HOW ARE BANKS NOW ASSESSING LOAN APPLICATIONS?

In a matter of weeks the major banks have started to make changes to their lending policies and lending criteria around income assessment, the industries in which people work, where people live and their level of exposure.  Some banks have also lowered their LVR (loan to value ratio) and property valuations are starting to come in a little lower to reflect the changed propery market conditions.  

Mortgage brokers are frequently receiving new guidelines from the banks in a very fluid lending climate and pre-approved loans are also being reviewed in some cases.

Self Employed & Business Owners

For self employed people and business owners, all banks are now requiring increased information including quarterly BAS statements to confirm revenue and supporting bank statements must not be any older than 14 days when the loan is being approved.  Valuations are also being reviewed depending on how current they are.  The industries receiving the most scrutiny at the moment are travel, tourism, hospitality and retail and any businesses connected to these industries.

Commercial Lenders

Banks are becoming increasingly nervous when it comes to commercial lending and are using this period as an opportunity to increase rates.  Customers are being asked to supply an increased level of supporting documentation which must be up to date and commercial property valuations have decreased in the last four weeks. We expect that commercial property values will be under pressure in the coming months.

Investment Lenders

Investment loans are harder to secure in the current environment as banks are looking to reduce their exposure to this market which means the availability of credit has decreased.    For investment loan applications, rental income may be discounted and some banks have already reduced customers ability to draw equity out.  Banks are also applying more stringent lending crieria which will reduce many borrowers' lending capacity.  However on the upside, as we always say, "change creates opportunity”.  If you’re able to draw equity from your current portolio, you may be able to position yourself to take advantage of the reduced property market conditions in the months ahead.

Where to from here?

Our advice would be to review your lending as soon as possible.  Firstly it will give you a degree of confidence and comfort in the uncertain months ahead especially if you’re unsure about whether you’ll be able to remain employed and so to some degree it may help protect you if economic conditions worsen.  However if your employment is uncertain, please proceed with caution.

How can a mortgage broker help?

Many of us have been devoting more of our time to developing new working from home arrangements and home schooling, which leaves little time for anything else.  If you’ve ever considered using a mortgage broker, now’s the time.  We’re more up to date on the current lending market, we know where you'll find the most competitive rates (and we’ll negotiate on your behalf) and get the process started quickly.  Timing is critical at the moment, so the sooner you can start the review process, the better.

SHOULD YOU LOCK IN A FIXED RATE LOAN?

We’ve been saying for a long time (and now the RBA is finally agreeing with us), it doesn’t look like interest rates will be increasing any time soon.

So now we move into a new phase, where the banks are pre-emptively offering really low fixed rate products (around 3.65 to 3.99% depending on the loan term) which appears to be a good deaL… but are they really?

What happens when you come off the fixed loan period?

Low fixed rates are, generally speaking, an incentive to get customers to switch banks or loan products which at face value is fine however many people forget to consider a critical metric – the comparison rate. This is the average real rate that you’ll be paying after you come off the fixed rate (including fees), honeymoon period, etc, which is normally much higher than what you should be paying on a well discounted variable rate.

As former bank execs we know what you may not - which is that one of the banks most profitable 'products' is fixed rates whilst an added benefit is that it creates a sales opportunity to gain market share and lock customers down rendering them (largely) unable to switch banks.  The bank sales pitch for low rate fixed typically focus on helping customers / families to budget, keep costs down, and control their costs in an every changing world, etc.

The downside to locking in a fixed rate loan

If you lock in a fixed rate you’re generally paying a premium to do so; signing up for a loan with a higher comparison rate. The comparison rate which is the rate you pay after the fixed interest period, is far less competitive than it should be.  If you want to break your loan early (for any reason), then most banks charge a break fee that can be in the thousands of dollars and is very difficult to calculate. Whereas if you leave your loan on variable rates, this allows you to keep your options open and be in a position where you can seek the most competitive rates, anytime you like.

Whether fixed or variable rates are right for you depends on your life circumstances and financial situation.  If you’d like all of the options explained to you from someone who is impartial to a bank, contact us on
1300 76 40 30.

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