I would like to bring you attention to 3 changes that are in progress or have recently happened with lenders in the Australian market. These have to do with elements highlighted in the Royal Commision.
1) Almost all lenders are now running a micro profit and loss on you to determine your actual living expenses. While some lenders are will look at discretionary vs non discretionary spending others don’t. So if you spent more than you normally would over festive period (vs later in the year). The bank may use the total expenditure as your living expense. I had a very concerning conversation with a credit assessor about this last week. Her belief was that Christmas happens every year and people will spend every year so Christmas expenses are a hard living cost. My belief is that the majority of people (if not all) understand that if you can’t afford to spend extra money then you will do what you can to get by. But if you do have the extra cash you can splurge a little. So, I asked if she had ever received a pay rise and she said yes. So then I asked if she saved every extra cent of the payrise? or did she reward herself a little, knowing that if she needed to she could reduce her living costs back to the previous amounts. She went silent as the the trap closed in on her. Obviously I set her up and she couldn’t answer (recorded phone calls after all). As a general rule people that as people earn more they spend more, but that’s not to say they can’t go back. The 2 scenarios are the same as we all have costs to live and then we have extra costs- little luxuries perhaps I will call them. Eating out a bit more often, a little holiday as a reward, a nice bottle of wine, extra presents for the kids…. All of these things you know you don’t need, but you do as life is for living and enjoying. I have a saying that I can show anyone how to pay off their mortgage fast. But it involves no social life and eating like a uni study in the second week of their fortnightly Austudy payment (I lived this so I know its not great). Rice , noodles and pasta are economical after all, but not always a taste sensation.
So what does this mean? it means you might need to be on your best behavior for 3 months before applying for a loan. To show what you are capable of living on as opposed to how you are living now. My belief is we can work out our hard costs pretty easily and the rest are the little luxuries. I think that if you the client, sign a document with 2 columns saying these are you existing expenses and these are your living expenses you cant do with out then the banks should use these figures. Why wont the Lenders do this?? because it is easier to take the worst case approach and it has less compliance risk. Because the Royal Commission highlighted that some lenders were just using a default living expense. Which wasn’t inherently wrong, but they got complaints that loans were not affordable for the client. I believe the borrower needs to take some responsibility for this as well as the lender. As clients should also do their own calculations to know what they can or can not afford. So because of this you may need to live a more austere life to prove to the lenders you can before you get you next loan. This is a evidence based system.
2) Credit cards are now being assessed differently from 2018 and will reduce your borrowing capacity more severely than they have in the past. Previously 3% of the limit was the figure used to determine the monthly expense. Now it is treated like a 3 year principal and interest loan which is a much bigger number. So please don’t accept credit card limit increases unless you actually need it. As it may be the difference between getting a home loan with a lender or not.
3) Some lenders for commercial lending are now also looking at clients living expenses as well. To ensure that the business can still afford to pay the business owners enough to live and pay their commitments. Depending on lender they may use a figure for the expected increase in revenue from the new asset (if there is one, as not all purchases are income producing).
So these are just some of the changes happening that will have impacts on your lending. Along with changes in the value of proeprties, particularly in Sydney and Melbourne.