We all know that divorce figures can often look a little frightening to those who are planning to get married. We give an unquestionable ‘yes’ at the alter that can easily turn into a ‘no’ down the track – perhaps when the rose-coloured glasses come off and all those imperfections are revealed.
Long term banking relationships don’t mean what they used to.
Unfortunately, Australian borrowers are also finding this applies when working with their personal banking lenders. Due to new regulatory actions throwing a bucket of cold water over financial relationships once entered in passion, borrowers are now under much more scrutiny before lenders settle down and agree to tie the knot.
Whether they have been a loyal bank customer for some time, or explored their finance options with pre-approval success six months ago, it seems market conditions this Spring can turn optimism into rejection. And that – as all jilted spouses or lovers know – only ends in tears.
In the past, borrowers who applied for credit with their existing lender could rest assured that their finance would likely be approved without question. With all that payment history and loyalty there was rarely a problem in stretching the friendship.
Lending tightening.
Right now, in late-2018, this is no longer true. Since 2014, banking and financial institutions in Australia have been encouraged to be much stricter guardians of credit chastity, through a range of measures such as a 10% annual speed limit on investment credit growth, tightened serviceability requirements and metrics, less lending within the interest-only and higher LVR lending segments, and an overall reduced appetite for risk.
The result? The rules of the finance game are changing.
Circumstantial evidence is suggesting that banks are currently knocking back existing client applications in droves. Likewise, any client that looked at their maximum borrowing limit six months ago may need to readjust their potential expectations heading towards the end of of the year, as the new figure may likely be lower.
New divided loyalties.
Banks are not overly interested in the fact that a borrower has dutifully slaved away for 10 years to pay their mortgage on time. Nor are they focused on customer loyalty, even if a close relationship has been developed over many years with a banking institution in good faith.
The conclusions that banks are coming to today, are focused solely on your loan serviceability and their lending policy. If the client doesn’t fit that policy, their finance application won’t be approved. Simple.
In practice, this means living expenses are now being put under a microscope. Yes, you may be asked for twelve entire months work of bank statements and six month’s worth of credit card or personal loan statements. The bank will then be ticking these off line-by-line.
Is a client not declaring some of their actual expenses? Are living expenses high enough to raise questions? This may be enough to confirm they are not even a good fit for their own lender.
What can you do?
Regulatory action in Australia has seen investor housing commitments come off 27.5% since their peak in April 2015, and owner-occupied refinancer commitments come down 13.1% according to the Australian Bureau of Statistics data. Simiarly, house prices have been falling, with major capital cities hit the hardest. Sydney prices are down 5.4% from their peak, while Melbourne is down 3%.
As the year goes on, this downward spiral is set to continue. Many economists are forecasting even further falls, and it is clear the strict approach from lenders will continue into the unforeseen future.
The best way for borrowers both new and old, to remain in this lending game is to keep a close eye on the rules. First of all, borrowers should ensure they keep up to date with fixed and variable rate offers. Often you will find that fixed rates are coming in lower than the variable rate in Australia. In July, RateCity said the average three-year fixed rate was 4.12%, while the average variable rate was 4.28%.
Be realistic about how banks are likely to view things such as your current lifestyle and spending habits. When they look at your bank statements, what are they likely to see you are spending on? Ensuring you have cleaned up your budgeting, have removed any bad financial habits, and are presenting as financially fit over an extended six-month period, you will make accessing the credit you are applying for much more likely.
Thank you to our partner Zippy Finance for their content contribution.
