Lending

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<p>GUEST OBSERVATION</p>
<p>Everyday, prompted by pressure from the government, banks are changing their lending policies. What happens if, last week, your bank indicates you will get a loan approval, but this week they decline you?</p>
<p>Let’s face it, if the lending manager from the local branch declines you, they are hardly likely to want to send you to the competition. And, even if they were being generous and wanted to point you in the right direction, how would they know what their competitors’ lending policies were?</p>
<p>This is the benefit of using a Mortgage Broker. Brokers know which lenders will lend what, and to whom.</p>
<p>And, in a rapidly-changing world, really good brokers stay in close-touch with the banks and lenders so that they are ready for lending policy changes; that way clients don’t have the rug pulled from under them.</p>
<p>This is particularly the case with the reputable non-bank lenders who can match the Big Four for rates and products but are not facing the same government restrictions.<span style="line-height: 1.3em;"> </span></p>
<p>When you are choosing which mortgage broker to go with, you may want to ask them key questions such as:</p>
<ul>
<li>How often do they attend Professional Development sessions</li>
<li>How many lenders do they have on their panel</li>
<li>Which non-bank lenders are on their panel</li>
<li>Are they part of a wider group where fellow brokers share industry tips and updates</li>
<li>How long have group members been in the mortgage broking profession</li>
</ul>
<p> </p>
<p><em>Jenna Ford is p<span style="line-height: 1.3em;">artner, Chan &amp; Naylor Finance and can be contacted <a href="https://www.chan-naylor.com.au" target="_blank">here</a>.</span></em></p>
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Is your home loan out of date? Jenna Ford

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<em>60 Minutes</em> was an interesting talking point this week, wherein some American geezer claimed that he "could" have got a 95 per cent mortgage using a "fake income" by pretending to be a "gay couple".<br><br>OK. Given that he didn't actually get a mortgage written, it is a little perturbing how often people choose to believe what random punters say in preference to the actual data, but such is the nature of confirmation bias.</div>
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<br>Household debt is high, no doubt, and some lending has been reckless, particularly in mining towns, but by the same token not everything that is claimed on the internet or elsewhere is true.<br><br>For example, some years ago bearish commentators got sucked in to believing erroneous figures which claimed that an incredibly high percentage of lending was 100 per ent mortgages.</div>
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<br>Of course, the data sources quoted advertised loans rather than actual loans written, a rookie error that surely wouldn't pass the sniff test.<br><br>Another favourite trick is to tap a few notional numbers into a mortgage calculator and use this as "evidence" of irresponsible lending, conveniently neglecting to mention the key words "<strong>may</strong> be able to borrow". Clickbait ahoy!</div>
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<div><a href="/images/2016/02/25/Mortgage.jpg" target="_blank">Click to enlarge</a></div>
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<div>It's one of the reasons I write blogs - not to get a readership, mainly just so I can stop annoying my missus by regurgitaing every blasted "fact" that I read in the media and on the internet.<br><br><strong><span style="text-decoration: underline;">APRA exposures data</span></strong>
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<div>Back in the real world APRA released its latest ADI Q4 2015 property exposures data today, which showed that the share of new loans whereby lenders extended a 90 per cent or more loan-to-valuation ratio (LVR) has continued its long and steady decline from more than 18 per cent in the March 2008 quarter to under 10 per cent in the December 2015 quarter.</div>
<div> </div>
<div>The share of loans whereby an 80 to 90 per cent LVR loan was advanced has also declined significantly over the last eight years from 20 per cent to only 14 per cent, meaning that the overwhelming majority of loans see a deposit of 20 per cent or more used. </div>
<div> </div>
<div>I'll just clarify that.<br><br>In aggregate high LVR lending has been in decline for years, while low-doc loans and other non-standard now loans represent just a small and rapidly declining fraction of new loans and total residential mortgage market exposures.</div>
