Loan to Income (LTI) Ratio vs Loan to Value Ratio (LVR)

Discussion in 'Loans & Mortgage Brokers' started by Simon Hampel, 22nd Mar, 2017.

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  1. Simon Hampel

    Simon Hampel Founder Staff Member

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    From: Crackdown on bank lending through tougher macroprudential policies imminent

    "The University of Queensland economist Cameron Murray said loan-to-value limits were not effective because rising prices allowed investors to leverage more for the same house. He suggested loan-to-income ratios and said repayments of mortgages should be tied to rental income."

    "For example, an 80 per cent LTI would mean that the interest on borrowing must be less that 80 per cent of the rental income of the property," he said.

    To be consistent, I would prefer to call it "LIR" (Loan-to-Income Ratio).

    The problem with this measure is that the rental income varies significantly with supply and demand - indeed, I think often the volatility of rental returns can be greater than that of property prices (other than perhaps in boom or bust periods!).

    It would only work based on gross rent - and a broad figure applied to every type of property would not take into consideration the condition of the property and the fact that older properties or properties with certain types of construction can have higher maintenance costs than others - so your net rental return after expenses is going to vary greatly for different types of property.

    I can't really see that as being a workable solution really - too many variables.
     
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  2. Redom

    Redom Mortgage Broker Business Plus Member

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    There's a few different approaches to 'macro prudential' policies regulators can apply to slow the heat in property markets.

    Go across the ditch and we've seen LTV restrictions - 70% LVR caps for certain cities, etc. This is a direct control that addresses certain risks (valuations + high ltv benchmarks). In Asia this has been applied too, with stronger controls being used in a low rate environment.

    Aussies have targeted 'servicing' and the income/expense side of the equation far more than any deposit side restrictions. It doesn't have a fancy name that people can hold onto, other than 'APRA changes' - but these changes have very much been forms of debt/income assessments.

    It may not be direct or obvious, but loan capacities, across ADI's are closely tied with incomes now.

    Its not a set rule as banks have some wiggle room around the edges, but its broadly a form of LIR.

    The regulators did this by providing stricter and more accurate guidance on how lending should take place. In the past their guidance had far more wiggle room, today it is far more prescriptive and guides lenders with clear instructions (e.g. don't apply 7% neg gearing addbacks, take 100% 80% variable income, etc etc).

    Having a 'direct' control tied to a direct measure usually has indirect consequences.

    IMO you can achieve similar results in a better, less direct fashion, by:
    • Removing negative gearing from servicing.
    • Having a 60-70% rental income assessment instead of 80%. This is probably more accurate reflection of reality anyways.
     
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  3. Simon Hampel

    Simon Hampel Founder Staff Member

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    Like it or hate it, from the way you describe things - it does sound like the regulators via the APRA changes, have actually come up with a fairly common sense approach to cooling things down - much more so than the "sound bites" that the media trots out from various economists or academics aimed at generating a catchy headlines.
     
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  4. PandS

    PandS Well-Known Member

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    APRA doesn't make the rules

    APRA is part of the basel committee, and there is still some argy-bargy going on between members on the final version of basel 4 but it should be done this year and start phase in implementation in CY 18-19.

    Once Basel 4 is finalised APRA has to adopt it and APRA passed it on to our banks
    and banks has to follow those rules
     
  5. Simon Hampel

    Simon Hampel Founder Staff Member

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    We use the term "APRA changes" only in the generic sense to indicate the new rules being imposed on the banks - no matter who is actually instigating them or enforcing them.
     
  6. Corey Batt

    Corey Batt Well-Known Member

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    If I remember correctly this is the same guy who got ripped into last year for saying factually incorrect information regarding brokers and had to issue a retraction/amendment to the articles about his hair-brained ideas.

    I prefer a free-er market wherein the government steps in for the exception rather than the rule, as over-regulation can cause significantly worse outcomes than what they're trying to limit.

    Academia still remains a hive of socialist nonsense however, advocating for 'solutions' which will cause five problems for each one it attempts to solve and continue to put pressure on any type of economic innovation or advancement.