Why is it still hard to get a home loan when rates are so low?
Interest rates are the lowest in history but I regularly come across people who are still struggling to get a home loan and it’s not because they can’t afford it. How does that make sense?
Well, the reality is that the home loan market today is much tougher than it needs to be and that’s because the big end of town – that is, the Australian Prudential Regulatory Authority or APRA – has been pulling strings in the background for more than 18 months now.
In fact, it’s probably as hard today as it was post-GFC – maybe even during the GFC and back to the recession “we had to have” – for some borrowers to get a property loan approved.
About 18 months ago, the regulators (that’s APRA) got a bit worried about the housing market and the number of investors in particular. So they decided to act and made some new rules that lenders had to follow so we all could avoid a looming “disaster”, that perhaps they could only see coming.
I think the new lending criteria, including much stricter financial models for investors, were a bit over-cooked and even somewhat overly-dramatic.
Some lenders had to make dramatic changes to their lending policies, to the point where AMP closed its (investor lending) doors and a few other lenders basically just stopped altogether. Macquarie, which is probably the biggest investment bank that we know in Australia, had some severe restrictions placed on it regarding its investor loan book.
Since then, the regulators have also been working through and looking at people’s living expenses and trying to get some analytics on the ballooning of interest-only loans, which is a real concern to them.
So, they’ve looked at all of these things, and while rates have been coming down, the regulations and the regulators are making some of the rules as well as the ability to get access to funding stricter and much harder to get.
Let’s be honest that the investor inflows that the banks were receiving two years ago, in the spring of 2014, was at all-time record highs. Today, it has come off those highs but lending is still strong.
The main difference is that good borrowers with good incomes and good deposits are still getting money. Now it’s probably those that were pushing the limits that have come under a bit more scrutiny and are struggling to secure finance.
So the banks, when they suffer lower inflows, they go on a pricing war and that’s making the differentiation even wider where you’ve now got people with ‘threes’ in front of their mortgages. However, they’re being told that they can’t borrow anymore because they can’t “afford it”, even though most investment property with these record low rates are quite easy to hold or afford, but it’s just the servicing that they don’t seem to understand.
Unfortunately, in my opinion, it won’t change anytime soon but there’s a number of things that would-be investors and homeowners can do to improve their attractiveness to lenders who seem to be only looking for the “perfect” borrowers at the moment.
- Firstly, you should do a full review of your finances. In Australia, we’re very complacent when rates are going down, but the best way to find out what you can afford is to do a full review and go to a property-investment savvy mortgage broker to best understand your true position.
- Secondly, don’t take on unnecessary debt. In low interest rate environments, some people tend to get excited about all of this “cheap money” so they rush out and get a car loan or book up their credit cards with extravagant purchases that they really can’t afford. While it might seem that money is cheap, it’s actually more important to keep your personal debt to an absolute minimum.
You should also review your loan structures because sometimes if you have fixed rates it can help you get access to more money. Another thing to consider is whether you’re paying principal and interest or interest-only, which again can help your overall “attractiveness” to lenders at the moment.
You should also take advantage of whatever equity you have to set yourselves up for the future. Even in today’s times, you want to make sure you’ve got good capital growth properties in your portfolio. If you haven’t, well, with low interest rates a rising tide lifts all ships. So, it might be better to quit that under-performing asset and consider getting more blue-chip assets in your portfolio, instead.
With the massive supply of new units about to hit some of our capital cities, I don’t see the lending restrictions changing anytime soon. In fact, the next 12 to 18 months are likely to be very interesting indeed. What borrowers can do, though, is to make sure their finances are in the best shape possible so that lenders don’t pass them over without a second glance.