In 2018, banks started toughening their lending criteria, restricting the amount they will offer borrowers and also making it harder to obtain a home loan in the first place. We’ve been exploring what this means if you’re buying or selling a home, and how it’s impacting on our sales process.

THE BANKING ROYAL COMMISSION AND LENDING

The 2018 banking Royal Commission heard evidence that some lenders had lax lending criteria, offering borrowers more than they should have been and failing to carry out proper checks that they could repay their debt. This was particularly linked to the fact that some bank employees and mortgage brokers had bonuses tied to the number of loans they could write and the amount they could lend.

As a result of this conduct coming to light, lenders began tightening lending criteria to prove they could self-correct their behaviour even before the Royal Commission’s findings were handed down.

The need for the banks to take action was accentuated by concerns that, with rising house prices, we were becoming too indebted and people were spending more money on servicing their mortgages. By June 2018, Canstar announced this was as high as 42 per cent of disposable income, the highest figure since 1995.

HOW THE LENDERS HAVE CHANGED THEIR CRITERIA

Perhaps the biggest change to come from the Royal Commission, is that lenders are often unwilling to provide as much finance as they once were. Anecdotally, we believe most borrowers have seen their capacity with the big four banks reduced by around 20-30 per cent over the past couple of years.

This means, for instance, that a potential buyer who may have been allowed to borrow $1.8 million in 2017, would now be able to borrow only around $1.3 million – $1.45 million. This obviously has a direct impact on the amount they can offer for a home.

Also important is that lenders are also trying to become more exacting in their assessment. Previously, many lenders would assess a potential borrower’s capacity to repay their loan by applying a “cost of living calculator”. Now, they’re more likely to ask for a detailed and accurate account of exactly where an applicant’s finances go. This usually includes asking for bank statements, receipts, bills, and more.

THE IMPACT OF LENDING RESTRICTIONS

We’ve noticed that, for risk-averse lenders, a steady job means stability – and stability means you’re more likely to repay the loan. Because of this, it has often become more difficult for business owners and entrepreneurs to get the finance they’re looking for. Even wealthy and asset rich business owners are being affected.

It is generally also taking longer for lenders to approve finance – sometimes longer than three or four weeks, making it harder for some buyers to act quickly and decisively, particularly for any property in a short auction campaign.

We believe these lending restrictions are the single most important factor in bringing down the average cost of Sydney property. After all, unemployment and interest rates remain at record lows and these usually have a direct relationship with home prices.

The restrictions are having a particular effect on prices at entry level, given that first home buyers and others in this range usually haven’t yet built up much equity in their home and need to fund their purchase with a substantial mortgage. They’re also affecting the mid-market, which often comprises maturing families who are traditionally happy to take out a substantial loan to fund a quality long-term home. In this part of the market, sellers also rely on getting a good price for their existing home to make the next step on the property ladder.

But where we’re seeing the biggest impact is in off-the-plan purchases. Declining prices mean that these properties often aren’t worth as much as they were when the buyer exchanged contracts. Many buyers who have put down a deposit sometime in the past are finding they can’t borrow the same amount they once could and this is often making it difficult to complete the purchase. Some are even choosing to forfeit their deposit and walk away.

At the other end of the spectrum, perhaps the least affected part of the market is the prestige sector, where buyers tend to be less reliant on a mortgage to fund their purchase.

THE OTHER SIDE OF THE COIN

That said, the current lending environment isn’t all doom and gloom. Interest rates remain exceptionally low and many economists believe they could fall even lower, with up to two rate cuts on the cards for 2019.

New lenders are also entering the market with different lending criteria and models to the traditional banks. We’re even seeing models such as crowdfunding began to take root.

While currently, these lenders seem to be the second port of call once a borrower fails to qualify for a bank loan, we believe they’ll soon start to be seen as a legitimate first-tier alternative to traditional lenders. This will even force the banks to reassess their lending practices or to launch spin-off brands or models to take them on.

There are also more lending products available than ever before, many of which are aimed at first time buyers.

HOW WE’RE ADAPTING TO LENDING RESTRICTIONS

The current restrictions affect the way we go about selling a home. There was a time when buyers would bid at auction or make an offer and then obtain finance. We try not to let that happen anymore. Instead, we now like to make sure a potential buyer has loan approval before they offer. Given the uncertainty, most buyers feel the same way.

We believe that, contrary to the Royal Commission’s findings, mortgage brokers have an important role to play in the current lending environment. At The Goldman Brothers we have an established partnership with Logix Financial Services, and recommend their lending services to our buyers.

Our view is that any buyer – no matter how wealthy – who doesn’t fit the mould the banks are looking for now needs a mortgage broker. After all, a good broker won’t simply help them effectively navigate the current lending landscape and point them not just to the best deal, but also to the one they’re most likely to qualify for.

Contact The Goldman Brothers for advice about buying and selling property in Sydney’s Eastern Suburbs.