Lending conditions in a state of flux

Delays in the lending approval process have become yet another hurdle to overcome for borrowers, on top of tightened lending standards.

A recent analysis of 30,000 mortgages reported in the Australian Financial Review showed that approval times for investors have doubled, and are up by 50 per cent for owner-occupiers.*

Lenders still appear nervous following criticism of banks’ conduct during the Royal Commission. They also have ongoing concerns over borrowers’ capacity to pay, given household debt is at record highs and mortgage arrears are beginning to rise. It is largely these issues that have led banks to uphold a stringent interpretation of APRA’s responsible lending requirements, which includes much more involved – and lengthy – investigations into borrower expenditure and debt.

The result has been a general slowdown of the lending market as banks need more staff and resources to assess each submission and get it through to settlement. Unfortunately, this increases the cost of writing loans too. While customers are yet to see fallout from the increased cost of loan assessments, it certainly poses that risk.

However, the Australian Prudential Regulation Authority (APRA)’s current proposal to remove their 7 per cent mortgage serviceability obligation could assist borrowers in the tightened environment. Initiated in 2014 to ensure borrowers would still be able to make loan repayments if interest rates increased, APRA says the 7 per cent floor is no longer warranted given rates have since dropped by a full percentage point. If the changes eventuate, borrowers could be looking at an increase in their borrowing capacity, assuming their lender changes their serviceability buffer in line with APRA.^

Regardless, data shows that banks are indeed being more cautious. Before the Royal Commission, around 40 per cent of loan applications were held up by “MIR” or More Information Required. In the first quarter of 2019, this figure jumped to 67 per cent. Lenders are even requesting MIR on items outside the standard policy, and this trend is also increasing. The percentage of MIR loans that attracted non-policy questions rose from 30 per cent in March to 47 per cent in April this year.*

Lender changes to policy have certainly lowered the borrowing capacity of many, and more borrowers have simply been unable to get a loan at all. It is estimated that around 22 per cent of loan applications that were settled prior to the Royal Commission would no longer meet serviceability requirements.*

Hopefully, lenders will agree with APRA’s proposal, as times have certainly been tough for borrowers. With interest rates very likely on the chopping board too, and Labor’s property tax changes no longer threatening to put downward pressure on the property market, we might start to see a more positive lending environment in the near future.

The Coalition’s First Home Loan Deposit Scheme, giving first home buyers access to a home loan with just 5 percent deposit, should also alleviate some of the pain experienced by this borrower segment.~

There isn’t much borrowers can do about the changing state of lending standards, except to know that Mortgage Choice brokers are keeping right on top of the latest policy changes and trends. Our existing relationships with each of our lenders mean we know how they differ in their assessment of various borrower circumstances, expenditure levels and debts, and how they will calculate borrowing capacity.

As the plot thickens on the lending environment, using a Mortgage Choice brokers makes more sense than ever before.

SOURCES: *www.afr.com/business/banking-and-finance/home-loans-delayed-denied-and-dearer-post-hayne-20190422-p51g5h
^https://www.afr.com/real-estate/residential/apra-game-changer-to-boost-prices-20190521-p51pih
~https://www.afr.com/news/politics/national/coalition-pledges-500m-for-first-home-buyer-deposits-20190512-p51mi6

DISCLAIMER: The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, Mortgage Choice recommends that you consider whether it is appropriate for your circumstances. Mortgage Choice recommends that you seek independent legal, financial, and taxation advice before acting on any information in this article.