April 26, 2018 by Dymphna

Investors become collateral damage

How tough is the credit environment right now? This tough:

The Royal Commission is practically unearthing the equivalent of bodies in barrels in the financial sector.

The CEO of AMP is gone, more will probably (and should) follow.

This is all a good thing. It was pretty clear to everyone that the banking sector had become a swamp that needed draining.

Only thing is, property investors are becoming collateral damage in the war on the banks.

Partly this is because their practices have been shown to consistently and probably deliberately out of step with regulations. They needed to pull their heads in.

But there’s a PR opportunity too. When people are accusing you of selling financial advice to dead people like CBA did, why not jack rates a little or tighten standards.

In PR land, sometimes things just can’t get any worse. So that creates an opportunity.

And so what we’re seeing is banks really cranking down on their lending criteria. Like, in a massive way.

This mortgage broker sums in it up in online forum I was part of recently:

As you are probably aware the lending landscape is changing rapidly, what was possible a month ago is now a struggle. One of the biggest issues we are facing right now is a new responsible lending requirement for property investors to fully disclose the ALL COSTS of maintaining their properties. This includes insurance, rates, water/sewerage, body corporate fees, maintenance etc.

These costs are then to be taken into account IN ADDITION to HEM (the minimum living allowance) and all other costs when calculating the borrowing capacity for a client.

In the past lenders have sensitised the rental to 80% to account for these costs however new ASIC guidelines require lender to sensitise rent to 80% to allow for “vacancies only” and require lenders to include all other costs in the calculation.

This additional requirement is going to see about $5000/mth in expenses added to you borrowing capacity which is going to blow your servicing out of the water.

This new requirement is creeping into all major lenders as we speak with the second and third tier lenders to follow shortly after.

I wonder if people get how serious this is.

Effectively, banks are giving themselves a buffer by assuming that your property is vacant 20% of the year. That’s pretty massive.

Then they’re making you account for all your expenses. And this gets added to HEM – the rule of thumb banks use to estimate your living expenses.

What’s worse, HEM itself is under attack. APRA isn’t keen on banks using HEM at all, and wants banks to actually assess people’s actual living expenses.

That may or may not inflate your expenses, but probably does. And it also adds an annoying layer of compliance, and compliance adds cost.

So all that means as well as crunching our borrowing capacity in a major way, we’ve also got to probably pay a higher interest rate as well.

Nothing in this is good.

Personally, I thought the HEM was a good way of estimating serviceability. I mean, right now, my actual expenses include a massive caviar bill. But if things became tight and I was struggling to meet repayments, then I would just stop eating caviar.

Your actual expenses tell you what you are willing to spend now, not what you need to survive.

Anyway, we are thick in the storm right now. The Royal Commission is still going. Some people are saying it could run for another year.

I’m hoping it blows over quickly, and we get more stability and clarity about what the banks are willing to lend.

But its not coming this week.