More serviceability floors announced...

Suncorp = 5.5%
Macquarie Bank = 5.3%

Also heard that some mutuals are as high as 6.8%

Interesting days...

 

The floors don’t really matter at the moment - no one is really getting full benefit yet . Most people are at high 5’s and many are at high 6’s still ...

It will need another couple of rate cuts, and for banks to pass most of them on , for people to get value from those floor rates ...

So far the big improvements to borrowing capacity that have been spruiked are proving to be a bit of a myth. Only a select few borrowers - specifically o/Occ P&I cleanskin borrowers are seeing anything worth talking about ...

More calcs to come - some of them may be more impressive that what’s come so far

 

Just some further comments on this since yesterday. I've now had the opportunity to look at this more closely. I've been using one particular scenario that I ran on Firstmac before the changes, to see what differences there are are under the new regime. So far, ANZ, Westpac, Macquarie and Suncorp are STILL offering less than Firstmac did before the changes .

Now I understand this wont be the case for cleanskins with no other debt - they will see some worthwhile improvement - but as you read through the particulars below you'll see this is not a scenario that pushes any boundaries ... its a 6 figure household with only 370K of existing INV debt and the debt has been P&I from Day 1. No IO has been used whatsoever . Here's the scenario so you can appreciate things;

Couple. early 30's.
male applicant earns 220K - 160K base + 60K bonus/comms.
female applicant is FT student - not working .
1 dependent child -2 years old.
20K AMEX
no car loans or personal loans
no HELP debt
frugal lifestyle.
260K in super
1 x 370K INV loan that is 3 years old, but it was set up P&I from day 1 rather than IO, and its on 4.29% so the assessment of that debt has come down from 7.25% P&I over 27 remaining years to 6.79% P&I over 27 remaining years ..... debt is 50/50
Rent is $336 per weekl or $17,472 annually. 50/50
250K + in savings
Seeking 1.2 Million for O/Occ P&I

Worked at FM before the changes - just
Doesn't work at ANZ, WBC, SCORP or MAC or STG even after the changes...

Why?
They shade the 60K of comms/bonus. FM doesnt shade. But thats not the only reason...
Their NG addbacks are done at 4.29% - FM are done at 7%...that's also not the only reason - all the lenders who have issued new calcs have also increased HEMS... and of course the C/C assessment rate has increased.

This demonstrates what Ive been saying - these changes are not what some are cracking them up to be.... they offer some improvement for sure , but it is simply not the big leap forward some are claiming...

I've had a lot of conversations with multiple brokers this week as well. I have dozens who are referral partners to my business- they are all running scenarios of their own for clients who weren't quite there a week or two ago.... and they are all concluding the same..... the improvements are there, but they aren't as great as they'd hoped . In some cases its enough to get something going, in some cases its not. Other brokers here have posted the same experiences as well, which are finding the same conclusions. We cant all be wrong .

I think another 50bpts will be required to really set these policies alight

 

@euro73 I'd be curious to see what the results of that scenario are for the old Firstmac calculator vs the online released a fortnight ago.

 

@euro73, thanks for the illustration.

For the general audience, its probably worth presenting the full set of information here and unpacking the 'why' behind your assessment.

The reason why this borrower isn't going to a mainstream lender is because lenders have different niches. Comparing what one lender can do in certain scenarios to another lender can invariably produce different results. This particular scenario is a big demonstration of this because:

- there is a ~25% variable income component. Thats an 80k+ difference in borrowing power from this component alone. Firstmac and other non ADI's will always be better placed here, they're not haircutting variable income because they don't have to follow APG223. For situations like these, non ADI's are likely to perform better. Assessment rate changes do nothing to income assessments, they simply extrapolate a greater borrowing power from the existing income/expense assessment.

- You've also included a very high P&I variable rate loan, perhaps not including the latest rate cut (do they have a poor credit history too...why are they so far above market?). This client can drop their rate by 0.50-70bps comfortably and thereby reduce the assessment rate by 0.50-0.70%. This is what the change does. But if you don't reduce their headline rate, then you don't reduce their assessment rate, and the change isn't as powerful.

If this particular client is trying to achieve an outcome, the broker would:

• Go to a lender that's dropped their assessment rate and takes bonus/comms at 100%. This may not have happened as of today, but by next week there'll be some. By next month there'll probably be a few.
• Reduce their rate on their existing debt. This is just a win win all-round and great for borrowing power. It brings the assessment rate down on it by 50-75bps on existing debt component.

Overall result for this borrower is the same:

- A 10-15% improvement in their borrowing power from ALL lenders. I.e. if ANZ were offering $800k, they'd be offering $880k from the assessment rate change at least (more like $910k). Note, some have updated their HEM at the same time as the assessment rate change, making it a little tricky to completely unpack what component is what. Assuming it's an OO loan being sought, the improvement is closer to 14% (depending on the rate being paid).

- Noting this clients goals, it may not be enough with mainstream lenders to achieve what they want given their income assessment. But if they could borrow $1mill last month by going to lender A (e.g. Firstmac), make that $1.1-1.15mill with lender A (e.g. Firstmac) once their assessment rate changes go through with that lender (all else equal).