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<div><a href="/images/2016/02/25/APRA2.jpg" target="_blank">Click to enlarge</a></div>
<div><img src="/images/2016/02/25/APRA2.jpg" alt=""></div>
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<div>Within the "big four" major banks 90 per cent plus LVR loans have fallen even more sharply from 21.6 per cent in 2009 to just 9.1 per cent, while 80 to 90 per cent LVR loans have declined from 22 per cent in 2011 to only 14.2 per cent. </div>
<br><div>
<strong><span style="text-decoration: underline;">Lending shifts to homebuyers</span></strong><br><br>If there is anything suspicious in the APRA figures related to lending standards, I believe it is in the incredibly smooth transition from investment loans to owner-occupier loans. </div>
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<div>The market has barely skipped a beat in recording remarkably similar headline quarterly data while the percentage share of loans conveniently swings from investors to homebuyers. </div>
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<div><a href="/images/2016/02/25/APRA1.jpg" target="_blank">Click to enlarge</a></div>
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<span>Draw your own conclusions from that, but I'd hazard that some of these homebuyers may well be would-be investors sneakily veiled behind a Scooby-Doo mask.</span><br><br><span>The </span><em>60 Minutes</em><span> segment claimed that household debt is "exploding", and indeed the above chart shows that the total stock of outstanding credit has more than doubled since 2008.</span><br><br><span>However, the aggregate of outstanding household debt nearly always rises in an inflationary economy with rising household incomes and a strong population growth.</span><br><br><span>The truth is that after accounting for record high mortgage buffers and offset balances, the figures show that the household debt to income ratio is unchanged in Australia since 2008. Australia has a unique mechanism whereby loan repayments often continue at the same level when interest rates fall, as they have been since 2011.</span><br><br><em>60 Minutes</em><span> also claimed that "half" of all loans are interest only.</span><br><br><span>The true figure as revealed in APRA's figures today is 39 per cent - still too high for comfort, granted, but this mostly reflects tax strategy rather than that people "can't afford to pay the debt back", and the interest-only loans figure should theoretically now decline following the crackdown on investor lending.</span><br><br><span>The truth according to the Reserve Bank of Australia (RBA) research is that on average homeowners are miles ahead on home loan repayments, by fully two years which is an unprecedented margin. </span>
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<p><span><em>PETE WARGENT is the co-founder of <a href="https://allenwargent.com/" target="_blank" rel="nofollow">AllenWargent</a> property buyers (London, Sydney) and a best-selling author and <a href="https://petewargent.blogspot.com/" target="_blank" rel="nofollow">blogger</a>.</em><br></span></p>
<p><em>His latest book is <a href="https://www.bigskypublishing.com.au/Books/General-Interest/Four-Green-Houses--and-a-Red-Hotel/1015/productview.aspx" target="_blank" rel="nofollow">Four Green Houses and a Red Hotel</a>.</em></p>
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High LVR loans have been declining for years: Pete Wargent

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<p>The Australian Prudential Regulation Authority (APRA) released its December 2015 quarterly data on property exposures by Australian authorised deposit-taking institutions (ADIs).</p>
<p>The data is always interesting to analyse in order to get further insight into the current state of the mortgage market.</p>
<p>The first data point is residential term loans to households which have a total outstanding balance of $1.384 trillion which has increase by 8.9% over the past year. The total value of outstanding owner occupier loans is $884 billion having increased by 12.8% over the past year and accounting for 63.9% of all outstanding loans. The remaining 36.1% of outstanding loans are to investors, having increased by 2.6% year-on-year to $500 billion. </p>
<p>Growth in outstanding loans has tilted away from investors to owner occupiers.  After year-on-year growth in investor loans peaked at 18.2% in March 2015 it has slowed to 2.6% growth while owner occupier credit troughed at an annual rate of 2.2% in March 2015, before rebounding to the current annual rate of 12.8% (the fastest annual growth rate since June 2010).</p>
