Over the past year, your borrowing capacity has nearly halved, your age has become a hurdle if you are over 45 and your lifestyle may be put under significant stress due to banks avoiding interest-only loans.
The lending world has changed significantly and you may notice it only if you interact with your bank.
Obtaining new bank loans or even retaining your existing ones has been getting progressively more difficult and there’s still more tightening to go.
Lending guidelines are getting more difficult to adhere to in general and people with interest-only loans will be forced from a schedule of lower repayments and onto one of principle and interest; this results in significantly higher monthly repayments and less discretionary spending available to the family.
The tightening bank guidelines are leading to lower LVRs requiring higher deposits for new borrowers, longer times to assess loans and greater scrutiny over spending habits.
If you were in a position to borrow $1 million last year, this would drop to $600kthis year due to the tightening lending parameters of banks. Credit card limits, for example, are now weighed more heavily in determining your borrowing capacity – e.g. if you have $50k credit limit (with $0 owing), you will have $1875 of your income unavailable to repay the proposed or existing loans as it has been allocated to repay potential credit card debt.
When assessing your ability to repay a loan, the banks have increased their loan assessment rates to over 7 per cent interest rates as a buffer rate, even though your actual home loan rate may be half that.
Your monthly expenses will also be analysed to assess your available funds to repay a loan. If you are very frugal, however, your projected expenses may be increased to reflect the banks’ benchmark spending rates; likewise, if you have recently enjoyed splurging, the bank will likely assume this is your standard spending pattern.
Banks are also asking their customers to submit an updated Statement of Position, indicating their income and expenses, which is used to calculate their ability to pay their existing loans as well as any new proposed loans. The issue arises when the bank assesses the clients’ position under the new, more stringent lending guidelines, which may indicate the client cannot afford their existing debt position. Once the bank establishes this, then the question arises as to what action the bank will take knowing that the client cannot afford their existing debt (according to their new servicing calculators).
If you are self-employed, your hurdles may be even greater -- perhaps insurmountable-- if you are looking for cash flow or overdraft facilities, especially in industries earmarked for a significant correction in the near future , like the building industry.
It may be helpful to note that most non-bank lenders do not have the same lending criteria as banks, and that their fees may not always be significantly more expensive. These lenders offer low-documentation loans and assess them according to data more in accord with the actual financial position of the applicant. Also, by using a licensed and qualified brokerage firm, you will have access to these lenders and you will be shown how the proposed solution will meet your stated needs and how it will benefit your situation. Any fees and charges will be disclosed before deciding to proceed with the broker. The driving force for the broker is the benefit to their clients – rather than shareholder’s dividends.
More than 50 per cent of loans are organised by finance brokers which is one of the main reasons banks are making moves to undermine their viability. The removal of brokers from the industry will force clients to always deal directly with banks and erode the viability of non-bank lenders. This is a lose-lose scenario for borrowers, brokers and non-bank lenders.
Master Builders Financial Services (Chocolate Money) offers you the services of fully qualified and experienced finance brokers, working independent of banks and lenders. Contact us on 1300 137 539 to see how we can help you.
Chocolate Money t/a Master Builders Financial Services
Australian Credit License – 387277
Please Note: The information in this article is not to be considered specific advice as it is general in nature. Your situation has not been taken in consideration.