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No More First Tier Asset Lenders

Ben Pauley explains how lenders have changed lending standards and the impact of these on investment trends.

By: Ben Pauley

1 September 2018

A common misconception with borrowers, brokers and buyers is that the most important thing is how much deposit or equity you have. Whilst important, changes to lending standards have shifted the focus over the past 12 months.

You will have heard rumours around “responsible lending standards” and “the Royal Commission” but what does this mean for your average punter? Put simply, it means lenders are increasingly moving from a focus on “asset” to a focus on “income”.

The Reserve Bank implemented loan-tovalue restrictions (LVR) and “speedbumps” in October 2013 which brought gearing against assets into sharp focus. This meant the public was limited to borrowing at a certain level against investment and owneroccupied property. This focus however was misplaced. The intent was to ensure that those who purchased property had saved appropriately to do so. It ensured that the purchaser had “skin in the game” which is important, however, it is likely a backward way of deflating an asset bubble.

Ensuring borrowers had equity in their properties ensured two main things:

  • In the case where the borrower failed to meet their commitments, the bank was able to take the property to a mortgagee sale with reasonable certainty of recouping their investment.
  • In the case of the property market falling, there is a sufficient “buffer” to ensure the bank’s security position remains sound.
‘[The LVRs] can be likened to jumping in a car worried about the airbags rather than the steering wheel’

It can be likened to jumping in a car worried about the airbags rather than the steering wheel. One will protect you in the case of an accident – the other more likely to prevent the accident altogether.

Fortunately, the Reserve Bank have begun to change intent and responsible lending standards have now placed focus on a client’s ability to service all their commitments. This has seen a shift in people’s borrowing capacity, which is no longer predicated by the value of their property, rather the income they generate.

If you can only service $500,000 then in all likelihood you can only borrow $500,000 even if your property is worth $2,000,000.

Banks now focus on three primary things:

  • Your income and its reliability: If you are a salaried earner, brilliant, if it is commission and/or dividend based then be ready for some serious scaling. Rental income is typically scaled back at 75% now for residential and 85-95% for commercial.
  • Your monthly expenses: Be prepared to complete a statement of position which will require you to declare in full what your monthly expenses are. Be wary of understating these – in Australia there is a push to cross reference these with bank statements. No more hiding behind what you consider reasonable.
  • Interest Rates: Banks are required to sensitise the interest rates used to assess serviceability. They will not assess your debt at the one-year fixed rate of 4.20% but rather a market sensitised rate of 7.80%. (For every $100,000 that is an additional principal and interest cost of $450.00 per month or just under $115.00 per week.

What Does This All Mean For Property Investment?

We are likely to see a return to yield.

We are likely to see more prevalent rental increases in the next six months across the board.

This will be coupled with a continued softening and slowdown of the property market. As investors find it harder to borrow there will be less activity and a focus on consolidation.

It’s not all negative though. This change is likely to present opportunities as some investors will be looking to consolidate their positions and reduce exposures. These may be enforced by the bank as they find top-ups not as easy to come by or interest-only roll-overs being denied. These situations should bring good stock onto the market at more affordable prices.

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