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With the Royal commission into misconduct in the banking, superannuation and financial services industry in full swing I thought it prudent to give you a bit of an update into how the lending landscape has changed over the last few years and what measures banks have taken to improve their overall lending practices in this time.
The changes are intended to ultimately lead to better consumer outcomes but it is interesting to note that the majority of feedback I have received on these changes directly from our members has been negative. Negative from the perspective that you feel they have gone over the top in what documents you need to provide, the restriction in how much can borrow and how many different documents you need to sign.
Here is a sample of what changes we have seen in recent times:
SERVICEABILITY – Let’s just say that how much you can borrow today is a lot less than what the banks thought you could borrow 3 years ago.
- Only accepting 80% of overtime and bonus/commission income
- Assessing repayments on existing loans at 7.25% p.a. as opposed to their exact current rate
- Asking you to break down your living expenses (budget) into a variety of categories to ensure that your exact monthly living expenses are reflected in your application as opposed to a “generic” expense figures.
- Existing interest only loans expensed as P&I loans based on what their “remaining” term will be when the interest only period expires
- Reducing the percentage of your rental income they will accept
- Reducing their willingness to rely on Centrelink income
- Tightening on what items they are willing to add back to self employed income
These are to name but a few. All these added up has made for a pretty drastic change in someone’s borrowing capacity, particular if you have a decent amount of existing investment debt.
POLICY & PRICING
Some of the changes in general banking policy and rate pricing over this same period include:
- Higher rates for loans over 80%
- Reduction in maximum loan to value ratios in certain postcodes
- Reduction on maximum loan to value ratios for investment and interest only lending
- Incremental rate increases on investment loan and interest only loans
- Requirement to provide evidence of current rate, repayment and remaining loan term for debts held with other institutions
Once again, these are to name but a few but overall the tightening has been quite significant.
One could argue that all these changes were forced upon them by APRA’s intervention and the measures and targets that they put in place and for them to meet, as opposed to their eagerness to right some of their wrongs. This is probably true to an extent but the fact is that they have adhered to these changes and implemented the change that was required.
We are now at a point where lending practices are very good and in some cases (and certainly the opinion of a lot of you) a bit over the top. Ultimately I believe it has been a good thing and now that most banks have abided by the rules, we will start to see things relax a little in the short to medium term.
Interestingly, only just yesterday (26th April) APRA “removed” the 10% growth in investment lending cap that was imposed on banks in 2014. They are satisfied that banks have made the changes required and whilst they will be keeping an eye on them, banks will be able to relax some policies around investment lending from here on which is a great thing for Hudson members.
I look forward to chatting with you soon to give you an update on your borrowing capacity and see if we can improve on your current rates.
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