Several downturns recorded this year were associated with tighter lending criteria. These include the decline in new-home approvals, new-home sales, and property prices, among others.
Your Investment Property recently chatted with Philippe Brach, founder and CEO of Multifocus Properties & Finance, about the tighter lending environment.
“Yes, it certainly is more difficult to borrow now,” he said.
According to Brach, the tightening of lending began over two years ago when APRA introduced “speed bumps” to slow down investor lending. This resulted in increased interest rates, which slowed the number of investors’ applications. In addition, the banks were forced to improve their service.
“I modelled the borrowing capacity for some of our existing investor clients, comparing their position three years ago and using the same numbers today in current lender servicing calculators. The result was that serviceability was reduced by between 30% to 50% compared to three years ago,” he said.
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industries called out the financial industry for its lax practices, such as failure to thoroughly check living expenses. This move was also one of the reasons why it became harder for borrowers to get a loan. Lenders now require borrowers to list every single expense, discretionary or not.
“I find it silly to include restaurant bills, hobbies, holidays, etc., when borrowers can reduce these when they feel some financial pinch,” Brach said. “Most people will spend more on discretionary items in line with their increase in income, so the net result is lower borrowing capacity for everyone. Considering that loan default rates in Australia are amongst the lowest of all OECD countries, it seems that the tightening is somewhat overdone.”
Brach said that banks have become so paranoid about committing mistakes that they have become almost paralysed into inaction.
“Loan applications take weeks longer than before to get processed, assessors keep coming back with more questions every time you answer previous ones, and frankly a lot of them are pedantic and unnecessary. It is almost like they are looking at reasons for not giving you a loan,” he said.
Brach said that in order to get financing in the current environment, investors need to strongly control their expenses, and overall, spend less to improve their borrowing capacity.
“It is a silly situation: if you want a loan, you may need to go on a serious diet and be miserable by cutting down on entertainment, recreation and restaurants! The good news is that once you have your loan approved, you can go on a binge again!” he said.
Is there such a thing as “right timing” in getting financing? Brach said that the right time to get a loan was three years ago. However, since it is not possible to go back in time, now is the best time since there may be more tightening when the RC releases their report in February 2019.
“I think that this current lending environment will last for some time. Investors just need to navigate the situation. If a borrower is tight on servicing today, then he or she has to make lifestyle choices to improve servicing,” he said.
Moving forward, there will likely be a softening of these criteria, but Brach said that they will never get back to the old benchmark tables of the past. The softening will come at some point since banks need to up their volumes to maintain profits and market share.