Lending Changes in the Midst of COVID-19

For those of you who have been pre-approved for a home loan or considering refinancing your loan to secure some of the great rates in the market, then things are changing rapidly in the current environment.

Lenders are reviewing their lending criteria, particularly when it comes to borrowers that they consider to be in higher risk industries, which can be concerning for anyone looking for a home or a better deal. 

So, is there any good news to share? Absolutely there is… And not just for those borrowers who had the foresight to re-skill into toilet paper manufacturing!

Banks are still coming to us every day to re-iterate that their doors remain open and they are keen to lend to quality borrowers.

This means, if you remain in a sound financial position, you are in a position to leverage off the lowest rates we have seen in the Australian market. There are banks lending at a 3 year fixed rate for as low as 2.09%, and variable rates for home loans can be as low as 2.7%.

The team at Kingsbridge Private are keeping up with the changes so you don’t have to. We feel it’s never been more important to use the services of a mortgage broker so that you don’t spend a significant amount of time and energy trying to achieve an outcome that may simply never have been achievable.

Some More specific Detail Regarding Current Changes

We are starting to observe the next wave of risk management by many lenders in the face of the sustained economic impact the pandemic is causing. However this doesn’t necessarily mean banks have stopped lending, in fact quite the contrary, however they are showing clear signs of being more selective of what they consider to be an acceptable risk.

One of the key changes we have observed so far is a COVID-19 overlay assessment on any perceived affected industries. This at times has been re-assessed after an approval has been issued, with many lenders requiring a risk assessment of the specific impact to a borrower before they will proceed to settlement. In fact, in extreme cases we have seen borrowers’ approvals being withdrawn, at times placing them in a precarious position with an impending settlement. The assessment may include ringing an employer to ensure the borrower remains employed, requiring up to date BAS statements and bank accounts for self-employed borrowers , or other information requiring a borrower to prove that their income levels have not been substantially affected by the economic impacts of the pandemic.

Some specific credit shifts we are observing are as follows:

• Further discounting on bonus, commission and overtime income above and beyond the standard 20% discount rate, and at times no allowance for this income source whatsoever.
• More stringent treatment of casual employment, and in some cases not accepting applications for casual employees, regardless of the industry they are in.
• Some lenders have advised they will no longer lend to borrowers in perceived high-risk industries such as tourism, hospitality and airlines.
• Risk based pricing for particular affected industries.
• The lowering of loan to valuation ratios (LVR’s) in certain postcodes.

Some future changes we believe will happen in the coming weeks can be summarised as follows:

• A wider array of banks reducing their appetite for those industries largely affected by the current crisis.
• Potential additional discounts of rental income given the current predicament surrounding tenant’s ability to continue to pay rent on both residential and commercial investment properties.
• Second tier lenders temporarily exiting the new business market due to potential funding issues.
• Further drops in LVR as we see the potential for the property market to be placed under pressure. Coupled with this, we may see softer valuations of properties from licensed valuers as the market contracts.

Will we see a Credit Squeeze Similar to that during the GFC?

Simply, we do not see this happening. Whilst banks and lenders will be more selective in their approvals, the fundamental difference between this crisis and the months following the GFC is that there remains significant liquidity in the credit market. This is a result of early government and RBA intervention as well as the relative capital strength of Australian banks resulting from more stringent capital requirements from APRA following the GFC. Therefore, access to credit appears for the foreseeable future to be stable, albeit we may see this play to the strengths of the major banks in Australia.

Some Tips if you are Looking to Purchase a Property in the Current Environment

If negotiating by private treaty (which is becoming more and more common given the changes to auction requirements), then ensure you have negotiated a cooling off period that will allow for:

• Time to receive the valuation report to check that the purchase price is confirmed. There is increased valuation risk in the current environment therefore this is a critical step.
• Time for the bank to complete any additional COVID-19 assessment questions.
• Time to achieve an unconditional approval prior to the expiry of the cooling off period.

All of these steps, are recommend by us to ensure the risk is minimised during this process.

Of course if you are purchasing via an online auction, the above steps are not available to you. In this instance, before exchanging contracts, please contact the team at Kingsbridge to discuss how we can minimise your risk to an acceptable level.

What Next?

We continue to keep a close eye on all the changes, which are seemingly hourly, not daily. That means Kingsbridge Private are best placed to be able to pre-assess any borrowers by applying different credit criteria from a range of lenders, to get our clients the best outcome.