Finance Market Update. 6th July 18
Winter is here. The property market is seasonal and generally market activity during the colder months is slower but compounding this is the beginning of a credit crunch.
The property market has cooled due to a number of factors including slower and less lending. This can be seen in the lower auction clearance rates, pricing down ~5-10%, approvals down and the number of settlements dipping. We are also seeing loan approvals taking longer, the loan amount being lower and consistently lower investor activity. We are not trying to be pessimistic rather realistic. Our view is that this is the new norm for now.
The big banks are under pressure. This is coming from multiple angles but a persistent one we see is there desire to be seen as responsible lenders. The outcome to borrowers in that is longer waiting times to get approvals and having to provide a lot of facts, figures and papers to verify their life.
The longer approval times are fundamentally a compliance issue and from banks dealing with their regulatory obligations, particularly the requirement to investigate the applicants’ expenses. The increased focus of lenders on expenses is partly a response to the Royal Commission, but they are going above and beyond in terms of verification, meaning a lot more upfront work needs to be done by borrowers.
At Skyward Financial we are constantly trying to manage client expectations for turn-around times and prepare borrowers to be ready to get a lot of documents together at the start of the process.
Aspiring borrowers are also facing downward pressure on the amount they can borrow. Banks are gradually reducing the ‘Debt to Income Ratio’ or levels they are willing to lend – which means lower mortgages for borrowers, and therefore lower purchasing power for property.
The amount of investor activity, particularly from foreign buyers, is slowing, and in certain areas, has stopped. A few banks have basically stopped considering foreign buyers altogether, and local mum and dad investors looking for a mortgage, particularly a “interest Only’ loan are finding it tough. We have seen more success at second tier lenders and non-bank lenders for investors.
The Key Takeaways
1. Loan approval times are taking longer
Why? Because banks are taking a much closer look at borrowers’ expenses, even going so far to force borrowers (and brokers) to itemise expenses across 32 or more categories. While this is excessive, with all the bad publicity from the Royal Commission (more on that in this report) they need to be seen to be extra diligent.
We are telling clients to be prepared to answer in-depth spending questions and to obtain several months’ worth of statements and documents ready when applying for a loan.
2. Mortgage amounts are falling
A few years ago, borrowers could borrow 7 to 9 times their annual income (easily) as a mortgage. In the UK the limit is 4.5 times, right now Australia is around 6 or 7 times, and likely to move closer to 5 – this means that people’s borrowing capacity, the ability to buy a bigger house and take on more debt, is significantly lower than it was.
The lower the ability to borrow, the lower they can bid for a property. This directly impacts our Real Estate partners.
3. Investors have been retreating
Not only is it harder for investors to get a mortgage, but the Australian property market is starting to look less attractive, which means lower buyer activity in general. Even mums and dads with equity and appetite to invest are finding getting an investment mortgage more challenging.
We are talking to investors about non-bank lenders in these cases who offer competitive and flexible solutions that help clients grow their portfolio.
Lenders in the News
The Royal Commission has scalped the CEO and Chair-woman of AMP, who have been charging a ‘fee for no service’ which was against the “FOFA” (future of financial advice) regulations. We expect AMP to undergo significant structural changes which could impact borrowers’ experiences. If you have clients with superannuation money or a mortgage at AMP and they want to consider other options, we can help.\
The new Commonwealth Bank CEO Matt Comyn has his work cut out to repair the culture, reputation and share price of the bank. Besides the $700 Million in fines (and counting) they announced that they are ‘demerging’ (I.e. cutting off the parts of the bank that are not ‘core’ or easily managed). Those parts being Aussie Home Loans, Colonial First State (the asset manager and fund manager), Count Financial and Financial Wisdom (financial planning). The newly listed entity (which will comprise those businesses) will be called CFS Group.
Although AMP and CBA are both major players in the mortgage market in Australia, we are seeing a growing shift in borrower sentiment and openness to ‘second tier’ or non-bank lenders and we expect this trend to continue. Fortunately, Skyward Financial works across the board the major banks, non-bank lenders and even specialist lenders.
Refinancing & Tax Debt
We work with many business owners for commercial property finance, cashflow working capital solutions and asset finance, and know that after EOFY there can be tax bills due.
So, this time of year we are seeing a lot of ‘cash out’ loans, which means we refinance a home that has equity so the owner can get access to cash.
For example, a property worth $1.5 million with a current mortgage of $1 million means the owner has $500k equity. If they refinanced and cashed out to an amount of $1.2 million they would still have an 80% LVR and a healthy $200k cash, which they could use to upgrade their property, buy a car or pay the tax man.
This is a popular option because the rate on a mortgage is much lower (less than half) than a personal loan.
For self-employed people, we have specialist options that suit their situation on mortgage refinance and debt consolidation. If you have any clients in a tight space or who could use extra cash, Skyward Financial could help.
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