<p><a href="/images/2016/03/Chart-1-3-580x204.jpg" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/03/Chart-1-3-580x204.jpg" alt=""></p>
<p>In terms of the types of loans outstanding, 42.3% have an offset facility, 39.3% are interest-only, 0.2% are reverse mortgages, 2.0% are low documentation loans and 0.1% are other non-standard loans.  The year-on-year change across these loan types has been recorded at: +22.0% for loans with an offset facility, +11.6% for interest-only loans, +1.6% for reverse mortgages, -16.6% for low documentation loans and -5.7% for other non-standard loans.  Importantly, the value of outstanding residential loans for low-documentation loans is now at a record low.</p>
<p><a href="/images/2016/03/Chart-2-3-580x207.jpg" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/03/Chart-2-3-580x207.jpg" alt=""></p>
<p>The data highlights that the average outstanding balance on a residential loan is $248,800, up by 1.0% over the quarter and by 4.4% year-on-year.  Reverse mortgages ($95,700), low-documentation loans ($192,800) and other non-standard loans ($195,900) all have much lower outstanding balances.  Meanwhile, loans with offset facilities ($303,700) and interest-only loans ($330,000) have significantly higher outstanding balances. </p>
<p>The year-on-year changes to the outstanding loan balances have been recorded as follows: +7.2% for loans with an offset facility (fastest year-on-year growth since June 2011), +4.9% for interest-only loans, +2.8% for reverse mortgages (slowest year-on-year growth on record), -1.5% for low-documentation loans and -6.8% for other non-standard loans.  The data shows a slowing in the growth of outstanding loan values for reverse mortgages while riskier lending types (low-documentation and other non-standard) have seen an ongoing fall in outstanding loan amounts.</p>
<p>While the previous data looked at the total value of residential mortgages outstanding, the following data focuses on new residential mortgages over the final quarter of 2015.</p>
<p>Over the December 2015 quarter there was a record-high $98.130 billion worth of new residential mortgages approved, $69.091 billion worth were owner occupied with the remaining $29.040 billion being for investment purposes.  Year-on-year the value of new owner occupier loans is 28.8% higher, its greatest change on record, while investor mortgage lending is -24.9% lower, its largest fall on record.</p>
<p><a href="/images/2016/03/Chart-3-3-580x212.jpg" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/03/Chart-3-3-580x212.jpg" alt=""></p>
<p>Looking at the types of mortgages approved over the quarter: a record low 0.3% were low-documentation, 37.0% were interest only which was its lowest proportion since March 2013, 0.1% were other non-standard loans, 47.4% were originated by third parties and 3.7% were loans approved outside of serviceability.</p>
<p>Focussing on the year-on-year change; low documentation loan approvals are -41.8% lower (their largest year-on-year fall since March 2013), interest-only loan approvals are -11.0% lower (their largest year-on-year fall since March 2009), other non-standard loan approvals are up 28.2% (their largest year-on-year increase since December 2013), third party originated loans are up 6.2% and loans approved outside of serviceability are up 41.3%.  The data indicates there has been a significant pull-back in low-documentation loans and interest-only loans. </p>
<p>At the same time, non-standard and loans approved outside of serviceability are rising significantly which may be a potential point of concern for APRA.  Although they make-up a small overall proportion of lending it will be something to keep a close watch on over the coming quarters especially since both have also recorded a quarterly increase.</p>
<p><a href="/images/2016/03/Chart-4-3-580x207.jpg" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/03/Chart-4-3-580x207.jpg" alt=""></p>
<p>Finally the data breaks out new lending by loan-to-value-ratio (LVR) bands.  Over the quarter, 23.4% of all new loans had an LVR of less than 60%, 53.4% had an LVR of between 60% and 80%, 14.5% had an LVR of 80% to 90% and 8.7% had an LVR of more than 90% which was its lowest proportion on record. </p>
<p>Looking at the year-on-year changes, the value of lending for LVRs of less than 60% was 16.1% higher, LVRs of between 60% and 80% increased 6.1%, LVRs of 80% to 90% increased 14.3% and LVRs greater than 90% fell by -20.1% which was the largest year-on-year fall June 2010.  Based on the data it is clear that lenders have been tightening lending requirements over recent quarters which has led to a sharp decline in new mortgage lending for LVRs above 90%.</p>
