Finance Market Update - 31 August 18
Who are “Mortgage Prisoners”? Are all of the big banks about to raise rates? Who benefits from loyalty in finance?
In this update we discuss how current borrowers can be trapped in their mortgage, rate rises and customer loyalty.
Before we dive into this update let’s look at a few numbers…
30% - the amount banks are reducing credit to your average borrowers compared to 18 months ago
20% - the ‘LVR’ percentage borrowers need to maintain as equity when refinancing to avoid paying ‘LMI’
1.50 – the current cash rate in Australia for the past two years, the longest period of an unchanged rate ever in Australia
37 – the number of expense categories borrowers might have to fill in when looking to refinance
3 – the number of months of spending and transactions banks use to verify expenses
4,000 – the number of mortgage products and variations of a mortgage that the Productivity Commission found in the Australian market
5 – the number of months Westpac says it takes on average to sell a house
0.14 – basis point increase by Westpac announced 29th August. On a $900k home loan this is a ~$105 per month increase. They cited ‘funding costs’ as the reason and must have determined that the reputational damage from the increase is worth it
What all of these indicators are telling us is that
· All big banks will start lifting rates (as expected)
· These are the real world implications of this ‘Credit Crunch’
· A lot more detail is needed for any borrower looking for finance
· Property prices will likely remain under downward pressure
While we don’t like using this term, it aptly labels a situation in which many homeowners could be in - that they are unable to exit their current mortgage or refinance, either due to their financial situation or the banks lending policy.
How would someone be trapped?
Someone who borrowed at maximum capacity a year and a half ago and tried to go to a bank to get the same amount today, chances are the borrowing limit is around 30% lower – essentially borrowers don’t qualify for the same amount of debt.
This is credit “tightening” in the market, meaning it is less available or accessible. Banks not being as willing to lend as much and having issues such as the Royal Commission to deal with.
It also has to do with ‘living expenses’ and ‘liar loans’ and ‘HEM’. Without going into detail on these, basically they are measures in which banks used or experienced and which gave them unrealistic figures to base their lending on and then they lent more than they would lend now.
This is why expenses are now under so much scrutiny by banks, they need to do more than they have been.
It is now common place for banks to verify at least 3 months’ worth of bank statements to confirm the expenses the borrower declares are correct, and they need them categorised in certain cases by over 30 types.
This is adding delays to approval times and stress to borrowers, and if the transactions don’t match the declaration, the application could be declined.
For a recent data example of options reducing, Digital Finance Analytics, a leader in mortgage market data, estimated a massive 40% of refinance applications are being declined. That is up from approx ~5% 12-18 months ago.
Skyward Financial helps clients in any situation refinance and discover options. If you or someone you know feels trapped in their current loan we offer a free finance consultation.
Are there options outside of banks?
We have discussed “second tier lenders” in a previous update but want to highlight them again as viable options for those borrowers who are declined by a major bank.
A “second tier lender” is not inferior and generally applies to all lenders besides the Big 4. They include regional banks, non-bank lenders and specialist lenders.
As more stressed out borrowers are rejected from refinance, experience rate increases and have ‘Interest Only’ periods expiry these kinds of lenders become more attractive.
Often specialist lenders will be a viable option for borrowers that cannot get funding from major banks or even regional banks, but they do come at a cost with higher rates, so it is important for borrowers to work with a broker like Skyward Financial to get a clear picture of their options.
As at time of writing, Westpac is the first of the Big 4 banks to raise rates since the Royal Commission started.
It is likely that in the coming weeks or months the other big banks will follow, all citing “funding costs” which we have discussed in a previous market update on 20th July. Essentially when they cite funding costs they are saying they need to defend their profit margins.
It is not uncommon for banks to “re-price” (aka rate hike) their rates out of cycle with the RBA monetary policy rate movements, so given the big banks have a combined market share of ~70% the vast majority of borrowers could soon face rate increases.
Property prices will likely experience further downward pressure if borrowers experience rate increases they can’t afford, can’t refinance and are forced to sell.
Customer loyalty pays the banks, not borrowers
In the recent report from the Productivity Commission they highlight that banks ‘penalise’ loyalty from customers.
What they are saying here, is that the banks offer low rates to get new borrowers in the door, but for existing borrowers they just keep providing the same service, the same rate.
Even the Governor of the RBA Phil Lowe said in a recent address at the annual Anika Foundation lunch in Sydney to “go ask your bank manager for a lower rate”.
This might work and is probably worth a shot, but the more strategic way to seek a better deal is to use a broker that can understand your situation, knows products that are suitable from many lenders in the marketplace and help to structure the loan and get approval, especially in this current environment where banks are declining so many loans and asking many more questions.
If two prominent government figures are highlighting the deficiency in the current mortgage market and highlighting that effectively many borrowers are probably not on the best deal possible, it makes sense to seek out advice and understand what options are available.
If you have had a mortgage for over two years, even in a tough market it pays to seek out options, or at least get a clearer picture of what your options are.
Skyward Financial offers free financial consultations for new clients looking to get a clearer view of their options.