It’s been a few months since my last financial update and today’s article is timely to assist you with managing the tumultuous finance world we now all live in.
I get a lot of e-mails about the behaviour of the banks predominately being slow, asking for more information on multiple occasions and a distinct lack of communication in comparison to how loan’s e were previously handled.
My previous articles talked about this briefly, but today’s article is more about letting you know exactly what is going on in the Financial Lending world. Why it is happening and how you, as our important client, along with ALIC can manage the situation better together.
I want to be very honest with you and in simple terms, the Banking world has turned upside down. A lot of the people in the industry are exiting because it is too tough and they lack the life experience and skills to work through the red tape required to service their client’s appropriately.
As an experienced writer who has lent over $3 billion in my time in banking, I can say it is as tough as it has ever been, it is worse than the GFC and worse than 1991 when interest rates were at an all-time high of 18% with businesses failing daily.
The reasons why –
· The Regulators finally got the job done after two years of trying to slow the Melbourne and Sydney market. This has resulted in very tight guidelines around interest only loans, Investment loans and the overall assessment by financial institutions.
· The Royal Commission is six months in with a further six months plus to go and their findings have been surprising for all people outside the finance world. This has changed the behaviour of all lenders drastically, they have increased debt servicing requirements by up to 35%, reducing the number of loans allowed to be approved slightly outside standard Policy by 80% and finance assessor’s increased reluctance to put a signature on the dotted line to approve a loan without further interrogation.
· Investor activity has been reduced significantly through capping of loan books, the capping of Interest only loans and the significant increase in interest rates for such loans. Major banks moving up to 5 times last year and some second tiers now moving due to the increased cost of funding themselves on the securitisation market
· Monthly living Expenses are now calculated around your income levels, if you earn more, the banks will use higher living expenses, if you own multiple properties they will increase their internal numbers to ensure it is harder to borrow so you can’t buy the next property. All these changes are a result of deliberate regulatory action to slow the Melbourne and Sydney markets.
· Increased work load by up to 45% for all staff in the finance sector which makes its very hard to hold on to people that aren’t there for a long term career, which I admit has hurt our business as-well. We are doing a lot around this by employing specific people who are career driven, tripling our staff training because when markets behave like this, the whole world seems to become 20% dumber overnight and all people start to second guess themselves. It’s interesting to watch how the market disintegrates overnight.
· Loans that reach their interest only expiry now need to go through a full servicing assessment. This has always been the case but was never adhered to by the banks due to lower levels of controls by the Regulators and the banks. This is a very big change that you need to understand. For example- a 3 year Interest only loan is expiring for the 3rd time. Remaining term is 30 years minus 3 x 3 = 21 years. The banks will be place the loan on principal and interest payments over 21 years if income cannot be proven to service the loan under the new income verification laws which are much tighter on a 21 year term. On a $650k loan the payment will increase from $2601 to $3956 per month if income cannot be proven and it is imperative that you are aware of this major change to be able to manage your own personal situations.
· Age is now a big issue. Not long ago a bank couldn’t discriminate against an older person applying for a loan. The regulators have now put a stop to this and from 50 Years of age, some banks are reducing loan terms because they don’t think it is feasible to have a loan at 80 years of age after a 30 year loan term. This is a risky move by the financial institutions and the regulators because it can cut out half of the borrowing population and will reduce loan numbers significantly which brings a lot of other issues to the fore front.
· The second tiers and smaller institutions are now becoming very popular, they now account for 37% market share, but they are struggling to service such volumes and navigate around this ever changing financial system. Patience is required as they improve, gather staff to manage volumes and learn the ropes that the majors have developed over the past 30 years to be able to play in the big school ground.
As you can see a lot is happening and it is very important for you to know, it has changed and will continue to change. Our approach together should be different by doing the following –
· Speak to us well before you require the funding.
· Get paper work to us quickly and all together because banks won’t half assess an application in such an environment.
