Covid19: A Major Shock to Lending Markets is coming

Covid19’s impact on the economy will mean broad ranging changes to the lending market. The uncertainty in the economy will change the risk appetite of banks temporarily. The broadness, pace & scale of changes will be unlike anything we have seen in over a decade.

This means getting loans from banks will become more difficult and far more uncertain. Nonetheless, there are positives for borrowers too.

Specific changes that we may see that will work against borrowers seeking loans:

• Covid19 Policy: Lenders will want to see demonstrated proof that borrowers are not impacted by Covid19 financially. This could be in the form of questioning, stat-declarations, letters, etc.
• Income stability: Lenders will apply different income policies for workers from certain industries that are likely to be directly impacted by Covid. If impacted, they will use additional verification metrics to confirm employment, or in some cases, refuse to lend.
• Variable income: Commissions, bonuses, overtime or other variable sources of income may be discounted further (if outside an essential industry). Lenders will take more conservative approaches to your income. Each lender will do this differently, as they already do.
• Rental income: Rental income is now also more uncertain. Some lenders may choose to place additional haircuts to this income to account for uncertainty in income flows. Other lenders may seek additional verification of this income.
• Self-employed income: Typically banks use two years previous tax returns to determine your income. This is backward looking and looks into the past. Banks will want a snapshot of your current income. Be prepared to provide additional income verification (BAS’s, account statements, interim financials, etc).
• Low-doc loans: This is a type of self employed income verification. Some lenders with too much reliance on this as income verification may stop doing this and apply greater checks.
• Loan to Value Ratios: Lenders will be cautious that prices are likely to fall & overall leverage ratios may be increasing across their books (repayment pauses). This may trigger a pull-back in high LVR loans with some lenders. Specialists in this space may see themselves as having too much weight in this market now, and pull back.
• Postcode restrictions & property types (Security): Given the nature of Covid19 is across the board, postcode restrictions as a risk management tool doesn’t make too much sense. Nonetheless, if widespread price falls occur, lenders will pick and choose locations that they deem higher risk of price shocks & restrict lending accordingly. For example, if you own a high rise in a ‘at risk’ area, banks may pull-back lending here.
• Cash Out & Equity releases: Banks will likely want to see more proof of where funds are going & why they are being sought.
• Construction loans will see some pull back from some lenders will take themselves out of this more riskier segment of lending temporarily.
• Non-bank lenders: Are facing a much more difficult time across the board. They have been growing at rapid rates in the past couple of years, have aggressive lending policies and riskier books. They also rely on securitisation, which may demand better loan quality given the higher risk attributable to mortgages now. This may mean vast changes to lending policies from non-banks who seek to rebalance their portfolio and slow down the pace of their growth. They also face funding pressures and will likely rely on tapping into the Federal Govt’s 15bn facility to manage rising funding pressures.
• LMI loans: The costs of default are the highest on these, and the risk of defaults is much higher than its been in a long time. Insurers will be the most conservative and apply more the above Covid19 policies than others.
• Verification changes: Specifically this may mean things like settlement calls confirming employment, additional verification of rental income, verification of salaried income, etc.

Overall, the above changes will represent the biggest changes to lending policies so quickly in a very long time. Not all of the above will happen, and different lenders will apply their risk frameworks differently. They are guidelines for some of the things we will see in coming months.

Thankfully, the RBA has taken major 'funding & liquidity issues' off the table. In the absence of central bank intervention, credit supply could have been a big risk which would have been a major problem.

Some specific changes that we may see that work for borrowers:

• Interest rates have fallen dramatically and will stay low for a long time. Fixed rate markets will continue to fall across the board with the RBA’s bond buying program targeting the longer end of the yield curve. This adds to interest rate certainty. The RBA is actively telling the market this in all of their communication.
• Interest only extensions without re-assessment will likely be possible. The regulators will preach flexibility to help cash flow of households. I’d be surprised if more action isn’t taken here, pronto. It may be a short-term option though.
• Serviceability will improve to all-time highs once this crisis dissipates. That is, once this crisis abates and certainty appears, assessment rates are likely to continue to crunch down and banks will likely get more lee-way to drive up credit growth (more serviceability bending). This means that there is more potential leverage available to investors who with high risk tolerances.
• The lending market is deep & will remain competitive. The nature of these changes will mean individual lenders move differently and have different risk appetites. For borrowers, competition in lending will usually mean more options. While non-banks and low-cost banks will be hit hard and some consolidation is likely, the overall market will remain deep.
• Lending regulators will turn on the credit/housing burners to drive an economic recovery post Covid19. Lenders are in the business of selling mortgages, so these changes are temporary in nature and will pull-back once some uncertainty dissipates. The regulator will give them leeway to do this and take limiters of them.

