A broker questions if there are hard times ahead

Director of Hunter Galloway, Nathan Vecchio, started broking in 2015 and using the techniques from Jayden's Top Broker Handbook, is writing big numbers, leading to Vow Financial naming him Broker Partner of the Year Rising Star in 2016.

Is the end nigh for investment lending? If you have been reading the papers from the past week, things might be looking a bit bleak in our world of mortgages. Headlines about the Sydney and Melbourne property markets bubbling towards a crash, APRA cracking down on investor loans and even ASIC is having ago at the banks’ servicing calculators – but really what does this all mean for our clients, and ultimately us as brokers?

Well, this week we are going to give you the Top Broker breakdown of the current state of play in the market, how it affects our clients, brokers and what we can do to front foot the changes so you can keep your business ahead of the curve.

Give me the 30-second breakdown of what exactly has gone down?

In short, APRA (the regulator that looks over the banks and other financial institutions) is constantly watching the Australian property market and worried about the heat in property market investor loans have been growing too quickly, in particular investor loans with interest only repayments. They sent a letter to the banks on March 31 telling them they need to slow down, or else across three major areas.

1. Housing Loan growth is being closely monitored
“The environment of heightened risk that has prevailed for the past few years has not lessened: the environment remains one of high housing prices, high and rising household indebtedness, subdued household income growth, historically low-interest rates and strong competitive pressures” said APRA to the banks.

2. Interest Only Lending is in focus
APRA will limit the banks ability for interest-only lending to 30% of new loans. “Lending on interest only terms represents nearly 40% of the stock of residential mortgage lending by ADIs – a share that is quite high by international and historical standards”.

3. Investor Credit is to be limited down by:
•Limiting the volume of interest-only lending at a loan to value (LVR) ratio above 80%
•The banks to provide strong scrutiny of interest only loans at LVRs above 90%
•Manage investor lending to ‘comfortably’ remain below 10% growth
•Review and ensure that serviceability metrics are set at appropriate levels by the banks
•Continue to restrain lending growth in risky segments e.g. high LVR loans

Ok, so what does this mean for brokers aside from the fact it is going to be even harder to get investor loans approved and what should I be looking out for?

According to Credit Suisse analysts Jarrod Martin and James Ellis, they believe the new measures may cause the banks to lift interest rates (again, yeap) in interest-only loans to pull them under the new limits imposed by APRA. The analysts said they expect the banks “may choose mortgage re-pricing, as well as changes to other terms and conditions, to implement this regulatory required adjustment”. In other words, rates will go up and other benchmarks may also get tougher – including serviceability assessments.

Further to this ASIC said earlier this week that it would use its data gathering powers to find lenders and brokers that were moving customers into “more expensive” interest only loans. “While interest-only loans may be a reasonable option for some borrowers, for the vast majority of owner-occupiers in particular, an interest-only loan will not make sense,” ASIC said. It said banks should be able to obtain actual expense figures rather than “relying on a benchmark figure to assess suitability”. This includes actual spending on food, transport, insurance and entertainment to “provide lenders with a better understanding of consumers’ expenses”.

Interestingly, the eight lenders that ASIC have forced to change their lending practices, (which we would all be aware of given recent changes in servicing and overall lending appetite) include ANZ Banking Group, Commonwealth Bank and National Australia Bank, Macquarie, Bendigo and Adelaide Bank and ING Bank. There were also some non-bank lenders including Pepper and FirstMac.

Hold up, what’s the difference between APRA and ASIC?

APRA regulates the banks, financial institutions and Australian deposit institutions and can enforce lending limits on the banks. Whereas ASIC mandates them to lend responsibly, and also extend past the banks and include non-banks plus mortgage managers.

So how is this going to affect my customers?

In short, and looking at what some industry experts and analysts are saying:

•According to analysts, interest rates for investors on interest only payments are likely to go up to keep banks within the new thresholds.
•Servicing benchmarks may be further tightened, and it’s likely there will be increased criticism on living expenses in line with ASIC’s review in 2015.
•By keeping the banks below 30% growth on interest only loans and limiting the volume of interest only loans above 80%, lower deposit investment loans will be even more scrutinised.

As a Top Broker what should I be doing to stay ahead of this?

In our industry we know change just comes with the territory, since we saw the introduction of the NCCP in 2009 and with broking having strong annual growth and a record 17,700 brokers in the industry, competition is only going to get tougher.

So what can you do for your clients to retain them?
•Think about the end impact on your clients with increasing rates. How will this impact them individually and their goals? In my business, I’ve front-footed this by getting in touch with them and anyone on interest only we have shown the difference in repayments (and costs) if they switched to P&I.
•Consider what fixed rates do you have on offer? What options do you have for your clients to front foot this? Can you look at a proactive campaign to existing clients?
•Remember that there are lots of other banks out there in the right situation and to consider if it is suitable for clients to look at refinancing and moving away from funders that don’t fall within APRA’s guidelines.

In the coming months, I guarantee the banks will be pushing further to improve the quality of individual applications.

So what can you do to hit this head on?

You need to look at improving the quality of each and every application you look at and stay familiar with the responsible lending guidelines to understand your clients needs and objectives.

For me this looks like:
•Including a detailed credit memo along with meticulous file notes on the client’s background, individual goals (short – medium – long term) for each and every deal.
•Spend more time up front and in the initial interview to understand and document the client’s exit strategy, so they understand their financial commitments fully – today and into the future.
•If you want more information on this, have a look at my template Broker File Note template and Credit Memo.

These challenging market conditions ultimately mean more people need help from experts – like the Top Brokers in our industry.

What will set you apart from bank lenders is that you have multiple options, both within the banks and externally. You need to build a complete and sustainable business, growing quality leads and not ones that are focused on seasonal clients.

Based on my own experience I have used the systems and processes within the Top Broker Handbook to grow my business in a very short time to writing some big numbers, and have even been awarded Broker Partner of the Year Rising Star in 2016, so I know this stuff works. If you feel like you’re struggling to get quality leads and develop a network you’re not alone, so check out the guide here.

PS: I’m going to be taking over here at Top Broker for a little bit while Jayden focuses on a few big and exciting projects we are looking forward to bring you in the next few weeks. A quick background, I started broking in 2015 and using the techniques Jayden has given in the Top Broker Handbook I have grown my business in a very short time to writing some big numbers, and was fortunate enough to be awarded Broker Partner of the Year Rising Star in 2016. 

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