Loan Tip: Why Can’t I Qualify for another Loan?

Loan Tip: Why Can’t I Qualify for another Loan?


A common question these days is “why, in the eyes of the banks, can’t I service another loan?”.


Often the potential borrower will have a positive geared property and/or large sums of surplus cash left over each month so it is understandable that they may think they can qualify for a loan while a bank thinks they do not service.


The usual reason is because the income is not enough!


But digging deeper it is usually because the bank’s assumptions have huge buffers build in.


Where the borrower has other loans already these will often be assumed to be at an interest of 7 to 8% pa – even though the client is being charged 4%pa.


However the borrower’s loans are often interest only and the lender may calculate existing debt at PI repayments.


To make things harder most lenders these days will calculate the term of the loan on existing debt on the remaining loan term less the interest only period. So if someone has a 30 year loan with Westpac with 10 years Interest Only and they go for a subsequent loan with Suncorp the loan will be assumed to be 20 years PI. That will make the repayments very high.


Example

Someone with a $1mil existing investment loan with a 10 year IO term on a 30 year loan term. Say the rate is 5%

Actual repayments would be $50,000 per year.

PI repayments at 5% would be $64,416 per year on a 30 year term

PI repayments at 8% would be $88,056 per year on a 30 year term

PI repayments at 8% pa would be $92,616 per year on a 25 year term

PI repayments at 8% pa would be $100,368 per year.


So what this means is that even though the actual repayments being paid are $50,000 per year the lender may assume that the repayments are double at up to $100,000 per year.

The reasons are mainly to allow for a buffer, for rate rises and to make sure borrowers are not over committing.


On top of all of this there are minimum expense levels a lender will assume a family is spending per month. For a couple with 2 kids this could be around $3,000 per month minimum or more if the borrowers are actually spending more.


So that is why you probably will find it difficult to qualify for another loan, or to even refinance existing loans. In the good old days many lenders would have assessed borrowers at what they are paying in interest only -$50,000 in the above example

 

Hi Terry, do you think the 'good old days' could come back sometime? Or do you think lending will remain this way for a long, long time (ie 10-20 years)?

 

In the future, do you think investors may get around this by renting out their PPOR for 6 months and live with their parents or relatives to 'qualify' for another loan and then move back to their PPOR?

 

I think it'll ease over time, but it's unlikely to ever go back to what it was with the mainstream lenders.

Keep in mind that those most affected are property investors. Everyone's borrowing capacity has been reduced to some degree, but for owner occupiers it's not a critical problem for most. As a result 70% of the population doesn't really care about any of the problems investors are facing, neither do the banks or the government. Properly investment isn't exactly popular right now.

 

It will be a long time I think.

 

This can help to a degree, but many lenders assume a notional rent is paid to the parents - $300 pw in some cases.

 

This is why a lot of property investors 'cant service what they currently have'.
In some cases applying for another loan with your existing bank, could raise more questions than answers.

Do you guys see a time when the banks move in and start re-assesing existing borrowers on the updated policies?

Blacky

 

The good ol' days always come back.

But when they come back it will be much harder to make money out of property. That is, the boom will be over and property prices will no longer be this political hot potato.

And luxuries like neg gear and CGT discount will be looong gone.

The bogans will be forced out the Druitt and will be couch surfing with their cuzzes on the Central Coast.

Yep, it will be a different landscape. I subscribe to the belief that it is not possible for the masses to make too much money out of anything because it throws the equilibrium out of whack.

 

Only if they apply for increases. But if they can't service any increase will simply be refused with the original loan remaining as is.