The media’s scrutiny of the banking industry’s poor behaviour lately has prompted a knee-jerk response from them to prove they are implementing significant changes to bank lending standards and practices, motivating brokers to acclimate.
UBS Australia says that the royal commission will most likely increase the bank’s due diligence and curb customers’ borrowing latitude. In fact, they have begun a roll out for the process for calculating living expenses for loan applicants. An example of this is Westpac’s increase in the number of living expense categories from 6 to 13 as of April. They also started requesting more detailed banking data from potential borrowers to evaluate their income and expenditures.
Already, brokers are noticing the slowing of loan application response from banks as they perform exponentially detailed evaluations of applicants’ living expenses, documents, and other transactions, ensuring every piece is in place for new as well as existing loans. Australian brokers feel they are going over the top with their scrutiny of loan applications.
According to Smartline’s Sam Ghoreyshi, a recent client with an income of $700,000 per year applied for a mortgage and the bank assessor was insistent upon a $100 deduction that came off her monthly pay as a taxi credit. He said, “This is something that never would have happened in the recent past.” This isn’t the only instance of over-assessing mortgage loans.
Another over-the-top example of assessors making loans more difficult: They wanted one of Mr. Ghoreyshi’s clients who had reimbursed their mother for some groceries she had bought for them to verify this expense. The assigned assessor wanted them to verify whether this expense was an ongoing commitment.
Sam commented, “If you have your heart set on buying a property that you might not be able to afford now, it almost comes back as the broker’s fault, whereas it’s not.”
Brokers like Ghoreyshi who are diligent about keeping their clients updated regarding living expenses are adapting to ensure they can help avoid some of the scrutiny of the assessors for their clients. In other words, brokers are now having to pay close attention to the tiniest of details before they send a loan application up to the assessors.
Property valuations are also on the chopping block, possibly resulting from the royal commission, regarding top-up loans, some new purchases, and those that are coming up short on refinances.
Mr. Ghoreyshi said, “The banks are either mandating a more conservative approach to the valuers, or the valuers are obviously a lot more careful to make sure they’re not overvaluing anything right now.” He says he has seen clients’ property valuations come in short from between $20,000 ad $200,000 of their property’s estimated worth or half the price they paid for it. This has a significant impact on the LVR calculation.
This could result in the bank lending less money or pushing clients into LMI dominion, raising their costs. It has already caused challenges for customers to make their purchases as they don’t have the extra funds to come up with the difference.
While most clients understand how the lending market is changing after their brokers explain what’s happening, they aren’t all understanding with their brokers. It isn’t the broker’s fault. It’s honestly about the calculations that the banks are putting these loan applications through. The positive side of this is that the loans banks do allow will be viable and of higher quality.
It would be a good practice for brokers to reach out to their clients regarding these changes and how it might affect them. Being proactive will help your clients avoid issues with their loans. Ghoreyshi believes that these things happen in cycles and that this industry happens to be in a tightening cycle for now.
First Choice Mortgage Brokers are a Sydney Mortgage Broker operating under the Australian Credit Licence Number: 382370