Macquarie Bank - changes to living expenses and IO requirements

• Now requiring interest only applications to provide a reason as to why it's being utilised. Very simple requirement as there's genuine good reasons for investors to use interest only.
• Living Expenses break down - requiring estimate figures to be broken down to 12 separate categories including investment property utilities, rates etc - this part is interesting considering how rent is already taken at 80%

The continual evolution of the investment lending witch hunt continues.

We haven't utilised all that much Macquarie in years since they were hit by APRA, this will ensure that continues.

 

funny how medical and health and investment property costs are both classified as 'discretionary' living expenses.

 

Does 'discressionary' also mean that existing mortgages are optional?

This really is the last thing to make Macquarie a no-go-zone for investment lending. Their residential offer has some good points, but they don't have much to distinguish themselves from several other lenders with a better track record.

 

This is pretty light change, more so on verification & assessment of loans rather than straight out changes to policy. They take rentals at 75% too - that announcements was a few months ago.

Good to see clarity from a lender on the I/O part, plenty of lenders ask for this without officially stating it in policy. Personally i thought there'd be more momentum on this after the ASIC review, which asked brokers and lenders to justify I.O lending. Plenty of lenders have been asking the question for OO deals with lenders now (ANZ, St G, Westpac, etc - have all asked in recent months on some deals).

 

This will be the first of many lenders to move in this direction. I believe that before long, brokers will likely be required to provide detailed living cost analysis for every application. I also believe more and more lenders will scrutinise I/O loan requests more closely.

The I/O scrutiny is, as @Redom suggested, no surprise. The more pedantic living cost analysis requirements are going to add a good a chunk of time to every brokers processing time .

 

And to borrowers. What % of people know how much they spend in each category off the top of their heads?

 

This has been around since at least November last year - I converted my loan to 30 year p&i loan that meant the repayments were less than half of the current repayments and filled in more paperwork and jumped through more hoops then setting up my construction loan with westpac.

 

The level of scrutiny hasnt been around at this level, for the most part. But yes, it had started being more pedantic previously. I suspect it will only continue down this path in the coming months, across most lenders

 

Do you believe the lenders are going to request a breakdown of living expenses supported by transaction statements?
Or will it more be just a breakdown of living expenses supported by "had a conversation with client" and a spreadsheet.

If the latter then their will just be a bunch of templated spreadsheets Created that sit at HEM levels, catered for different types of family setups.

If brokers are however expected to have a conversation and then dissect 6 months of statements then this will be HOURS of work...well until someone can create an application that you can run electronic statements through and it separates and then groups every single expense.

 

I can only go with the information several lenders provided at an event last week. They implied that I/O would begin being scrutinised much more, and that living expenses would start being scrutinised much more. If Macquarie's response today is this, I would imagine others will follow suit - so I would think itemised living assessements , possibly supported by bank statements - may become the norm. We will likely see responses from more lenders in the coming weeks, if as I suspect, APRA has been ramping up the pressure behind the scenes ... But the banks all move at different speeds when these things are implemented, so who really knows....? The only thing that seems certain is that it aint getting any easier anytime soon.

 

Always enjoy reading your posts and feedback so will be interested to know your thoughts on this personally? I mean to me it sounds like this has the potential to start crossing into other areas of advisory?

Obviously I understand as a broker/banker you need to enquire about a clients living expenses. Most of the time this would be done as part of a conversation, sometimes I'm sure backed up with a budget. Anyone with a budget however knows having one and sticking to it are two very different things.

So if they go down the path of statements to accompany expenses then what becomes the expectation of the broker/banker?
Is it there job to then dissect the statements and start offering advice to reduce expenses.

Maybe it starts at "hey have you tried shopping at Aldi instead" but where does this go to? Do they start advising on cheaper insurances? Maybe start advising on how they live their life? How about maybe stop sending your kids to private school...

I just really believe using statements is not the right way. MOST people simply adapt to their financial requirements. I know myself personally my statements are nowhere near a true reflection of what I am capable of.
I also think as a professional you would know very quickly without needing to look at expenses the characteristics of your client and could advise without specifics.
For example you have two high income earners in their jobs for 10 years buying their first home with LMI whilst they have 2 Range Rover leases and 50k in credit cards...maybe they need to have a chat to.

A couple however with some kids, low LVR and savings have likely proven they know how to live on or below the HEM.

Keen to hear the thoughts of the experts on this one? And also what kind of advice do you currently offer your clients in terms of expenses?

