Changes in the lending landscape
have underpinned the rise in non-bank lenders
Over the past few years the focus among the major banks to tighten mortgage lending criteria has created a rise in non-bank lenders. We sat down with Mark Polatkesen (MP), Director and Senior Mortgage Broker at Mortgage Domayne to find out what it means for prospective borrowers.
RPM: Firstly, tell us a little about yourself and Mortgage Domayne.
MP: We specialise in construction finance in greenfield areas in Victoria’s growth corridors. Our buyer profile is mostly first home buyers seeking to purchase a block of land then selecting a builder for construction. We work alongside the likes of RPM, helping buyers to implement a strategy to obtain finance. Purchasing a house and land package can be quite complex given the customer is dealing with 2 different contracts (ie: land and house) and timeframes. So we hold the client’s hand throughout the entire process.
RPM: How would you describe the current lending environment?
MP: Before the Financial Services Royal Commission, the big lenders had the lion’s share of loans. However, the inquiry resulted in sudden and sharp changes to lending policy, which has made accessing credit harder among the major banks. This has shifted our focus on exploring other options for clients with second tier lenders. People are now definitely looking to brokers to find a finance solution.
RPM: What is buyer sentiment like?
MP: Clients are well aware of the Royal Commission and are feeling the pinch of credit because they’re so used to the traditional lending options from the banks. There’s been an influx of other lenders through which we’re able to find solutions for our clients. In fact, in 2018 market share of non-major lenders increased by 10% to 42%, with the major lenders sitting at 58%. Policies from non-bank lenders have always been more flexible than the banks and they can be more aggressive with interest rates. There’s real value in dealing with non-prime lenders in terms of interest rates and ongoing costs.
RPM: Can you explain the key changes to lending criteria?
MP: The main changes include a new system called Comprehensive Credit Reporting which gives banks much greater visibility into applicants’ credit history. For example, banks will know if you had a credit card from 5 years ago that you forgot to disclose on the application, if you pay your bills on time, or if you ever go over your credit card limit. All this data is now much more visible to lenders and therefore they can profile clients more comprehensively.
Another measure is the introduction of HEMs – the Household Expenditure Method. In the past, if you were a single applicant and earning $40,000 or $200,000, the linear expense calculation was the same. Now, if you’re earning more, you’re likely spending more to live which is being taken into consideration.
As a secondary measure, a lot of lenders now review living expenses assessed by bank statements. Most lenders now want to see 30 to 90 days of a client’s bank statements, which is about vetting them to ensure the linear expenses they are declaring line up with bank statements on what they’re spending day to day.
Certain banks have also lifted the expense of a credit card repayment. So if you had a credit card with a $10,000 limit, in the past banks used to expense it at about 2.5% to 3% of that limit as a repayment every month. That’s irrespective of whether you used the card or not. Now the expense rate has gone from 3% to 3.8%, it reduces what a client can borrow by between $40,000 and $60,000. We have to educate clients on whether they really need a high limit credit card.
RPM: Can you also explain the changes to the mortgage broking industry as a key outcome of the Royal Commission, and what effect it may have?
MP: A lot of the findings were targeted at the broker channel. The Liberal party wants to keep upfront and trailing commissions in place.
I don’t feel it will change too much. We (as in brokers) have got way too much market share and there’s a much greater benefit to have us around than not. The interest margin before the growth of the broker channel versus now was a lot higher so people were paying a lot more for a home loan. The channel also allows non-major banks a distribution facility that they otherwise wouldn’t have access to.
RPM: any final comments you’d like to make?
MP: One of the biggest impacts of the Royal Commission was the level of borrowing capacity. I look at affordability in the context of what lenders are prepared to lend, which is why we are going to lenders for certain policy requirements as opposed to lenders who will be heavy handed.
Many lenders increased their Loan Assessment Rates to 7.25% or even 8%. That’s because they want to ensure applicants can afford a fluctuation in the interest rate. For example, 3 years ago, for a loan with a 4% interest rate, the Assessment Rate was only 1.5% higher at 5.5%. Now, with an interest rate of 3.8%, the Assessment Rate is 7.25%.*
Having said that, there are many misconceptions about how hard the lending landscape is. Securing finance is not as hard as many people think. As an indication, our business is in line for a record month for new lending applications. Our average loan amounts have gone up 5% in the last financial year and the volume of lending applications has increased by 20%. We are inundated with new loan enquiries. So absolutely there are a huge number of people out there wanting to buy and there are definitely alternative options if you engage with a broker.
*APRA has since announced it will allow banks to ease lending restrictions by lowering the Assessment Rate to a minimum 2.5% buffer above the lending rate, which will enable buyers to borrow more.