Presenting another 'skewed' analysis from lender niches for illustration purposes. Jane is a self employed dentist, she earned $100k in one year and $350k in the next. If Jane goes to ANZ, they'll accept the $350k income with a half decent explanation. If Jane doesn't know this, and goes to many other lenders, they'll probably cap it at $120-130k. Of course an assessment rate isn't nearly enough to overpower a massive income differential like this. If Jane's is looking to borrow more money to invest/buy, she will be better of at ANZ because of their niche lending policy here. ANZ will now be offering her around 14% more money than before (all else equal). The same applies to the other lenders that take a much smaller portion of her income too.

This is what brokers do. They place loans, understand lender policy and find solutions to achieve a clients goals.

Assessment rate changes may not necessarily mean that solution has changed. It does mean that the customer can borrow more though.

 

Hi @Redom With OFI debt, is it better to fix it before getting a new loan so that the assessment rate for that debt will be lower and improve borrowing for the new loan?

 

If you fix right before you refinance aren't you looking at a heap of break costs?

 

I already covered that ...

Even if ANZ or WBC didnt shade, and that resulted in @80K extra capacity , they are still short of where FM was before the changes . Ive already run all those scenarios north south east and west , upside down, in reverse and all over again.... . You know me... do you really think I wouldn't have explored this from every angle?

The NG addbacks are the other difference maker here ...and as rates come off, investors NG add backs come off .

This is why I said back in May that everyone should just hit the pause button and wait to see how these things unfolded.... there are multiple little levers within each lenders servicing calcs, so generic estimates of % increases to borrowing capacity just cant be relied upon

 

Did Jane show you her face or was it an online application? You also didn’t indicate whether she uses Oral B. Is it a factor for servicing calcs this week?

 

It is good to see now that when we negotiate better discounts it results in better borrowing capacity too. Was becoming a bit silly that people could actually borrow more when not asking for discounts due to the negative gearing addbacks.

 

Same same... I'm more interested to see what their new calc will offer., whenever that becomes available. I'm mindful that if they lower their floor rate and introduce the same 2.5% buffer everyone else is introducing, they will lose some of their NG addback "juice" . Be interesting to see how that washes out ....

 

Unsure on this just yet @JohnPropChat. I presume so, but we haven't seen how lenders actually apply this. Will they ask for evidence of revert rates for OFI fixed's...not too sure yet.

We have quite a few loans at 3.44% IO INV now (a new cheapie product that suits some clients). If Westpac apply the 3.44% + 2.5% buffer on this as OFI, the assessment rate change is going to be a pretty big influencer for investor profiles. This compares to their own fixed rate products, where the assessment rate drop isn't very much at all (they apply a 1.29% SVR discount as the revert rate, and then 2.5% on top, leading to assessment rates on their fixed products in the high 6's).

It's easy to start game planning investor debt portfolio management around lower rate suitable products, expanding capacities elsewhere.

Some of this will take a bit of time to flesh out. Over coming months investors will get a bit more clarity how to maximise the pro's of this new lending landscape in their favour.

 

We saw some examples of this in the media releases from ANZ, ST.GEORGE and WBC. Those releases specified that the variable revert to rate is the base from which the 2.5% buffer is applied . one would assume they will treat any fixed rate the same way ... In other words , the 2.5% floating rate will only apply to variable rates ... whether now (if you are variable) or later when you revert ( if you are fixed)

 

Do you think they'll apply this to OFI's?

Makes it very cumbersome during the app process trying to find out what revert rates are on fixed rate expiries with other banks (who don't quite work on the same discounting model as others).

 

We're going to have to find a way to demonstrate that info. The alternative is the lender simply uses their own standard variable rate, or they look up the SVR on the OFIs website (if it's even published). Neither is an optimal outcome.

Whoho! More administrative work!

There is a silver lining. As a broker we've got access to that information. Direct channels don't see or know what we do regarding OFIs. This can be turned into an advantage for the broker channel.

 

I'm listening to a webinar from Westpac right now. Their policy is either the actual rate, or for fixed rates, they'll use the variable rate after the fixed rate ends.

How they determine the reverting variable rate, is they use the standard variable rate, minus the published discount. In Westpac's case the published discount is 0.8% - 0.9% depending on loan amount.

They know full well that discounts of 1.5% are becoming common place, they're looking to review the 'standard' discounts. I suspect it will go to something like 1.3%.

 

Not sure..but if they dont they will open up quite a little loophole. Imagine all those investors refinancing over to 3%(ish) 1 year fixed rates to get access to the 5.5% floor rate

 

Note that CBA also announced 5.75% today

 

CBA amends home lending policy - Mortgage Business

 

IMO banks will be banks, and this is how it'll play out. It doesn't really matter either, APRA's guidance leaves them clear to do this anyway. They haven't made it very clear what to do here, so banks will probably end up somewhere suitable for them & simple.

Trying to work out revert rates of small loans...that sounds difficult, slow and painful for bank assessment teams. Its not even on loan account details pages of most loans. Most borrowers would have no idea what their revert rate is...or where to find it.