<p>Overall the data indicates that the market is responding to regulatory changes in the lending space implemented over the past year.  There is less new lending to high LVRs, fewer low documentation and interest-only mortgages being written. </p>
<p>On the other-hand some other potentially more risky lending types such as non-standard and outside of serviceability loans are continuing to rise.  It will be interesting to see whether APRA starts to look to crack-down on some of these types of lending in order to ensure stability within the mortgage market.</p>
<p><em>Cameron Kusher is research analyst for CoreLogic RP Data. You can contact him <a href="https://blog.corelogic.com.au/about/">here</a>.</em></p>
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APRA data shows a further tightening of lending standards: Cameron Kusher

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<p>EXPERT OBSERVER</p>
<p>This cemented a robust rebound in lending flows since the election, mainly driven by owner-occupiers (+23 per cent).</p>
<p>Investment loans are also up +15 per cent since the election, but from a very depleted base.</p>
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<p>Since the election the rebound in home loans has been driven by New South Wales (+27 per cent), Queensland (+22 per cent), and Victoria (+21 per cent). </p>
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<p>First homebuyer numbers hit decade highs, even ahead of the rapid take-up of the deposit scheme in January. </p>
<p class="separator"><img src="https://1.bp.blogspot.com/-UCffVRVvlU4/XkNNp3PlozI/AAAAAAAA0PU/5nQ3kxdfUFgaY20wQ5Ey3vQNa4WYDqkCQCNcBGAsYHQ/s640/FHB.jpg" width="640" height="376" data-original-height="826" data-original-width="1405"></p>
<p>There was also a big jump in the average loan size to $500,000, but I'm less sure of the integrity of this data trend.</p>
<p><strong>PETE WARGENT</strong><em> is the co-founder of AllenWargent property buyers (London, Sydney) and a best-selling author and <a href="https://petewargent.blogspot.com/" target="_blank">blogger</a>.</em></p>
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Housing lending ended 2019 on a high: Pete Wargent

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<p class="post-title entry-title"><strong>EXPERT OBSERVER</strong></p>
<p class="post-title entry-title">There was an explosion in refinancing in May 2020, taking total lending to owner-occupiers up to record monthly highs.</p>
<div>This will effectively act as a rate cut (or perhaps two) for many of these borrowers.</div>
<div> </div>
<div>But once you strip out the massive surge of 21,227 refinancing approvals there was the expected decline in housing lending, as the economy was largely shut back in May. </div>
<div> </div>
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<p class="post-body entry-content"><br>Activity was down pretty much everywhere, as you might reasonably expect.<br><br></p>
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<p class="post-body entry-content"><br>First homebuyer transactions were...down.<br><br></p>
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<p class="post-body entry-content"> </p>
<div>And the average mortgage size also declined, although borrowing capacity for many borrowers has increased compared to 18 months ago thanks to the salvo of five interest rate cuts, and the average mortgage size was up by some +18 per cent from a year earlier. </div>
<p class="post-body entry-content"> </p>
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<p class="post-body entry-content"> </p>
<div>In particular borrowers in Sydney and Melbourne have been flexing their extra borrowing capacity over the past year or so. </div>
<p class="post-body entry-content"> </p>
<div class="separator"><img src="https://1.bp.blogspot.com/-c8KGGT5iocg/XwbTKzyZ5II/AAAAAAAA204/bNjn9_sgL1cNudx8sExOjl3EqZlQY2C_QCNcBGAsYHQ/s640/A5.jpg" width="640" height="360" data-original-height="800" data-original-width="1421"></div>
<p class="post-body entry-content"><br><span style="text-decoration: underline;"><strong>The wrap</strong></span><br><br></p>
<div>Overall, once you strip out the huge rip in refinancing there was much less housing lending and transactional activity in May. </div>
<div> </div>
<div>Housing prices have drifted a little lower since rolling over around the end of Q1 2020, but on much thinner volumes, and stock levels have fallen very sharply which has somewhat underpinned prices.</div>
<div> </div>
<div>Naturally the Victorian government now opting for a fresh <em>six-week</em> lockdown is going to lead another wave of local business closures over July and August, which will bring its own downside risks for Melbourne.</div>
