I've been in the mortgage broking business in Australia for many years and I have to say it’s never been a more confusing time to obtain a mortgage.
In the good old days, before APRA got involved, the mortgage market was largely predictable. Every mortgage provider had similar policies, give or take some niche products that allowed them to have a ‘point of difference’.
By and large, it was reasonably easy to navigate the lending landscape as there was consistency in product offerings. It now seems like those days are gone.
Today, the mortgage market is a mixed bag of completely unpredictable agendas and shifting goalposts. In May and June of this year, for instance, a number of lenders changed their policies both for and against investors:
• Macquarie Bank dropped its investor LVR to 70% for a number of postcodes in Brisbane, Melbourne and Sydney.
• Westpac bumped its investor LVR back up from 80% to 90%.
• Teachers Mutual Bank and UniBank, which operate one loan book under two different brands, put a freeze on any new investment loan business after going well over the watchdog’s 10% annual lending growth limit.
And we can’t forget AMP, which took the unprecedented step of removing itself from the investor marketplace altogether in 2015 in an effort to curb growth in its investment portfolio. It came back to the investment market after achieving its goal and meeting APRA requirements, but then announced it would restrict lending in certain postcodes.
Is this the new normal? This increasingly odd lending environment is distorting the mortgage market, and it’s hard to say when things will return to ‘normal’, if at all.
When APRA announced the 10% growth rule for investment lending, as well as other measures mainly relating to capital adequacy ratios, each bank reacted very differently. I was expecting that everyone would largely go the same way: that they would put in place consistent measures to comply with the new regime. For instance, I expected they would either reduce LVRs for investors, or would not allow negative gearing deductions in servicing calculations, or would use higher assessment rates, or a combination of the above.
While a lot of these measures have been adopted, they haven’t been adopted in a uniform way. Each lender has dealt with the issues in a very different way. It was my view, and the view of many others in the industry, that once the banks and lenders were under the 10% growth mark in their loan books, things would quieten down and return to an orderly fashion.
But I haven’t seen that happening! I’m as surprised as investors are by the fact that banks keep on chopping and changing all the time. It’s becoming particularly diffi cult and confusing because the banks are changing their policies at a rapid rate, and at different times.
With different lenders announcing significant changes every single week, it means keeping on top of who’s doing what is becoming harder and harder.
The reality of the situation is that, one way or the other, borrowers are going to suffer. A couple of months ago, my company arranged a loan for someone at Macquarie Bank because it offered a very competitive variable rate and the client could service the loan well. But no sooner had the loan settled than Macquarie changed its variable rate, so it was nowhere near as competitive as the next bank. We can’t get our clients to refinance every five minutes to a
more suitable product, and this type of unpredictability in the market makes things even more complicated.
The only way for banks to sustain profits is to increase margins on residential lending. This is one reason why I don’t think rates will go much lower than they are now.
There’s nothing to stop the bank you are with from changing its rates or policies tomorrow; banks are changing the rules as they go along and that has a real impact on people who are already in a mortgage.
Incidentally, this has to have an effect on investors buying off-the-plan properties. How can you be confident that you will be able to obtain finance one to two years in the future when the rules keep changing? A case in point is the recent sudden restrictions on lending to foreigners. How many of them will be in trouble when looking for finance now?
Will mortgage rates go any lower?
I thought things would have returned to ‘business as usual’ by now. That hasn’t happened, and I don’t think it will happen. The lending landscape has changed forever and there is a worldwide priority to make sure banks stay strong. What APRA is imposing on the banks has been mooted at an international level, through the Basel Committee, to ensure banks can sustain the next shock, if there is one.
One thing driving the banks for sure is profi t, and providing a strong return to shareholders, so it will be interesting to see if this volatility continues, and how it is going to impact on banks’ profitability. How are they going to sustain growth and profits when they’re impacting on lending, which is their main source of income?
If banks are reducing their reliance on household mortgages, and at the same time business lending is not picking up, the only way to sustain profi ts is to increase margins on residential lending. This is one reason why I don’t think rates will go much lower than they are now. Banks will be keeping at least part of any future rate reductions by the RBA. ANZ has already done that with the last rate cut, and the others will follow with the next one.
If you’re currently navigating the mortgage market, my suggestion to you is to not even consider going it alone. In this environment it makes even more sense than before for borrowers to use a good mortgage broker who can navigate the constantly changing landscape of offerings and provide sound advice about the most suitable products for their circumstances.