· Expect that the banks will come back more often than ever because the assessor is protecting themselves and would rather have someone else sign off your loan and take the responsibility. They regularly come up with the most absurd reasons which is frustrating not only to you but all of us processing your important application.
· A refinance before took 35-40 days on average, now can be up to 70 days depending on the above response rate. We are continuing to work on getting this down to 45-50 days, but we need your help to achieve that by responding in a timely manner to our requests and understanding the current situation. The Financial Institutions will make skill errors with documents in this environment due to work pressures from the Royal Commission and the Regulators. This results in signing documents multiple times and not utilising your time appropriately which means we all need to be triple checking all applications and paper work to minimise the effect for all our clients.
Other Notable Financial Information You Need To Know
As discussed above, cost of funding is more expensive and has become more expensive over the last 12 months for the institutions to get the money in and hence rates could go up for this simple reason. The discussions are around 15-20 pts which has minimal effect. On the other side, the RBA hasn’t moved and doesn’t look like moving due to the current economy. If you read the literature from all the economists, the next rate increase is expected in 2020. Obviously we can’t confirm or advise on this as a lending company but that is what is expected.
As far as rates are concerned, the Majors are still very expensive with variable rate loans for the Investor’s out there ranging from 4.4-4.6 % for Principal and Interest and 4.7-5.0 % for interest only loans if < 80% loan to value ratio.
The alternative to these high rate’s is getting a fixed rate term at 4.2-4.3% Interest only or going to a second Tier at 3.63% variable principal and Interest or 4.09% variable interest only that I will discuss further below in this article.
Please make contact with me if you are concerned about your current rates so we can discuss a better/cheaper solution for you.
CGT / Negative Gearing:
Capital Gains tax and negative gearing is a topic for discussion for the upcoming election and Labour have made it very clear that they want to change both of these which could affect investors dramatically moving forward.
Labour could either eliminate Negative Gearing or cap it at a certain number of properties for each individual.
This will make it a lot tougher for our more astute investors who own multiple investment properties. The Labour Government is also suggesting that the 50% exemption for holding investments greater than twelve months be eliminated as well. The impact of this will double your Capital Gains Tax when selling an investment asset and deter investors from hitting the market which could have a dramatic effect on the market.
Note that any changes have to be legislated and this takes time so all investor clients have 18 months up there sleeve to get into the market prior to any possible changes occurring because the government would grandfather these changes meaning that all people that hold the current Negative gearing benefits would continue to do so. A lot of Investors are getting into the market now so that they don’t potentially miss out on this if there was a government change to come.
The majority of major Banks want Broker closed and the Regulators & Royal Commission have been considering this which is concerning
Over the last three months, ALIC has been working closely with the top fifteen brokerages in the country to explain to Treasury and the head of the Royal Commission (Mr Hayne) exactly what brokers bring to the market and that they do cater for up to 57% of the loans written in this country. This % has increased dramatically as the skills internally in the bank system have diminished.
The banks have lost 29% of market share since the GFC in 2008 and would be extremely happy if Brokers were eliminated to ensure that all consumers go to the banks directly for their funding requirements.
This could have serious implications on second tiers that don’t have branch distribution networks which would work to the Major Banks’ advantage in getting market share back, reducing competition and in turn would likely lead to an increase in interest rates to you, the consumer.
It’s imperative that the powers that be, the consumers and our clients at ALIC understand the importance that Brokers bring to the market and the competitive advantage they offer. The industry is working to ensure all interested parties have the right information, and the outcome is to ensure that the consumer gets both choice, competitive interest rates and the right advice. We don’t believe forcing consumers back into branches to borrow with minimal options, nor lending advice offered to borrower’s is the right choice for any of our customer’s.
What to expect over the next six months and have the regulators gone too far?
I was asked this question by the Advisor Magazine only last week and I personally believe that the regulators had to act due to the increase in the Melbourne and Sydney property markets of 57% and 42% respectively over 3 ½ years. However a lot of this comes down to how the financiers interpret the regulatory changes and what they implement into their lending processes over the next six months.
