Strange days indeed…yes, they are most peculiar, with the only real certainty in life, aside from death and taxes obviously, being constant change. This is particularly true for the world of high finance…our banking sector.
Last week, Trilogy Funding’s award winning broker Deanna Ezzy posted an article to Facebook with the comment, “For all my investor friends and clients…Interest Only loans may soon be a thing of the past…best to start working out repayments/cost to hold etc, based on P&I repayments just in case.”
Now, when a broker who spends the majority of her downtime researching loan structures and financing principles makes such a recommendation, it’s worth heeding her advice.
So we wanted to delve a little deeper into the mind of said broker, imparting De’s valuable knowledge of all things housing credit to give you a little more clarity, amidst the current chaotic clamour of media click bait around our banks.
So De, what’s been happening in the world of banking?
“I was talking to a BDM (Business Development Manager) yesterday who actually predicted all of this was going to happen about 18 months ago,” says De.
“He told me the regulators have swooped on all the majors, and Macquarie Bank, recommending that they drop the LVR on Interest Only loans to 70%. That hasn’t been rolled out yet. But I’d be surprised if it doesn’t happen.”
While the banks will likely keep IO loans around in favour of scrapping them entirely, as happened a few years back now with no doc loans, De says you’d need to be in a super strong position, with a 60 to 70% LVR, to be approved for one.
She adds that serviceability buffers on lenders’ home loan calculators will also be increased if you happen to be applying for an IO loan.
“I think they’ll only offer it to the rich basically,” says De.
If a bank was to have a meltdown, this is what it would look like. Banks are freaking out right now. De reports that she’s had three declines in the past month! Which is insane, given her track record of maybe two declines in an entire year!
“Another broker told me the same thing. He’s had three declines in the last month. And someone else I was talking to said he had a decline out of the blue last week.
“I managed to get one of those declines overturned. But it’s just the system now.”
In other words, more often than not these days, “Computer says No!”
“You hit submit and ten seconds later you get a decline,” says De. “Pretty sure no one’s even glanced at it.”
With regulators and internal policymakers who are being leaned on themselves (by those higher up the food chain) breathing down their necks, assessors are seemingly scared to approve anything right now, unless they’re 200% sure it would pass regulatory scrutiny.
“It’s bizarre,” observes De. “And timeframes are blowing out with various lenders too, which I think is due to assessors taking their time a lot more than what they used to and picking apart deals to make sure they’re 100% squeaky clean.”
Winter is coming…
If you were hoping for a glass half full breakdown from Deanna, you’d better prepare for the bitter taste of disappointment.
“I don’t see it getting any easier any time soon,” she says.
And it doesn’t help that many of the banks’ own BDMs feel like they’re as much in the dark as the rest of us when it comes to the ever shifting, credit processing goalposts.
As information trickles down to the coalface at an increasingly slow pace from up on high, De says, “It’s making their job really hard. They tell brokers one thing and then a loan gets knocked back, surprising everyone. So it’s also the reputation of the BDM on the line and it’s directly impacting their performance.”
At an internal level, it’s obvious that the banks are really looking for anything they can pick on and scrutinise in loan applications at this point in time.
Loans that Deanna and the team once had approved through exception to policy channels are now being knocked back as well.
“We took one application that was knocked back right up to the head of credit who told me, ‘While we would normally approve these on an exception to policy, we’re not doing exceptions to policy anymore, particularly with investment loans.’”
In other words, if an application doesn’t fit within the policy parameters 100%, it’s no deal.
“There used to be some sort of common sense and wiggle room in the process,” says De. “So if someone was earning a million dollars and the loan amount was below 60% LVR, they’d accept that as a really strong deal. Whereas now if it doesn’t tick one box, they’re rejecting it.”
It’s really a wait and see what happens scenario in the wash up of all this, once we move beyond the current chaotic spin the banking sector seems to be in. And by the time you read this, since I wrote it on the weekend, everything could have shifted once more. It’s that cray-cray right now!
So what would De do?
Take off your rose coloured glasses folks, as Deanna delivers up a harsh dose of reality; “Prepare for the worst, because it’s not going to get any easier.”
For homeowners with a mortgage that’s currently set to interest only payments – because you’d be on Struggle Street with principal and interest repayments – De says, “Really consider your position and the next best move.
“Maybe something happened personally for you and disrupted your income. Your circumstances changed. Whatever it is, if you’re at that point, it might make more sense to cut your losses and sell your home, downsizing into something more affordable until you’re back on your feet.
“Normally we could roll that IO loan over for a few more years, and when your family is functioning at full financial capacity again we could switch it back over to principal and interest and you’d have that bit of flexibility.
“Whereas now, I don’t know if we can switch a loan over to interest only at all. So if you can’t afford it right now, then it could be worth selling the home and downsizing. That’s an extreme thing to suggest, but it’s probably what I would do in that situation, if things were already tight.”
De says she sees this scenario with clients when the wife becomes pregnant and has to stop working, foregoing some or all of her income for a lengthy period of time.
“Maybe they’ve gone overseas, wracked up a bit of credit card debt, and because the wife’s not going to be working, they want to switch their loan over to interest only for a year or two, giving them some breathing room on repayments.
“But I feel like that’s not going to be an option for much longer. Especially on owner-occupier loans, I think interest only will be a thing of the past.”
De says as far as investors go, if you’ve got a few years left on an IO loan, the best option right now is to fix the rate, which is almost 1% higher than the average owner occupier, P & I rate.
“I think you need to fix it in and then seriously consider what’s going to happen in two to three years, if you can’t roll it over to IO again,” says De.
“Can you afford these repayments as P & I? I’d probably be working to a 6.5 per cent principal and interest repayment over a 25 years term. If you cannot afford that in the next two to three years, you need to start figuring out what your options are.”
Possible options, according to De would be:
1. Bank heaps of cash and have a good solid buffer to help ride it out.
2. Get the wheels in motion in your own mind and start to really analyse the possibility that you may need to offload one or two properties at some point.
3. Look at how you can create more cashflow, for instance by putting a granny flat in the backyard of an existing investment, to make yourself more appealing to lenders.
How brokers are adjusting
“We’re focusing a lot more on making sure the application is going to credit score as best we can,” says De. “Because we think they’ve turned up their credit scoring risk parameters.
“So we’re suggesting to clients if they have say $50,000 worth of savings, break it all down across different bank accounts, because that actually helps with your credit score. It’s all those small things, the tiny details, to make sure we can prop the application up as best as possible.
“Even if that means reducing credit card limits, whether they might usually need to or not for serviceability, just to make the application look even better and avoid that credit score decline.”
The take home message really, is now more than ever, it’s wise to have an experienced mortgage broker on side when negotiating with the banks.
“Things are changing every week!” says De. “We have to double check policies and interest rates all the time. If someone walked into a bank and enquired about lodging an application, then proceeded to do so a month later based on what they were told at that time, everything would likely have changed.”
Yes…strange days indeed.