<div> </div>
<div>Sydney, on the other hand, is now steadily reopening for business, and most other housing markets have been fairly flat through the COVID shutdown.</div>
<div> </div>
<div>Of course the lending figures are, as always, old news, reflective of historic activity from the end of April to the end of May.</div>
<div> </div>
<div>More timely indicators from the REA Group appear to be relatively upbeat.</div>
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<strong>Pete Wargent</strong> is the co-founder of AllenWargent property buyers and a best-selling author and blogger<strong> </strong>
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Refinancing explodes to record high: Pete Wargent

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<p><span>April 24th, 2015 was a significant date in the Australian property investment landscape. Why? On this date, APRA (the Australian Macro Prudential Authority – an institution who helps regulates the rules of play for banks and other kinds of lenders) implemented some new rules / codes of conducts for lenders to adhere to.</span></p>
<p><span>The new rules mean that for some lenders who previously had very liberal lending rules and practices for local Australian property investors; had to tighten them up to comply with APRA’s policies.</span></p>
<p><span>Whilst it is still early days; we have seen a number of “Big 4</span><span>″</span><span> lenders, as well as many other tier #2 and tier #3 lenders, begin to implement more restrictive borrowing rules for investor-based loans.</span></p>
<p><span>These have come in all shapes and sizes, such as (but not limited to):</span></p>
<p><span>- Restricting maximum LVR (loan to value ratio) allowance for ‘investment’ category mortgages from, say, 90/10 to 80/20. Part and parcel with this has been some lenders refusing to allow LMI (Lender’s Mortgage Insurance) as a capitalised cost on to loans at those higher (say, 90/10) LVR ratios.</span></p>
<p><span>- Removal of discounted interest rate package deals for their mortgage products; again, for investor-only mortgages (many lenders have retained discounts for owner-occupied, or PPOR – Principal place of residence – loan products)</span></p>
<p><span>- In light of further interest rate cuts from the RBA in recent months; some lenders have; whilst passing on rate ‘cuts’ not actually reduced their ‘calculation of repayment capability’ for mortgage applicants. What this means is, let’s say when interest rates were 0.50 basis points higher, several months ago, and lenders were calculating an applicant’s serviceability based on a scenario where interest rates spiraled to say, 7% (they run these calculations as standard for all applicants); typically when RBA rates drop by 0.50 basis points; so too should the lender’s serviceability calculation assumptions (I.e. their calculation should be using a rate of say 6.50%, not 7%). However, lenders in recent months have maintained say that 7% figure in that calculation.</span></p>
<p><span>These changes have substantial implications for would-be property investors: </span></p>
<p><span>1) The reduced LVR allowance by lenders means borrowers need to cough up more initial deposit. Say you wanted to borrow to buy a $300K investment property. Some lenders at 90/10 LVR acceptance would only require your $30K (10%) deposit, plus purchase costs. A drop to 80/20 means borrowers need to find another $30K to make up a $60K deposit.</span></p>
<p><span>2) Removal of discounted interest rates also is a deterrent to first-time investors entering the market, as their interest repayments will now be slightly higher than what home owners pay. There could thus be a cooling of investors being active in many markets throughout Australia.</span></p>
<p><span>3) For investors who remain active or don’t perceive the above two changes to inhibit their ambitions; they’ll continue with their property investment purchases. However, they simply won’t be allowed to borrow as much. If banks are calculating serviceability based on a higher ‘worst case scenario’ forecast; the banks won’t lend as much. To some investors, this could be the difference between being allowed to buy a $500K investment property, to now only perhaps $320K – $350K. If this eventuates, this will be a game-changer in the market as it’ll wipe a lot of the Sydney and Melbourne potential investor buyers out (who can play in the Sydney and Melbourne markets with &gt;$350K, these days) and into lower-median markets such as Brisbane, Adelaide, Hobart, and some regional centers.</span></p>
<p><span>The role of foreign investors in amongst APRA rules for local lenders: </span></p>
