THREE CHANGES BANKS ARE MAKING THAT WILL IMPACT YOUR LOAN APPLICATION

It has beeHouse4n very much in the news lately that APRA, the banking regulator, is forcing banks to make changes to the way they assess loan applications. These changes will have a big impact on whether or not your loan will be approved by a bank. Amongst the numerous changes there are three which will have the most impact on your loan application. They are:

  1. Living expenses are being assessed much more stringently.

Prior to mid-2015 most lenders used a benchmark system to assess a loan applicants living expenses. This is known as the Henderson Poverty Index (HPI), which provided an average minimum figure for living expenses for families in Australia. Now lenders require brokers to make extensive enquiries regarding the client’s household expenses and spending patterns.

Even though brokers are to make extensive enquiries the banks are still applying pre-determined averages of living expenses when they assess loan applications. So if the brokers’ enquiries reveal that a family of two adults and two children are frugal and only spend $2,000 per month on expenses and the bank average is $2,500 for a family that size then the larger figure will apply and the broker’s figure will be disregarded.

  1. Existing loans are receiving bigger loadings

If an applicant has an existing home loan the banks are adding a loading onto the actual repayments that are made. For example, if you have a $300,000 investment loan at 4.5% interest only your actual monthly payment is $1,125 per month. The bank, in calculating your ability to service another loan, would include that commitment at $1,350 per month. That is a 20% loading being applied. The result is that it is reducing the amount that you can borrow.

This has a major impact on those people who are trying to build their wealth through investing in property. If you are an investor with two or more investment properties then your borrowing capacity will be badly affected by this change. Given that rents are also falling this use of loading makes it very difficult to build a property investment portfolio.

  1. The assessment rate being used is much higher.

This change is the one that causes most pain for consumers. When a loan application is made the banks do not assess the repayments at the current interest rate but at an assessment rate that has been recommended by APRA. At present, most variable interest rates are at around 4.3%. The recommended APRA assessment rate is 7.40%, which is a massive 3 percentage points above the current average home loan interest rate.

The idea behind this assessment rate is to stress test the applicants in case interest rates go up. The problem with this is twofold. Firstly, it penalises home buyers in a market where prices are rising as they cannot borrow as much as they were once able to. Borrowing capacity is impacted by these assessment rates. Secondly, it assumes interest rates are going to go up at some stage in the future by a large amount, which, given how central banks are intent on repressing interest rates worldwide this may not happen for a long time.

These three changes mean that qualifying for a loan at the moment has become a lot more difficult. We are in a paradoxical situation whereby the Reserve Bank is cutting interest rates to stimulate borrowing whereas APRA are forcing the banks to implement policies that will reduce borrowing. Where it will end no one knows.

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