24 Aug How to navigate today’s complex lending landscape
The lending landscape is changing rapidly.
In fact, it’s the most complex that I’ve seen in my many decades in the sector.
Banks seem to be shifting the goalposts constantly, which can mean increased rates for certain types of new and existing borrowers as well as lowering loan-to-value ratios (LVR) for new loan applications for both interest only lending and new investment lending.
There are some lenders who have now reduced their LVR’s for any new interest-only lending to 70%.
But that’s not as bad as another lender who is asking for a 50% LVR for any new interest-only loan applications.
Now that’s effectively saying that it is closed for business for interest-only lending, but it’s just using the ridiculous LVR as a way of saying the same thing more diplomatically. These are the levers that lenders pull when they are in default of the regulators’ wishes, they just effectively close the doors to those applications.
There is also now a very pronounced differentiation between interest only lending and the regulators wish to balance this with more principal & interest borrowings. The key is the rates that are being applied and varying between 0.45% and 0.75% for the same loan but with the different repayment style.
A complex landscape
The complexity of the lending landscape means mortgage broking professionals need to be across rapidly changing policies.
I really don’t know how consumers could possibly navigate their way through the current lending marketplace.
There are interest rate differentials between home and investment loans, between principal interest and interest-only, and between under and over 80/20 LVRs. It’s almost enough to make your head spin!
On top of that, you have got all of the policies that you have to navigate your way through to try to work out what is the best outcome for borrowers.
It’s driving us crazy and we do this every day!
We’ve got spreadsheets all over our walls, trying to keep it up with it all.
But we’re busier than ever because people are looking for advice and help because it’s so complex out there.
A moving market
The changing lending goal-posts is happening amidst a moving market and an interesting economy.
We’ve got a growing population, an economy spluttering along, a housing market in two cities that’s been booming, investors making up more than 50 per cent of all properties purchased in Sydney, people acting purely because of Fear of Missing Out (FOMO) and just buying whatever, as well as the amount of new property coming to the market generally.
What does it all mean?
Well, that is the $64 million dollar question, isn’t it?
It means that it’s a market of many moving parts that each can have an impact.
What I do know is that there are some people in Docklands and South Bank in Melbourne that bought new units 10 or 15 years ago, which have still not increased in value.
So if we think about all the new units being built in some capital city areas, then there may be some valid reasons for some of the lending concerns.
But I believe that the APRA restrictions have gone too far too quickly. It is hurting some people and others are losing money because of the changing market such as these expats who bought a property 2 years ago and now are having trouble completing their purchase.
In years gone by, the blunt tool that was used was interest rates, which were levered up or levered down depending on the state of the economy and inflation figures.
Now they just have more tools in their shed – but they’re still blunt.
Economic data is starting to show reducing numbers of investors, which is what APRA wanted.
What they may be unprepared for is the impact of their retreat, given the property market was one of the only parts of the economy doing well.
I guess we’ll just have to wait and see what happens – while continuing to professionally navigate a lending landscape that is starting to look a little like spaghetti.
Here are my top tips to assist you in this complex environment:
- Seek professional advice – you want people on your team that are specialists in these areas
- Consider your living expenses and ensure you can justify them
- Principal & interest loans are not the enemy. You just need to consider all your options and cash flow requirements.
- Interest only loans aren’t that bad! Similar to above, along as you have a plan and can manage the repayments “as if” you were paying all your loans paying principal & interest then you’ll be fine.
- Put the additional funds away in an offset account to build your buffers
- Buying the right properties is paramount
- Buying time is much more important – make sure you have sufficient financial buffers in place to allow you through the property cycle(s)
- Sometimes saying “no” is the right thing. The restrictions are being enforced for a reason – everyone needs to consider their personal circumstances and plans.
- Get your properties regularly re-valued
- Have a plan in place. If you have one, update it often. If you don’t have one – get one!