Drop in assessment rate ...

Discussion in 'Property Market Economics' started by jazzsidana, 20th Jun, 2019.

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  1. euro73

    euro73 Well-Known Member Business Member

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    The cases presented to the RC all happened well before 2015. Since that time, the banks have abandoned the Henderson Poverty Index for measuring Living Expenses. These days, the verification of living expenses is an area where an enormous amounts of scrutiny is applied

    Respectfully, I disagree. Firstly - it's been 4 years since APG223. Secondly, what occurred was absolutely significantly new. There is no "this time around" None of these measures had ever been employed before . Not even one of them had been applied in in isolation - ever - let alone all of them in unison. There has never been regulatory intervention before - EVER. Not IO quotas. Not P&I assessment of debt. Not increased scrutiny of living expenses. Probably the "toughest" or "worst" conditions borrowers experienced prior to this were LVR reductions for a very short period following the Credit Crunch /GFC era . Ouch! :)

    But other than that, there have never been any regulatory interventions of any kind, whatsoever, since deregulation. This has been a one of a kind, very different set of circumstances driven by regulators not free markets . And as of today, all that has happened so far is that the 7.25% P&I has been reduced to 6.5% P&I Debt is still being assessed at P&I. Actuals arent back. Living Expenses are still being heavily scrutinised. The Henderson Poverty Index isnt back. Plenty of secondary income sources are still being shaded and Credit Card limit assessment rates just went up from 3% to 3.8% .

    But I do agree with you that sentiment will help .
     
  2. Sackie

    Sackie Well-Known Member

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    Time will tell. I think anything can happen and nothing surprises me these days. You just need to look at the recent election results to know anything is possible. I am of the opinion that credit will come back quicker than many expect but not as quick as many may like. Time will tell.
     
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  3. euro73

    euro73 Well-Known Member Business Member

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    Splinters ? :)

    What does "back" mean though ? What needs to happen to call finance "back"? Back to actuals? Back to DTI ratio's of more than 12 x income ? Or just not as bad before? I ask because right now, I think anything that isnt 7.25% P&I is being used by many to argue that credit is somehow "back".... when perhaps the better or fairer way to describe it would be words like "moderately less difficult" or "not quite as tight as it has been".... I guess Im saying - even after a 2.5% floating rate is factored in, and 1 or 2 more rate cuts are factored in, we remain some way from being back to where we were before APG223... maybe we should say half way back? :)
     
    Last edited: 20th Jun, 2019
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  4. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    I think if past history is anything to go by, it will be a very long road before we see any real significant improvements to lending policies that favours a less conservative approach. There's a lot of little things (like the assessment rates) that lenders can play with, but that's not even close to what we saw until 2015.

    The biggest changes to lending policy I witnessed previously were at the end of the GFC. Lenders tightened up quite a bit. Whilst they did become more relaxed over the subsequent 6 years, most of those policies are still in place today. Here's some examples:
    * 100% loans - to this day, they just don't exist.
    * 95% loans for investors - there's one or two about, but mostly not.
    * Assessment rates - the floor rate was introduced shortly after the GFC. It's only being reviewed now, after 3 years of record low rates.

    Lenders will find ways to get an edge here and there, but don't expect anything truly ground breaking any time soon.

    Also what we've seen over the past 4 years is far more radical than anything that occurred after the GFC.
     
  5. craigc

    craigc Well-Known Member

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    No word on CBA assessment changes yet?
     
  6. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    6.75 I reckon

    by 2020 :)

    judging by some other changes around commissions that they could/should have made 9 mths ago and are still chewing over.

    ta
    rolf
     
  7. euro73

    euro73 Well-Known Member Business Member

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    Appears the Fin Review jumped the gun a little - some more detail is emerging and the westpac change is not what it appears . Seems the assessment rate is not being reduced for all - it appears to be a discretionary change for “some” owner occ P&I borrowers only. If you fail servicing, the bank has given its crdeit people the discretion to use a lower assessment rate ...... so it really isn't the shift in policy the Fin Review claimed. Also explains why the servicing calc hasnt changed

    Major bank pre-empts APRA’s home lending reforms - Mortgage Business
     
    Last edited: 21st Jun, 2019
  8. Sackie

    Sackie Well-Known Member

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    Good point re ' back' . When I said back I meant generally easier to get finance. Until then I know many folks who are just using more of their own equity to continue with investing/developing , needing less from banks. Obviously you need to be in a position to do that of course.

    I was talking to one of my finance friends the other day and she was saying that basically from a practical pow not much has changed re finance as no bank really wants to be the first sucker to jump in. But what was unthinkable for banks 12 months ago is perhaps now thinkable even though their not acting on it (yet). The conversation is moving in the right direction...slowly.

    Just imagine when finance does eventually get easier for many....how markets will react...all that pent up demand just waiting to jump in.
     
  9. Kangabanga

    Kangabanga Well-Known Member

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    There's not gonna be much pent up demand other than the usual seasonal factors.

    Wage gains ain't there to afford the loans and I don't see big changes coming back to servicing..
     
  10. albanga

    albanga Well-Known Member

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    Did this banker/broker ask you to provide 3 months bank statement for every account you own as is their policy?
    An assessor who literally takes a ruler to every line of every statement is the absolute harshest form of living expense scrutiny.

