I felt compelled to comment and share my thoughts following the ABC 4 Corners Program on 21st August.
This broadcast was grossly negative on our industry, the property market and unethical / bullish practices from brokers and lenders. Whilst I do not disagree about the concerns about increasing home prices, especially in capital cities of Sydney and Melbourne and the difficulty for First Home Buyers (it is the same in London and New York), I would like to comment on a few points.
The ex-Mortgage Broker spoke of his concerns about bullish lending practices and concerns of commissions as our source of remuneration. An 18 months ASIC review and enquiry on Mortgage Brokers processes and remuneration concluded that the current system of commissions is an effective remuneration model, of course some minor adjustments can be made, but on a whole it was agreed that the current system is OK.
Most brokers are individual microbusinesses, such as Pink Finance.
60% of all brokers have under 3 loan writers in their business. Only 20% of brokers have greater than 11 loan writers who could be subject to more settlement targets. An MFAA industry report for the 6 months of APR-SEPT 2016 showed that the average settlement volume was just $6.02 million. This is just over $1,000,000 / month in settlements.^
The targets of $3,000,000 or they are forced out is not from their bosses. Sure, lending managers from a branch may be different but the mortgage broking industry is certainly not that. The average settlement volume across Australia is under $2,000,000 / month.
What Mr Dempsey failed to point out is that there has been SO. MUCH. CHANGE to lending standards in the last couple of years where the effect that the average borrowing capacity has reduced by $150,000 – $200,000 in the last 2 years.
Here is a list of significant changes recently made to home loans:
- Increased rates for investment lending
- Increased rates for interest only lending
- Reduced borrowing capacity for interest only lending
- Mandatory detailed reporting of living expenses (not just relying on lender minimum standards)
- Increased assessment rates (the risk rating rate applied to your home loan)
- Increased buffer for other financial institution debts (car loans, personal loans)
- Reduced rental income with some lenders
Credit goes to ANZ CEO Shayne Elliot who was the only lender to comment on this report and stood by the assessments of their loans. They felt comfortable with their lending standards. As do I.
RBA Cash Rate
All of these changes mentioned above provide and allow for rate hikes. In mid August the RBA did make mention that the Cash Rate could increase 2% over the next few years – whilst this would be a gradual process, the banks are already assessing new lending at higher than this. Currently the average assessment rate sits between 7.25% – 8%. Many home loans will fall between 3.79%-4.79% if we add 2% to 4.79% the current assessment rates of the banks is still higher than the potential home loan rates.
Comparison to other countries
I struggle with comparing us to Ireland and Spain. Who have had significant reduction in property values. Their economies, social system and culture is completely different. The diversity Australia has and its proximity to the growing Asian economies holds us in a very different picture in my opinion. If we were to compare a city, perhaps England would have been a better comparison – but that would not be as dramatic …
The program also show-cased some investors who are struggling with their repayments due to reduced rent and was due to advice solely provided by brokers and developers. My comment to this is that brokers and developers are NOT financial advisors our credit licence does not warrant us to do this. Whilst we can guide you as to your borrowing capacity and loan structures, advice and wealth creation strategies should always be sought by an accountant of financial planner.
The young couple who have been very aggressive in their investment strategy is a poor reflection of a property investor. I too would be uncomfortable with this strategy unless if a financial planner or accountant had provided some sound advice. This is not reflective of most property investors. Less than 10% of the population have an investment property and less than 2% of the population have more than 2 investment properties. (source CoreLogic)
The location of the investment properties was also very skewed and one sided. When investing in areas heavily reliant on a single or transient industry you will experience greater volatility. Mining towns and some rural towns will always be volatile. This has always been the case and will continue to be riskier.
Whilst I am not dismissing that perhaps the subject was ill-informed where were the interviews with the brokers that advise clients NOT to increase their loan exposure for now.
My referral partners, some of which are property investors, know that I will never place clients into a structure that can put them at risk. This is what most brokers would consider as standard practice. Every. Single. Day.
Hand on heart, we absolutely care above your long-term goals and dreams and we truly work bloody hard to get your loans approved especially with the increased changes to policies. I know many of my clients are surprised by how much extra paperwork we need now. It is not like how it was a few years ago… and I am completely OK with that as it protects our clients, my licence and the entire industry.
This is what most brokers would consider as standard practice.
Every. Single. Day.
So, in summary, as someone who so dearly loves what I do and the difference we make to our clients lives here are some tips to consider when looking at your lending needs:
- Provide an accurate picture of living expenses – if you would like a budget planner, you can download one here.
- Think twice if you really need that credit card / personal loan / car loan especially if you are considering purchasing a home down the track.
- If you are investing seek advice from an accountant of financial planner if you have any concerns.
- Whilst your broker is here to look after your best interests, you do need to be accountable for your own expenses too.