How technology is changing the lending environment

Prior to the rise of the ‘policy environment’, where certain policies set up by banks, lenders and other regulatory boards are dictating the ability of an investor to access financing, investors used to rely heavily on cheap credit to grow their portfolio. ‘Slowing down lending’ is expected to alleviate the issue of affordability that arose following the consistent decline across the bigger markets, particularly Sydney and Melbourne.

Until the prices lower to a reasonable level, the so-called ‘policy environment’ could just be the new norm, according to mortgage expert Son Pham.

He said: “When I look at this current marketplace, a lot of people are still ingrained in this idea that the interest rate you pay is going to be geared towards what the cash rate is. That's not the way it is right now because policy is dictating the ability for an investor to skew financing and what price they pay for it as well.”

“They say that the lending is kind of in check now, but I still think there are a couple more rounds of tightening to go,” the expert highlighted.

Aside from following the regulations set by the Australian Prudential Regulation Authority (APRA) and other governing bodies, banks and lenders are also expected to introduce a software that will help them understand the living expenses of a potential borrower and get a complete overview of their current financial situation.

High-tech lending

The enhanced process of mapping people’s spending is one of the many ways that banks and lenders are regulating their books.

Through technology, new apps have been launched to help people do better budgeting. In the process, banks and lenders can identify your spending habits—from your savings account to your credit cards—and even categorise your expenses.

Mr Pham said: “If you say, ‘I only spent $1000 a month on entertainment’, they've got your bank statement that says, ‘It's actually more like $3000’. That's going to slow stuff down.”

“We’re trialling software at the moment. Essentially, we send you a link and you put in your banking credentials. It's all encrypted so we can't see it, but the software allows us to go to the back end of your banking. Multiple bank accounts, multiple loans and all other data, you can get all that information within 30 seconds. It's quite scary,” he added.

Aside from these new apps, banks and lenders have also introduced comprehensive credit reporting, where the potential borrower’s credit score is thoroughly reviewed as a basis for granting a loan or any other type of funding.

According to the mortgage expert: “There's no more hiding anything from the lenders, but it could also be a good thing in the sense that if you have good repayment history and you're a good quality customer, even though you've got a gazillion loans, they would still offer you something. If anything, they're looking at offering rates now depending on how good you are.”

“If your credit's not too good, you're late on payments, they'll offer you something but you'll be paying much more for it. Whereas, if you're a good customer, you'll get much better discounts.

“This is the pricing disparity you're going to start seeing. It's moved a little bit over the last couple of years where interest-only variable rates are priced differently from fixed rates, which are priced differently from owner-occupier mortgages, which are priced differently for first-time buyers,” Mr Pham highlighted.

Although the power that technology gives banks and lenders could be quite unsettling to some, he believes that going high-tech is the current path of the lending environment, and it’s not going on a different direction any time soon.

Ultimately, borrowers cannot throw in little white lies about the state of their serviceability anymore.

The system will weigh your worthiness for a loan based on the five Cs of credit, namely character, capacity, capital, collateral and conditions and where you can talk your way through it before, banks and lenders now have means to find out the truth.

The future of lending

Moving forward, securing financing for property investment could be harder, but that does not mean that a lot of budding investors will be kicked out of the market due to lack of funding. Banks and lenders are only working to be more responsible about lending.

After all, at the end of the day, banks and lenders will want to provide funding because they earn a big percentage of their income by lending money.

Moving forward, securing financing for property investment could be harder, but that does not mean that a lot of budding investors will be kicked out of the market due to lack of funding. Banks and lenders are only working to be more responsible about lending.

After all, at the end of the day, banks and lenders will want to provide funding because they earn a big percentage of their income by lending money. It’s just ‘all about policy’ now.

Mr Pham explained: “You can't just go to a mainstream lender and one shoe fits all. It's basically policy now—which lender's going to give you what you need?

“You need a real understanding of the different types of policies and different lenders and how they could meet your needs at different points of time of servicing that debt,” the mortgage expert added.

Right now, engaging a mortgage broker could just be the help that investors need to navigate the changing lending environment, he said.

“You definitely need a panel because even with all these lenders really, they all have limits to customers. They don't like too much exposure for one client,” Mr Pham highlighted.

When the issue of affordability is tackled, one of the expected long-term effect of the ‘policy environment’ is the decline of the unprecedented level of household debt across the country.

Through tighter lending regulations to which banks and lenders are subject to, authorities are hopeful that investors will be encouraged to move from interest-only to principal-and-interest loans in order to start paying down their debts.

According to Mr Pham: “Household debt is at an all-time high. One of the servicing criteria is when you've got a rental property, they take 80 to 70 per cent of rental income, taking into account the cost of running that investment property and your living expenses. We think it's a double up."

“The way the property investment landscape is now, the policies are definitely going to stay,” he concluded.

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