Loan Servicing: Many cannot Qualify for what they have

The tightening up in servicing by lenders is starting to hurt people.

In the last few days I have seen several clients who not only cannot borrow any more money, but they cannot refinance because serviceability has tightened up so much they wouldn't qualify for what they have if they applied for these loans now.

Qualifying for a few loans is still possible, but once you start to get more than a few it becomes increasingly difficult to demonstrate serviceability to a bank.

 

I'm seeing it everyday.

A year ago - I could glimpse at a Fact Find and no whether they'd service. Now - there's a lot more work involved!

Cheers

Jamie

 

Not good for business!

And not good for retirement plans.

 

For those on the line or already over it, that's why you need to be careful about selling down a stagnant or slow growth property with the intention of swapping it for something better. Even if that new place is the same price, you may not be able to redeploy that money and you end up with nothing.

 

This is just the beginning. More people will feel the pain once IO loans start to revert to PI. The lending will tighten further throughout 2016 and even more in 2017 once BASEL IV is finalized:

• The current independent risk assessment by the lenders will be replaced by centralized, regulated and audited risk assessment models.
• The equity held against loans will increase (by how much will be finalized in early 2017). What will the banks do ? Raise equity / reduce loans / both.

How about the traditional retirement plan:

Pension + Inheritance = Serenity

 

I've been dealing with this for about 6 months now. People can't qualify for the loans they have. There's frequently conversations in my office where people have done the figures, looked at their budget and they know they can afford the property even if rates increase to 7%. A year ago if people had made an honest assessment of this, getting the loan was straight foward. Today the lenders don't agree.

Once the serviceability roadblock was at about 4-5 properties. Today it's more like 2-3.

 

Investors will need to diversify their investments to continue on. Instead of building a portfolio solely in personal names with residential property, they may need to consider spreading the diversification with commercial, SMSF etc.

This isn't the end of financial independence for the average Joe - but it does mean investors will need to take a more holistic view at their finances and how they can get to their goals.

 

The answer is in the OP and almost all the other posts, rolling over is not easy/possible as the serviceability has changed.

 

Hi terry,

if a person has an IO loan, and then reverted back to PI once the term had finished. Are you saying that if they were maxed out with serviceability, they can't ask for IO again?
If you ask to go back to interest only, does this classify as refinancing?

I don't understand financing which is why I ask, and thank you.

 

Depends which lender you are with Barny. Some are tick and flick, others are full app

 

Good post Terry, agree entirely.
Banks will not like this scenario either though as will hurt bottom line. I expect some new innovations whether it be around pricing etc to improve serviceability in next 12 months

 

Ah ok, cool. thanks peeps.

 

And especially not good for those who had enough accessible equity pre-APRA––to buy an IP or two outright (if necessary)––but didn't grab it while they had the chance and are now stuck.

 

Are there any changes to how the big banks assess self employed people? Is it an average of last 3 years tax return?

 

I am with ANZ which was a tick and flick, however you also have to be above 80% LVR to begin with (which I was).

 

Sometimes the challenging part is refinancing a persons existing loans $ for $ just so you can get the repayments on a more favourable term (ie interest only, low rate) so you can hit up a lender who use actuals.

 

If you're coming to the end of an IO period, you've probably had the loan for almost 5 years. That loan was assessed under very different lending critera to what's currently in place.

Rolling over an IO period is a tick-and-flick in some cases but it's the exception, not the norm. Even the lenders who are tick-and-flick have a limit. They will want a full assessment at some point, which means a full loan application. It wouldn't surprise me if the tick-and-flick IO renewal was on APRAs to do list as well.

As a result, if your loan is about to come up for renewal, you may not longer qualify for the loans you've got. This means you can't renew the IO period and the loan will default to P&I over the remaining loan term. This could have a significant effect on cash flow.

 

That's actually become more favorable. It's generally been the average of the last 2 returns (not 3), or the lower figure if there's a 20% variance.

Quite a few lenders are now only using the most recent year if the LVR is 80% or less. They'll still see much of the previous years financials (because it's in the profit and loss statements), but they don't use them unless there's something very alarming in there.

 

BASEL IV is the bigger threat to bottom line as far as Banks and the regulator are concerned, individual mortgages or defaults is the sacrifice most financial institutions will gladly make to minimize impact of BASEL IV. This is exactly what is being played out in terms of serviceability. Exceptions will be greatly reduced if not eliminated.