    The barefoot investor has made life hell for brokers.
     
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  11. albanga

    albanga Well-Known Member

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    Depends on what your talking about though.
    People who have done modeling have shown that a floating assessment rate on owner occupied debt on current interest rates will actually surpass the “gold old days”.

    I know we are on an investment forum but I think it’s only fair to include an ** when saying credit won’t return to the old days. I think we forget even around these here parts, not everyone wants to hold investment properties.
     
  12. craigc

    craigc Well-Known Member

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    Wow Rolf - I thought I was obsessed with propertychat - 2:46am!
    Up late/early or travelling? :)
     
  13. Sackie

    Sackie Well-Known Member

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    There will always be areas more affordable for investors to park their money. More rippling will take place near higher priced suburbs and the ball will get rolling. Just need finance to get easier. The demand is there. Always has been imo.
     
  14. euro73

    euro73 Well-Known Member Business Member

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    See above - it appears that the lower assessment rate isn't a lower assessment rate at all. It's a discretionary lower assessment rate for limited numbers of O/Occ P&I borrowers who fail servicing at 7.25% P&I.

    I've said repeatedly through all my posts on this topic that O/Occ P&I borrowers who have no other debt , stand to benefit, while others continue to claim that ALL will benefit. I think I have been pretty clear in distinguishing between borrower types and the potential benefits of a floating assessment rate for each.
     
  15. Brady

    Brady Well-Known Member

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    Just been sent this, Interesting... APRA clamped Westpac for going early.

    "The Australian Financial Review’s James Frost reports Westpac is reinstating a key lending restriction on Thursday night after receiving criticism from APRA for removing it without approval. A spokesman for APRA said it was surprised Westpac lowered the serviceability floor before a consultation process designed to refine the standard had been completed"
     
  16. euro73

    euro73 Well-Known Member Business Member

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    Yes...seems to be a complete back down. This doesnt mean there wont be a reduced assessment rate at some point - perhaps even soon....but it does seem to suggest APRA is keeping a very very close eye on things and it's not going to be the free for all some here are predicting

    Westpac backs down on serviceability changes - Mortgage Business
     
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  17. berten

    berten Well-Known Member

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  18. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    As already said, APRA is keeping a very close eye on what lenders are doing and shows no hesitancy to step in when they think a line is being crossed.

    This will only serve to make lenders more cautious, more risk adverse. When lenders do make a move, it will be a very careful one.
     
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  19. Woodjda

    Woodjda Well-Known Member

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    I don't really disagree with anything the 3 of you have said. But for the most part you're talking about scrutiny and thoroughness, not conservatism in lending. There's no doubt that there is way more scrutiny of living expenses and the like now than before the RC. But the amounts being lent are still crazy by global standards. The change since the RC has meant that the numbers they're putting in their calculators are accurate but the calculators themselves give (as far as I can tell) the loosest access to credit in the world.

    Throughout most of the world a mortgage of 5x income is considered very large. In many parts of the world it is simply not possible to get a mortgage of that size or you need to have exceptionally stable employment. In contrast CBA indicated that 6.5x income was no problem and I'm confident I could've stretched them to 7x despite the fact that the interest rate they were offering was high by international standards. The only logical conclusion is that our access to credit is extreme and in no way conservative even if the scrutiny put on loans is vastly stronger than a few years ago.
     
  20. Marty McDonald

    Marty McDonald Mortgage broker Business Member

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    Yeah I have to disagree with that over simplified view. Sometimes yes but with an almost 4% pa buffer between actual interest rate paid and assessment interest rate it can hardly be called wafer thin. This is especially true if you have had some of your income not allowed or a 20% income haircut on part of your income which most people get subjected to unless they have super vanilla affairs.

    Here is an example. New $600K Owner Occ P&I loan that would fail current servicing.

    * Husband is in IT sales.$120K pa income. Same income level last 2 years but $60K base and $60K commission.
    * Wife is a nurse. $100K pa income consistent over last 2 years but $40K pa is shift and overtime.
    * 2 kids.
    * $5000 / m in actual living costs.
    * 2 investment properties. $800/ week rent.
    * $1M in P&I investment loans. P&I at 4.50% pa with 25 years remaining.
    * $1000 /m in investment property holding costs added to living costs. Strata etc.
    * $20K credit card limit, card paid off every month. Never paid interest.


    In this example deal would fail. However lets look at the buffers and haircuts that would be part of the assessment.

    1) $600K loan. Actual repayments versus assessment rates. Difference is $1382 / month.
    2) The commission haircut = $711 / month
    3) The shift allowances / overtime haircut = $406 / month.
    4) Amount of discretionary living costs that could be cut from family budget without hardship = at least $500 / month
    5) 20% Rent haircut = $693 / month + $1000 / month holding costs. Total haircut = $1693 / month for the properties.
    6) Difference between actual and assessed repayments on IP loans = $1670 / month
    7) Credit card assessed liability at 3.8% / month of limit = $760 / month.

    Therefore we are looking at a total difference between reality and assessment of .....$ 7122 / month. Pretty fat wafer!!
     
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