Looking To apply for Home Loan in 2018: Need to Know
Bishwas Bhattarai, Senior Lending Manager
M. Comm. (Banking & Finance) UNSW, Dip. Fin. Plan.
13 October 2017
Marco Prudential measure is likely to kick in, as regulators are in force to slow the lending growth amid the concern of property ‘bubble” to burst.
As a borrower, looking to borrow funds (loan) to buy property from Australian lender these are the things that are likely to change in near future.
Australian property market has outperformed most of the international market around the world. Especially, Sydney siders and Melbournians have been very fortunate and wealthier since 2012. As recent figures shows since 2009 Sydney prices has risen 99.4% and Melbourne 85% respectively. The rise in the last 3 years accounts for almost 50% growth leading to believe some economist market is unsustainable.
However, Sydney and Melbourne markets still are showing signs of strength, and demand. Most argue, this has been because of cheaper and easy access to the fund. ASIC and APRA is determined to contain this, with the fear of “property bubble” to burst which could spill in whole economy. It is estimated total Australian property value as of June 2017 is $6.7 trillion according to Australian Bureau of Statistics.
As a borrower, looking to borrow funds (loan) to buy property from Australian lender these are the things that are likely to change in near future. And, these could define whether you could borrow or not? Marco Prudential measure is likely to kick in, as regulators are in force to slow the lending growth amid the concern of property ‘bubble” to burst.
This is a word we are likely to hear a lot more and probably louder. With record high debt as a result of higher property prices lender are under constant notion to ensure due diligence is adhered prior to lending any funds. For example the need to go extra mile to know the customer and assess the contract (loan) given to customer is not unsuitable (meets the need). Documentation in relation to this and criteria used in likely to be closely watched. As due to responsible lending the scrutiny of transaction account to ensure the salary credit, undisclosed debts, and expenses are likely to happen more. Lender will be continuously forced to ask and answer “Why should the loan be provided to a borrower?”
Currently, Household Expenditure Method (HEM) as used by Australian Bureau of Statistics is the method used by most lenders in assessing borrower’s expenses. It is under scrutiny due to its conservative and one size fits all approach. Currently, depending upon the post code and income level those HEM expenses do fluctuate.
Within near future, it is expected this will be based real time on real data. Depending, upon last 3-6 months banks statements the living expenses will be averaged and used. As is believed, the actual expenses for borrowers who are likely to purchase the property in major capital cities are likely be much higher than HEM currently used.
As under ASIC guideline, this information will be mandatory be compiled by the financial institution where one holds the transaction account. And, will also be made mandatory to pass this to the lender who is assessing your loan suitability. By the end of March 2018, it is likely to be live and fully functional plus portable. And will be made mandatory, when one will apply the loan.
Expenses like childcare, car maintenance, holidays, electronic buys plus more are likely to be accountable currently those are missed of HEM.
We have seen all Big 4 now have some restriction on one form or other in relation to the postcode and security. Fears of apartment oversupply in most Capital cities now is very likely, this is going to get worse. As due to over exposure lots of major lender will be restricting particular security or post code forcing most to use 2nd tier lender or other lender with high cost of borrowing.
Income and policy
As evident in recent times, most of the lender have adhered strict lending condition as opposed to few years back. For example, lenders were more than happy to used 100% income for overtime and allowances few years and now handful of 2nd tier lenders do. Same with introduction of aged policy, the Low documents loans have seen a lot of policy changes.
Income from second, and third job. High reliant from Rental Income, Bonus income are likely to be under the spotlight.
As per Australian Prudential and Regulatory Authority’s (APRA) crackdown investor and Interest only loans are likely be much tougher. APRA believe this is the big segment responsible for surging property prices especially in Sydney and Melbourne while, making unaffordable for first home buyers.
The credit scoring model is likely be shaped as major deciding factors. It is inevitable by 2018, your credit file is going to be open book. Every debts, the repayment habit will be able to assess by any lender obtained from Credit reporting agency. Most lenders are already using credit scoring model now for the last few years and is likely this is going to be more robust. Your credit score will not only defy if one is loan worthy or not but even the rate of discount the lenders will offer for your business.
It is under belief currently biggest fraud is from undisclosed liability. Where, borrower would simply do not disclose their liability with another lender with a hope it will get unnoticed with fear of not meeting the serviceability (affordability) stress test prior to approval of mortgage.
The income tax, and other government services like Medicare will work closely to ensure that creditworthiness of the applicant. It is no-surprise Australian Tax office has been working hard to reduce the black (cash) money. As with the advancement of digital innovation and payment system this is going to take center stage. The needs for Tax return alongside Notice of Assessment are going to be common rather than just relying on pay slips.
It may have been the exaggerated by UBS, when it handed it’s survey report last month claiming almost 65% of the mortgage application are fraud. But, there is no doubt in currently climate the mortgage fraud has been in rise in few years.
And this report, has not helped at all. Currently, ASIC is in deep water and been very active since the last 3 months enforcing major bank and aggregators to implement numerous fraud prevention and identifying tools. Fraud on the mortgage application could be easy as just inflating the assets price to submitting the fraudulent income documents. Be warned and this space is going to be watched.
Sydney, resident have been fortunate for the last few years. The benefit of rising property price have made everyone wealthier. Due to the rise in the wealth quality of life have improved whether to buy a new family car or to improve lifestyle. Especially, for those who have purchased “off the plan” has been more fortunate able to obtain credit and even to own the second property without any extra cash injection.
It is expected, now the Sydney property market may not be able to replicate the same growth and may even will go backwards in next few years. This could mean for those who bought “off the plan” may require more cash injection, and for those who have purchased existing property may not be able to access equity where it may be to buy family car or home improvement on cheaper rate.
As with everything, finance industry is evolving system plus process are getting automated. In the past, this things would been hard to contain and identify.
If you are likely, to obtain the loan or credit in 2018, you need to keep an close eye, with changing financial market obtain professional help where needed. Buying, the property is probably the biggest purchase of your life, so ensure you tick all the boxes before committing.
*The purpose of the post is only General Advise and not to provide any type of financial advice and is not prepared in respect to your personal circumstances, objectives and needs. Before considering any investment decision, you should consider your personal objectives, circumstances and needs. And legal and financial advice may be required prior to acting in any decision.