We personally believe if the financers don’t loosen up on a lot of their restraints and requirements the lending market this year will decline by 30% across the country due to their actions. This in turn can offer you some amazing opportunities as Investors when a large % of borrowers struggle to get loans approved and are unable to go to auction.
In summary the regulatory changes and the Royal Commission had to happen, but we need to ensure that all parties are communicating and that the risk and compliance areas of Lending Institutions understand what is required. Lenders need to ensure they do not go over the top with such policy changes and in turn make the staff internally unable or scared to make a decision.
Our commitment from ALIC is to understand the changes that need to occur to keep ahead of the game and we will do everything possible to improve our service levels. This is the hardest time we’ve seen in the financial sector, we will train and employ our staff accordingly to ensure that you have a good experience within our business.
Please be patient and understand that the banking world has been turned upside down and that it is tough for everybody out there. But be reassured that we at ALIC are on the front foot to correct this for all parties.
Huge Opportunities Out There:
90% of our clients at ALIC are investor clients and investors love change and opportunity to allow them to have an advantage in the market place.
This market is exactly that and we need to have our eyes and ears open because there are opportunities here in the National market with a huge differential in property values in Sydney/Melbourne to the rest of the country.
The recent analytics our buyers advocates presented stated that the medium house price differential between Sydney and Adelaide has never been greater than $250,000 and over the last twelve months it’s grown to $750,000 which they believe creates amazing opportunities in that city. Other markets such as Geelong and Ballarat have grown between 30-50% over the last 18 months which brings in growth opportunities in Bendigo and Cairns of all places where the market has not moved for 12 years according to our property experts.
As you know, ALIC is the Leading Investment Lending firm in Australia on lending structures & strategies. Whilst we can’t advise where to buy, our professional advocates have some amazing data on this that shows and proves where you should be buying and if we can get the funding for you there are certainly opportunities out there that we would like you to have discussions about.
Lending Opportunity to save $10k to $20k a year
In my last article I discussed this and headed up a topic “Are you too Loyal to your Major Bank” and we had an enormous amount of responses to this because the Bank rate differential between Owner Occupied and Investment lending has never been so big after five rate increases over the last 15 months. It’s our obligation to update you and let you know when there are better offers on the table that can save you significant amounts of money. If you are not fixed with large penalties to break the loan and you are under a Loan to Value Ratio (LVR) of 80%, you could be saving a lot of $$$$$ by talking to us at ALIC.
We have seen savings of $5k to $30k a year by using institutions that lend on security and not on purpose with Investment rates as low as 3.63% for Principal and Interest. Please let me know if you would like to discuss this with you so that we can determine your savings and the positives / negatives of changing banks for this which in turn could open up more investment doors for you due to higher cash flows.
To finalise this article, I wanted to thank you for being a client of ALIC and giving me the opportunity to update you on the financial world at the moment. We appreciate your patience with our team while we work through a lot of the red tape that has been presented to us since the Regulators and the Royal Commission started their good work.
ALIC and I were lucky enough to win Australia’s Top Brokerage and Australia’s Top Broker 2018 last Thursday for the Mortgage Industry Body (MFAA) and we could not have done that without you, and the clients you refer to us.
I can say ALIC and I are here to make a difference, talk to you very differently to standard loan providers and to always come from a wealth and investment angle when setting up loan structures whether it is for your Principal place of Residence (PPR) or you are building a property portfolio.
So again Thank you and if you know people that want to improve there position and have significantly different conversations around lending, we would love to assist them so by all means hand our details to them or drop me an email.
Have a great day.
1300 254 228
Mark Davis is universally recognised as Australia’s number 1 adviser. For the past 9 years Mark has lead the way in debt structure and strategy enabling his clients to create wealth through specialist advise from Mark and Australia’s best property experts.
Named the MFFA industry body Broker of the year 2018.
To make a time to review your current and future position please call Mark on
1300 254 228.
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