Planning ahead when it comes to debt is vital, particularly in the current market where lending is much tougher post Royal Commission.
Controlling your expenses, managing your cash flow effectively and demonstrating this to potential lenders is crucial to securing a loan.
With the property market continuing to weaken, we’re starting to see opportunities, so make sure you have your finances in order well ahead of lodging a lending application.

Why is this happening?

In terms of the Royal Commission into misconduct in banking and financial services, it highlighted “irresponsible” lending practices which has led to a review of responsible lending standards; with public hearings commencing in November 2018.

In the meantime, lenders have sensibly tightened lending to minimise recourse on any new loans. This has had the effect of making it harder for borrowers to get approvals.

But all this hasn’t happened overnight. Over the last decade or so, lenders have used benchmarking tools in their credit assessment process to assess loan suitability. These tools suggest what the average household expenses are, not what the specific household spends. These two figures may be vastly different, and the banks have allowed money to flow in the form of loans on this basis. Meaning that people may be overcommitted financially having borrowed more money than they could afford.

Additionally, there has been evidence of people overstating incomes and misstating debts in lending applications. Again, banks haven’t sufficiently verified details supplied on loan applications, and prevalence of interest only loans meant that people borrowed more money than they could comfortably repay, particularly once the interest only period ended. There seemed to be a misconception that the interest only period would roll forward indefinitely!

Having created a situation where money was freely available at a low cost, generated upward momentum on property prices. Whereas now we are seeing a turnaround as many households are facing a credit crunch, and so too are business (with business lending reportedly tightening too). And, property prices are weakening overall nationally. That will flow on to the economy.

 

What might happen from here?

Inevitably, transactions are likely to be harder to execute in a weakening property market. For buyers, getting the go ahead from the bank will rightfully be harder as they are faced with increasing levels of scrutiny. For sellers, this likely means fewer buyers, lower levels of urgency from buyers as the fear of missing out (FOMO) has dissipated, leading to less competition for their property, flowing through to lower price expectations. Make no mistake, transactions will still occur, but generally with greater caution and longer time frames.

Homeowners will be nervously waiting to see how much of the recent property price growth is retained. They’ll be looking at their equity and assessing the impact on their investment plans. Households will be expecting interest rates to stay lower for longer, providing some relief given that wages growth is also weak.

Banks profits will be impacted as they face loan repatriation and increased compliance costs. Flowing on to shareholders and superannuants through reduced dividend payments.

Overall, the data suggests a slowdown, not a collapse of the property market. Remember though, the slowdown is generally across the market nationally, not a specific property in a specific street or area. Not all properties will perform similarly.

 

What strategies can you use to be ready to borrow?

  • Ensure you understand your cash flow thoroughly.
  • Be honest in your application about income, expenses and any other upcoming changes in your circumstances (such as a job change, mat leave, career break, leasing a new car, etc).
  • Have evidence of your income and expenditures, and good payment record.
  • If you’ve got any pain points in your financial history, consider waiting 3-6 months before you apply to a lender to make sure you’ve cleared up the problem.
  • Don’t just trust that because a lender will give you the money you can afford it. Run your own numbers and check against your plan.

Speak to your financial and credit advisers to make sure the gearing strategy is comfortable for you and you know what’s happening in credit markets and how any recent changes may impact you.

 

This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.

 

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