The last year has brought some changes to the home loan landscape. A lot of this has been driven by governments, regulators and banks, with decisions made at boardroom tables.
But these decisions trickle down to customers, and many people have been left scratching their heads about the mortgage market. Is it getting harder to secure a home loan? Are interest rates going up or down? And why do I need so many documents to apply for a loan?
Here, we break down some of the bigger changes happening in the market, and what it means for you.
Interest rates – why are they going in different directions?
Lenders have made rate changes outside of the normal Reserve Bank decisions. And just to make things more confusing, some interest rates have gone up while some have gown down. Why is this?
It’s all about managing risks in the system.
The banking regulator (Australian Prudential Regulation Authority) has the job of making sure that the lending market is sustainable and risks within the market are balanced. That way, if something like another GFC were to come along, the system is better able to withstand the shock.
One thing that concerns APRA is the rate of growth for loans to investors and customers who are paying ‘interest only’ – i.e. a lower level of repayments. The regulator is worried that too many of them could distort the Australian lending market, raising its overall risk profile.
As a result, APRA has told lenders to limit these loans. One way the banks can do this is through pricing. They assume that if interest-only and investor loans are more expensive, fewer people will want them.
At the same time, lenders want to attract more ‘owner occupiers’ and those paying ‘principal and interest’. That’s one reason why some of these rates have gone down.
Are loans becoming harder to secure?
In some cases, it may be more difficult to obtain a home loan in the first instance. One thing that happens in a heated housing market is that people get scared of missing out on a property, and they can embellish – or even lie - on their applications. Or they become overly-optimistic about what they can afford to repay.
In this environment, lenders and brokers are reviewing loan applications with a higher level of scrutiny, to ensure that applicants don’t take on more debt than they can afford. They also need to ensure all documents and information are genuine.
For example, loan applicants need to provide a breakdown of their living expenses, so the lender can be sure they have enough to cover the repayments. Lenders may request bank statements to validate your estimates, rather rely on guesswork.
The level of information requested varies, and depends on factors such as the loan type, amount and loan-to-value ratio. These requirements that can make the process seem more onerous, but it's ultimately to protect you, the customer.
What to do if you’re knocked back
With all the changes outlined above, the concept of who is a ‘prime’ borrower has also changed in recent times. Mainstream lenders and big banks have set the bar higher on who they will lend to.
That doesn’t necessarily mean you will miss out on a loan, but it may affect how much you can borrow, how much it will cost, and who will lend it to you.
While you may not be offered a loan by a mainstream lender or big bank, there are other non-bank lenders, including YBR, who provide solutions.
Read last month’s article for more information on these alternatives, and speak to a YBR adviser if you want to look at all of your lending options.