Borrowing money for a home purchase or refinancing your current home loan has never been tougher than it currently is. The main reasons for this have been well documented but I thought I would give you my short take on why the market remains difficult.
Banks sensitise all the loans they look at with a serviceability rate. Although rates have been in the 3-4% range for much of the last 5 years, banks have a fiduciary duty to make sure you can afford your loan under stricter metrics and thus they assess you on a higher serviceability rate than is currently in the market. Up to 24 months ago this rate ranged from 6.25% to 6.75%, however with recent changes the banks have increased this to a minimum of 7.25% to 8.00% in some circumstances. It is not hard to see why borrowing capacities for nearly every borrower in Australia have dropped over the last 2 years. Imagine trying to afford a $500,000 loan at 6.75% and then getting told you needed to show how you could afford it at 8.00%, most could not justify their ability to make repayments at the new rates and thus they have to lower the amount they can borrow to meet these new serviceability rates.
In any loan application, every borrower is asked to state their living expenses on a monthly basis. These costs include items such as groceries, health, transport, insurance etc. If the banks looked at your living expenses and considered them to be unrealistic they would often default to a benchmark called the HEM index to understand what your actual minimum living expenses would be for your living situation. This was always an imperfect tool and banks have now started to review borrower transaction accounts in detail to understand their exact living expenses. This has seen borrowers allocated a higher set of living expenses when statements have been reviewed and thus these additional costs have lowered borrowing capacities.
Having an interest only loan was all the rage when it came to investing in property over the last 5-10 years and banks played their part in making these loans extremely popular. As an example, let’s say 5 years ago you took out a 30 year investment loan with a 5 year interest only period. The bank would check to see if you could afford the loan over the 30 year period and this all appeared quite normal even for the fact that once you rolled off your 5 year interest only loan, you actually only had 25 years to pay off your home, not 30. Fast forward to the last 1-2 years and banks have now adjusted their calculations to completely disregard interest only loans from a repayment perspective. All loans are now judged on a principal and interest basis and are done net of any interest only period. Thus if you now take out a 5 year interest only loan on a 30 year mortgage, you have to show the bank how you can repay the loan over 25 years vs the historic 30 year term.
Banks increasing serviceability rates from 6.75% to 8.00%, living expenses being scrutinised with a fine tooth comb and long terms being assessed net of interest only period have all added to why the current lending market is the toughest it has been in recent history. Now more than ever you need the assistance of an experienced debt adviser to navigate an extremely tricky market and Hargate Advisory’s lending division continues to assist all of our clients to find a solution no matter what the scenario.