Become an expert: Borrowing Power
Are you getting frustrated with trying to get loans to meet the new serviceability requirements? You’re not alone!
Serviceability requirements put in place by APRA are a challenge for lenders, mortgage brokers and customers alike, but they’re absolutely necessary if Australia is to have a stable housing market.
Sydney and Melbourne
Nowhere is this more of a problem than in Sydney and Melbourne. Property prices and borrower’s expectations have far outstripped any growth in wages. So what can you do?
There’s not a lot you can – or should – do to increase what a customer can borrow. Instead you should focus on educating your clients so their expectations are in line with reality.
It’s called a property ladder for a reason: you start on the lowest rung. Our parents didn’t buy their dream home right away, so we may need to help the next generation come to terms with the idea of establishing some longer-term goals!
What about those who just won’t compromise?
For Sydney and Melbourne borrowers who won’t lower their standards, the next best option is for them to buy their ideal home as an investment property. This gives them the option of renting it out until they’re in a stronger financial position and able to handle the repayments themselves without experiencing financial hardship.
Rent-vesting works well with higher income borrowers, or borrowers that have income types that lenders can’t always include in their assessment. However, when rates are low like they are now, you’ll see that negative gearing benefits don’t have as big an effect as they used to, so some borrowers will need to lower their expectations regardless.
Improving borrowing power
If a homebuyer has some small debts, consider consolidating the smallest debt with the highest repayments. (Usually it is a car loan near the end of its term). That will give you the biggest improvement in borrowing power with the smallest outlay of capital.
If a borrower has existing home loans, it pays to understand how these are assessed because each lender takes a different approach. It’s also important to understand what effect interest only payments will have on someone’s borrowing power.
At Home Loan Experts, we sometimes ask a customer to switch to a more suitable repayment type, which can improve their borrowing power and get them a lower rate.
You’ve probably noticed that most lenders no longer rely on just the Household Expenditure Method (HEM) but instead scale this with the borrower’s income.
Someone with an income of $200,000 will be assessed as having higher living expenses than someone with an income of $50,000 – even if their family size is the same.
Some lenders such as CBA have living expenses well hidden in the back end of their calculator, which makes it hard for mortgage brokers to compare lenders.
I’ll be honest with you, I think some of the lender’s calculators go too far with this. In particular, I see a lot of high income, self-employed borrowers who have many expenses subsidised by their business, and rich customers who aren’t materialistic.
In these cases, you may find that comparing different lenders may help you to get a better outcome for your clients.
Whatever their personal situation, you need to have a meaningful discussion about living expenses with your clients. Most banks are auditing the living expenses that brokers put in their submissions and may cut your accreditation if you don’t take it seriously enough!
The least acknowledged expense that can have the biggest impact on someone’s financial position is private school fees. Make sure that your fact find includes education expenses, otherwise you may accidentally get your customer a larger loan than they can afford.
Clients getting creative?
Sometimes you’ll get a customer who wants to buy a house with their friends, or with multiple family members. To them it may seem like a good idea, but is it?
In my experience, these solutions rarely work as intended. Life tends to take different people in different directions and when that happens, there is a risk of one wanting to keep the property and the other wanting to sell it.
The solution? Keep it simple. Tell your customers to borrow less!
About Otto Dargan
Otto is the Managing Director of Home Loan Experts and has been a member of Connective for over 10 years. Home Loan Experts (Australian Credit Licence: 383528) has won Major Brokerage of the Year (Non-Franchise) and Otto has twice been named Australia’s Brightest Broker in The Adviser’s Broker IQ Competition. Home Loan Experts is also a finalist in the 2017 Connective Excellence Awards for Brokerage of the Year >5 Staff.