Overall, Covid19 is about to shake up lending markets and create massive uncertainty on loan approvals. There are opportunities and some large positives for borrowers too. If you're in the market & relying on credit funding, it's best to be more cautious than you would otherwise be.

 

I am experiencing it first hand with ubank.

I got pre approval just before Xmas last year for $710k. My situation has not changed in the last 3 months - Australian public servant in a very secure role earning $120k (health care/disability sector). They took over couple of weeks to finalise my pre approval and had assessed 3 months of payslips, bank statements, tax assessments, energy bills, etc. so it wasn't just a computer generated number as I understand all the information was assessed by their credit team and I had to respond to couple of queries.

Couple of weeks ago I put down a deposit on a property leaving me to borrow $690k(80% LVR) and 20% deposit through savings.

However just heard back from ubank and they have now reneged on their pre approval and have pulled it back from $710k to $550k leaving me high and dry and will probably need to pull out of the purchase as the cooling off period expires in 2 days.

If anything my financial position has continued to improve in the past 4 months - savings increased from $170k to $210k coupled with couple of interest rate cuts (75 basis points) so theoretically my borrowing capacity should increase or at the very least remain the same.

I am very ****** and have filed a complaint so will see how it goes. However glad I didn't purchase through an auction or I would stand to lose 10% or scramble to find a new lender.

 

I guess you get what you pay for with some of these small lenders.

But if this is a sign of things to come and if other banks take a similar approach, it will have a direct impact on property prices as we saw last year when APRA regulations were more stringent and banks were not as generous with lending.

 

The goal posts keep moving.... just have to adapt I guess

 

If banks tighten lending too much it will only amplify the impacts of the recession and create a spiral downwards

 

Credit demand will fall massively in coming months. These policies I don't think will really impact the market much. Those impacted by Covid19 are unlikely to be jumping into upgrade/get new lending. Those that aren't impacted, are likely to be able to access funding, albeit with a few more hoops to jump through (nothing major).

It's also, temporary. As noted, I suspect lending policy may be a bit V shaped. A temporary tightening, followed by cyclical changes that are very conducive to credit take up (lower rates, higher leverage). Its more likely demand for credit will be higher at this point too.

 

Ubank is better for refinance and never good for time pressured deadlines like a settlement. I've always just refinanced to them after getting a major bank fast approval and release. They're fine once you're in the property with no major needs for equity releases or such.

 

Thanks for that Redom.
We also are experiencing the above, doing a refinance.
Have been advised most lenders are only accepting 60% of rental income for example.
Looking forward to when this is over!
David

 

Awesome pos @Redom this is what I was eluding too in another post but didn’t have the time to post specific. Definitely going to have some impact short term!

 

The big thing will be how many of these measures how around and for how long on the other side. I suspect banks will be more conservative with casual and business income for some years.

 

Hi @Redom

Is this something you are seeing already?
Predicting?
Or have some information being in the industry that it is about to happen?

ps: With the Major lenders (can see from above comments some of the smaller ones already feeling a pinch)

 

Interestingly I had a call from my local big 4 bank manager asking if I needed any help. I don’t live in that postcode anymore but it’s an area dependent on tourism. We don’t have very much of our debt with them and the investment loan payments are always up to date. I said thanks for the call but we are fine..

 

Seeing some of this already & some is predicting what's likely to happen. Although, the spirit of what I'm saying is largely common business sense. It would simply not be prudent not to adjust risk settings given the economic situation. Note that the actual specificity of the potential changes noted above, are very much predictions. I expect different lenders will treat this differently and make these decisions based on their individual risk profiles at this time.

 

I am midway into refinancing my loan (with CBA) and settlement is in 8 days.. can they shift the goal posts on LVR, property valuations, income etc?

 

We are refinancing some commercial stuff through work, and our Bank is saying COVID is an issue, but only temporary. They aren't raising any red flags at all.

 

This all happened in 2008. Credit will tighten but it's important to consider it only affects some. A minority we hope. Perhaps under 20%. Official employment numbers can't be trusted as it excludes many. Commonwealth funding for some underwrites some risk but that will wind back

 

They are doing checks. Approval means nothing if you have no work or are impacted for income, rents etc