Responsible lending: How lenders identify good borrowers

Aside from income and property-related costs, banks and other mainstream lenders have also started to take living expenses into account when assessing home loan applications.

According to the mortgage expert: “I'm hoping they could lift some of those restrictions, but the way it is now, it's definitely going to stay.”

This lending environment had led to the rise of specialist lenders who accommodate investors that are finding it hard to prove their serviceability to mainstream lenders mainly due to the implementation of stricter policies.

“What's happening is we’re finding specialist lenders—that's what it's about now. You can't just go to a mainstream lender and have one shoe fit all. It's basically all about policy now. Which lender's going to give you what you need?” Mr Pham highlighted.

The importance of education and the assistance of good mortgage brokers have never been more critical now to avoid getting lost in the sea of varying policies and fluctuating rates.

While the process of accessing funds remains straightforward for first-time buyers and some homeowners, most investors are currently subject to the different policies being implemented by different lenders.

These policies will affect how certain loan products complement their needs throughout the loan period.

Responsible lending

Responsible lending has been a big theme over a couple of years as some of the biggest property markets in Australia enter the softening phase, facing the effects of oversupply, rising prices and other hindrances to growth.

Banks, together with governing bodies, wanted to make sure that lenders are not giving away too much mortgages or issuing too much credit facilities, especially to people who cannot handle them properly.

At the core of all these lending policies is their most basic aim—to uphold the importance of being responsible borrowers.

Mr Pham said: “Lenders used to overestimate what borrowers earn and underestimate what they spend or owe. It goes two ways— borrowers want money, and lenders want to lend because they make money.”

“This is why the NCCP [National Consumer Credit Protection Act] came out and responsible lending is implemented, to make sure everything's in check—can a customer really afford it?” he added.

Having responsible lenders makes way for responsible borrowers, and vice versa.

The predatory lending that has happened in the past can only be minimised or totally eradicated if borrowers stop biting off more than they can chew.

A good borrower

Despite the stricter lending regulations, being a good borrower is still as simple and straightforward as it could be—make repayments on time and avoid bad credit.

According to Mr Pham, investors must assess their financial situation regularly and avoid ‘cheating themselves and the bank’ because even if you end up getting the loan product you want, the debt may prove to be too much in the long run.

The mortgage expert explained: “You get all this debt then you can't service it. The next thing you know, they come off ensuring you can't refinance and you're stuck selling the property.”

To get the most suitable home loan, he strongly recommended following these simple tips:

• Maintain a good credit history, as in no late repayments or defaults, even on personal loans like credit cards.
• Protect your income and establish good savings.
• Avoid unsecured debts through your cash flow.
• Understand finance structures. Principal-and-interest entails different responsibilities than interest-only, and so do variable rates, fixed rates and split rates.
• Shop around. There could be different lenders and loan products that will suit your needs at a specific point in your investment journey.

At the end of the day, investors and lenders must simply be comfortable with the debt that’s being taken on.

Moving forward, policy will be the major difference between loan products and pricing.

While official regulatory bodies may set lending regulations that encompass states and territories, lenders maintain the freedom to establish additional rules to provide the best products and attract as many borrowers as they could.

Considering the wide variety of financing options available right now, Mr Pham encouraged investors to seek the help of property professionals, where appropriate.

In particular, whether you’re looking to buy a place of residence or an investment property, engaging a good mortgage broker will certainly help you make the right financial decisions.

According to Mr Pham: “More than 50 per cent of loans are written by brokers. Traditionally, people go to us because it's just easier, but now, we get a lot of customers that say, ‘I'm tapped out with my major. Can you do something?’”

“I'll check and say, ‘We can, but you're very restricted to only a certain handful because their policy is different to the banks.’ You definitely need a panel because even with all these lenders, there will be limits to customers.

“At the end of the day, we're all invested in a strong and safe and prudential lending environment. Property investment comes down to a game of finance,” he concluded.

Tune in to Son Pham's episode on The Smart Property Investment Show to know more about the rules of finance, mortgages and serviceability in today's market.