Banks must support APRA response to assessment rates
Let’s be honest, the word “bank” has been a dirty word to the general public since the royal commission. But in reality, our banks in Australia, for the most part, are very, very good at lending, and we need to let the banks do what they do best, and that is banking.
We need to let banks determine their own policies and pricing and products, as market competition is ultimately the best outcome for home owners and property investors.
But banks need to back the recent easing of mortgage serviceability rules by Australia’s prudential regulator.
APRA’s proposed changes make total sense given the current interest rate environment, added to the expectation that rates will fall from here and remain lower for longer.
I’m going to predict interest rates will drop to the high 2 per cents per annum very soon, and this is exactly why the market needs banks to compete with each other and deliver those interest rate specials to brokers so we can get them out to the home owners and property investors.
When it comes to lender policy, I’m sure we can all agree that nobody is a perfect fit, and no one, or at least very few mortgage consumers, will strictly meet a bank’s lending policy.
We have seen in the past two years, when lender policies are strictly applied to loan decisions, lending approvals stop in their tracks.
Prior to the royal commission as brokers and lenders, we used the five C’s of credit as a method to determine whether a loan should be approved or not.
We would then demonstrate the strengths and weaknesses of the application, mitigate where it didn’t strictly meet the lender’s policies, and recommend a loan decision that we believed in.
The five C’s of credit are:
- Character - of the applicant/s
- Capacity - to service the loan
- Capital - statement of position/fallback position
- Collateral - security, deposit and equity
- Conditions - conditions around the loan to de-risk default or mitigate where the applicant or application doesn’t meet policy but can be strengthened by considering other supporting factors
While it’s great news APRA is taking a proactive approach to policy in helping the banks lend more money, the 7 per cent servicing assessment rate hasn’t previously been a problem in home loan approvals prior to the royal commission into banking.
APRA’s very reasonable directive was for mortgage brokers and lenders to make “reasonable enquiries” into living costs instead of using the House Price Index and Household Expenditure Method living expense measurements as a default living expense calculation.
The banks have overreacted to the directive and taken an overly cautious approach when applying this to updated lending policies. This, as well as the responsible lending red tape, is the real driver for home loans being declined.
An example of this responsible lending red tape is the policy from a number of banks that requires a home loan customer to provide a personal statement detailing a list of their living expenses and commitments.
But they often go too far, requiring customers to provide personal bank statements on their accounts to “prove” their statement of living expenses to the bank.
It is tantamount to an audit on a home loan customer’s living expenses statement, and also on their personal lives.
This disingenuous policy suggests that home loan customers are not capable of telling the truth to the bank or their broker in order to get a home loan approved.
It is overstepping into customers’ personal privacy and is directly related to the number of loans being declined.
Home loan customers are entitled to their privacy, providing it’s legal, period.
What this policy serves to create is an environment where customers “protect themselves” by having non-disclosed secondary bank accounts where they might have subscriptions paid from.
I can assure you it’s not best practice to audit a client’s life by way of their bank statements.
A component of making reasonable enquiries into living expenses is discussing fixed and non-fixed expenses, and the client’s appetite to reduce or cancel these expenses should home loan affordability become an issue.
This could mean having a discussion around cancelling subscriptions like Netflix, Stan and Foxtel, providing they aren’t under a fixed contract, should the need arise.