<p><span>And what of the foreign investors? What will be the effect on foreign investor demand of APRA-inflicted local bank and non-bank lender restrictions on investment-based loans? This is hard to infer with any kind of concrete certainty; due to all data relating to foreign residential property investors (including actual volumes of them; types of financing etc.) not being readily available to the public.</span></p>
<p><span>As such, there is already speculation and confusion on just how many foreign investors are using the following kinds of financing for their Australian purchases:</span></p>
<p><span>a) Pure cash from overseas sources/local funds, to buy (no loans required). In this instance; APRA regulations on local lenders will have zero consequence on foreign buyers; or;</span></p>
<p><span>b) Financing/loans given by their local country’s lenders (in these instances; the lending rules imposed by APRA on local Australian institutions don’t apply – meaning foreigners may continue to have access to great cost-efficient mortgage products, for the purchase of Australian property); or;</span></p>
<p><span>c) Foreign buyers who are accessing local Australian lender mortgage products. For this type of foreign buyer; the APRA rules will have the same consequence as for local buyers.</span></p>
<p><span>When comparing drivers for foreign investors to local investors, we must be mindful that there are so many more variables beyond purely the loan or finance structure of choice, that affects their overall attraction to buying property in this country. For instance; exchange rates, FIRB levies or taxes they must pay, the type and condition of the housing stock they have access to, to purchase, are just a few of the many other factors related to foreign investor demand in this country’s residential housing stock.</span></p>
<p><span>So – and I must stress this is pure speculation based on the resources and news I’ve been reading on this subject – there are two quite likely outcomes I would speculate as a result of the tighter APRA rules on local lenders, in regards to the effect of these on foreign investor interest in the market, and on residential property values as a result:</span></p>
<p><span>1) Local buyers (investors, not home owners) get scared off and this takes a substantial amount of ‘heat’ out of 'most' markets. I say ‘most’, because the exception (as in; the markets that will still remain hot despite the APRA rulings) will be the foreign-investor ‘obsessed’ postcodes around Australia. These are the suburbs built in areas where foreign buyers and local buyers alike; both highly desire to purchase in. I say this because though we don’t know what foreign investors are using what finance structures; a more consistent and reliable metric of measurement here, is the actual postcodes they take interest in buying within.</span></p>
<p><span>2) Or, more markets will remain hot anyway. Why? Because those wannabe local first home buyers (FHB’s) who were thinking of applying the recently growing strategy of ‘Keep renting and buy an investment property now instead of a home; to kick start some growth so I can have enough money for a home deposit later on’, will throw that strategic approach straight out the window and say ‘nope, forget investment, the APRA rules don’t make it worth the effort; I’m going to go for that home purchase straight off the bat; better rates, discounts, and possibly LVR’s (depending on their chosen lender…) so I might as well go ‘all-in’ and buy my dream home’. </span></p>
<p><span>Unfortunately, for FHB’s who want to buy into suburbs that also happen to double as hotbeds for foreign buyers; the same bubbling of high housing prices will remain, and continue further. However, in this instance, opportunity could present for FHB’s buying in non-foreign-buyer postcodes, as the local investor volumes will dilute, which should deflate the bubble in those other postcodes enough to help FHB’s.</span></p>
<p><span>So, if either of these outcomes eventuate, I think it can only be a good thing for FHB’s, and less so for local investors. Foreign investors will likely remain unperturbed in their relentless pursuit of the postcodes that they so desire.</span></p>
<p><span>This means that in postcodes where the top 10-20 schools are, per-state (the ones where the Chinese investors specifically, are most active); prices will likely remain as high as ever.</span></p>
<p> Cameron McEvoy is a NSW-based property investor and maintains a blog, Property Correspondent. He can be contacted <a href="https://www.propertycorrespondent.com.au/contact-us/" target="_blank">here</a>.<span style="line-height: 1.3em;"><br></span></p>
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