

 

Thanks guys. Anyone work for ANZ`s credit department? haha

 

ANZ have always operated in this manner - they've just upped their servicing rate slightly and adjusted their minimum monthly living expense.

If you want to move forward - consider using lenders with more generous servicing calcs.

Cheers

Jamie

 

Agreed, however taking my business away from ANZ will be the final option. Currently with their Private Bank and enjoy the personal contact with the executive and associates, who we feel are on our side, but cant convince credit to get us over the line like they have in the past.

 

I had this issue with ANZ about 5 months ago when my IOs were up for expiry and the process was so slow I ended up paying P&I for one month on my IPs with ANZ... If it wasn't for one individual who took pity on me internally at ANZ that anything got done at all...all back to IO now, thankfully.

 

A quick look at how your loans are structured will tell a whole story about the executive and his associates Having a lot of lending with one bank is rarely a good thing, and trusting a bank to do the right thing with your loan structure is also something that almost invariably ends badly.

As soon as a lender won't play the way you need them too, it's time to find someone that will. Don't mistake a sense of specialness for actual loyalty - banks don't do loyalty very well and when it comes to lenders it's best you don't either.

 

Its nothing to do with specialness or loyalty, (although speaking to an actual person on the phone is a nice feature of private banking), its to do with rolling loans with IO. ANZ have loved our business in the past but as we expand its getting tougher. Ive no doubt that a creative broker who has been around for a while could help us when the time comes. Truth is most brokers freak out when they see our spreadsheet.... and most junior bankers.

 

This is a normal thing from ANZ and other banks are doing the same but on different levels. In terms of a broker or a junior banker freaking out not sure what you mean by this. At the end of the day we when assessing your situation you can either service a loan or can't.

 

What the spreadsheet for? If you're self employed it would be tax returns and biz P&L that's of interest.

That said, spreadsheets tend to be very helpful for the person that created them and like reading hieroglyphics to anyone else!

In terms of IO rollovers, CBA are excellent at this and also have better servicing than ANZ. It might be worth looking at moving some of your business elsewhere, it doesn't necessarily have to be the whole lot.

 

You might thank them in hindsight. These types of restrictions exist to keep people from getting in over their heads. Nothing necessarily wrong with having a bit of a safety margin ....

 

I agree with you - but I do think that some of the assessment rates are over the top. Some sort of buffer needs to be built in - but 3% higher and P&I is too much IMO.

Cheers

Jamie

 

The spreadsheets of our financials. I fully understand the process. In the past the CBA hasn't lent to us however im preparing docs for them in the hope they will now. Like i said we would only look elsewhere as a final option.

 

Point taken, but ill thank them when they roll me with IO like they always have.

 

These interest rate sensitivity buffers are just an arbitrary figure, set by the risk guys, and dont take into consideration the particulars of each customer. Very restrictive on business. But i suppose hoop jumping is part of the game.

 

Spot On!
I am actually all for the banks sensitizing rates, and calculating on P&I is a no brainer but 3-4% is just taking it a bit far.
I mean what would need to happen for rates to rise that significant even with a 5 year outlook from the banks? And if they are then calculating on P&I then you would have paid down a bit of principal anyway meaning the rate rise would not hit you as hard.
For rates to rise 3-4% EVERYONE would be in a lot of trouble based upon what it costs to purchase a home these days.

 

Over a 5 year period a 3-4% rise in rates is quite reasonable, we've seen whole market cycles, up and down by more within a shorter time frame.

What the assessment rates don't consider however, is else will occur in that time frame for rates to make that kind of adjustment. A 3% rise in rates will have a cause, such as a strong economny, higher wages and higher spending by consumers. People will have higher disposeable income and rents will also increase.

The various risk people only look at the worst posibly scenarios with no consideration about what would actually take us there.