 

I understand your point, but let me play the role of the regulator or credit officer for a moment, in responding to your argument. Your statement is like saying that what you earn is nowhere near a true reflection of what you are capable of earning. But am I meant to just accept that you earn more money than you can prove with payslips?

See what I mean..? If months of bank statements show you are spending X, but you try to argue that you are "capable" of spending Y in order to improve your borrowing power - where's the proof to support that? should a lender just ignore the proof in front of them , based on real evidence- ie your own bank statements and spending habits? Or should they assess your borrowing capacity based on your estimate of your "capability" ?


My thoughts are - the banks will be imposing HEM much more strictly whether we like it or not. Exceptions ( reductions) to prescribed HEM's will be difficult to come by.

My thoughts are - assessment rates are going to tighten further

My thoughts are - I/O lending is going to tighten further

My thoughts are - increase cash flow and use it to reduce debt. I have been saying this for quite a long time now.

More generally, I would just say this. It's Feb 2017. We have had over 18 months to understand the regulatory changes, but rather than accepting them, the forums are still largely seeking to find shortcuts or exemptions to get around them. Forget it. It's at best a short term solution. If you want to know how to sustain or improve your borrowing capacity for the long term, you have only these choices

1. Stop investing
2. Find a way to increase your income. You will need a significant payrise. The more you already owe, the larger the payrise needs to be. Think @40-50K per million owed as a guide. Modest rental increases wont do it, is the point.
3. win the lottery
4. inherit a lot of money
5. sell
6. concentrate on debt reduction.

Seems to me that Option 1 is a non starter
Seems to me that Option 2 is going to be a non starter for the majority. Its one thing to get a 4 or 5K salary improvement, but 40-50K ? Not so much
Seems to me that Options 3 and 4 are unlikely starters
Seems to me that Option 5 may be a short term solution, but means sacrificing the income from that dwelling.
This leaves Option 6 as the only option completely within your control, where selling is avoided.

The simple truth is that for most here - buying a cash cow or two with their remaining equity/borrowing capacity should be front of mind. Then use the surpluses to reduce non income producing, non deductible debt. That's how you will improve borrowing capacity , which is what needs to be done if you want to be able to harvest equity in later years and continue to grow your footprint. If you dont do this, you will reach servicing ceilings, and Options 1-5 will be your choices.

The exceptions to this will be

1. The very high income earners
2. Those with mature portfolio's yielding very mature incomes, all obviously built well before the regulatory changes

But for everyone else... see points 1-6 above again. Think deeply about the new credit environment. Be realistic. The sooner these realities are accepted and embraced, the sooner everyone can transition to a plan that will produce improvements to borrowing capacity over time. Keep chasing growth with no consideration for debt reduction/cash flow management, and see what happens . It will be all roses until that dreaded servicing ceiling comes a calling...and then you'll be stuck in the mud. No option but to sell or stop investing altogether.

Equity from growth wont improve your borrowing power. Equity used to equal borrowing power ( more often than not at least) because of the ever expanding nature of credit, but it simply doesn't work that way any more. Debt reduction or large pay rises are the only effective tools to improve capacity now.

 

Yes agree. For a decent sized portfolio people need to look at yield and reduction of non deductible debt or else there's no serviceability and no ability to borrow.

Of course you can buy commercial but that's risky if you buy the wrong thing.

I'm also looking at boosting my income.

All are changes to work towards a solid banking sector. By the way, I think our banks are amongst the best in the world... lets keep it that way.

 

I've had a client revert from IO back to P&I recently with Macqurie. To change back to IO required a fairly hefty semi-application, however it didn't service anymore!

Needless to say this didn't sit well with the client so I've placed them elsewhere.

I can't recall the last investment loan I've placed with Macquarie...

 

Totally understand your points @euro73.
BUt let me plays devils advocate, if that is the case then if I can prove to the bank hey I live on $50 a week because I eat 2 minute noodles and wash in the same bath water 10 times a week, backed up by bank statements...
Does that mean they will lend me heaps more money???
I bet it doesn't, so it works one way and not the other. Point being both ways simply are not true reflections of a persons expenses capabilities.
At some point you will need to revert from being a cheap slate on the other you can stop overspending.

But if your right the regulators will simply have their cake and eat it to. Don't spend any money??? Too bad your at the HEM.
Oh you have spent a bit much in the last 6 months, too bad that's your new benchmark.
Win/Win regulator.....Lose/Lose borrowers

 

You can apply for exemptions to HEM, but it will be a tough sell.