The last few months have seen lenders change their credit assessment criteria and, in some cases, quite radically.
Why have they done this?
With Australia’s level of householder/personal debt the highest in the world (loans for property, cars and personal goods) it looks like our government is seeking ways to limit these borrowings whilst at the same time maintaining low interest rates that support economic and business growth. Via pressure from the banking regulator, APRA, all banks have been under notice to tighten some of their key credit assessment policies.
With a few exceptions lenders have all moved to new standards if they did not already have these in place. There are variations in the extent to which they have applied these credit changes and so differences between lenders credit criteria still exist. Whilst there are many small changes below are listed some of those most likely to affect your servicing capacity going forward:
- Assessment of existing loans at a buffered rate of 7.25% or higher on principle and interest payments. If you have multiple properties with loans against them this change may radically affect you.
- Winding back of use of negative gearing in servicing calculations at higher LVRs and in totality with some lenders. If you have investment loans this change may radically affect you.
- Specially negotiated discounted rates on higher volume loans have been reduced.
- Credit cards are assessed at 3% per month at limit (generally up from 2% per month). Check your combined limits and reduce them where they are not really needed.
- Non acceptance by most lenders of loans made to hybrid trusts (St George and CBA being exceptions at present).
- Non acceptance of rental incomes from trusts as income available for servicing assessments with most lenders
- Higher living allowance amounts are now being used in bank calculations.
What can you do about this?
- There are always positives – especially improved cash flow in this current low interest rate environment. Loans are costing you less at present to maintain. Seize the opportunity to down your debts.
- Stay flexible and focus on what wealth creation strategies you have in place that can be amended to suit the current situation. Update your finance strategy and plan for best steps moving forward.
- Have a broking strategist assess where you are at right now with your property portfolio and how banks would currently assess your borrowing capacity. Chan & Naylor Finance can help you chart an amended finance strategy that fits in with today’s lending environment. We have tweaked a number of our clients’ wealth creation strategies lately in order to ensure they met tougher bank lending criteria.
- Focus on reduction of credit card limits, small high interest debts and personal loans. Improve your cash flow by eliminating high interest debts.
- Think of it this way – you’re doing it for your country!! Help reduce national debt levels! ;))
- If you have a Property Investor Trust (a hybrid trust) you may already have lenders refusing your trust loan applications. Talk to your Chan & Naylor accountant about possibly amending its structure away from being a hybrid trust.
Finance Strategist & Partner, Chan & Naylor Finance.