Business

How finance rules are changing

By Michelle Murchison

As the year progresses, it is becoming apparent that Australia has weathered the financial storm better than most, but while our major financial institutions are strong, there continues to be a transition of lending practices back to traditional credit policies of yesteryear.

We have seen more changes to credit policy in the last 12 months in the mortgage market than we have for the previous 15 years. During this time, we've experienced dramatic interest rate changes (both variable and fixed) and major credit policy changes.

To this end, it is essential that you obtain the right information and know where to find the right advice, so that you understand the 'rules of the game' when it comes to mortgage finance (or any finance needs for that matter!).

Interestingly, lenders have been swamped with new business this year, likely and in part due to the historically low interest rates and continued demand for well located properties.

While lenders still have to watch their 'cost of funds' which in turn impacts on their profitability, it stands to reason that some 'credit rationing' affords them the luxury to slow down and 'hand pick' the influx of new business.

Key areas of credit policy changes significantly impacting on mortgage and finance are:

• Loan to Value Ratios (LVR) – most lenders have made a significant change to reducing their maximum LVR down to 90% of valuation. When mortgage insurance is required (above 80% LVR) the lending criteria has become even stricter. An increased contribution/deposit from the borrower enables the lender to 'slow the tap down', thereby attracting better quality loans.
• Employment stability – in light of redundancies and staff layoffs this year, closer scrutiny of employment stability by the lenders is becoming more apparent. The longer you are in your job the better (three years or over). If you have been in your job short term (or you're looking at changing), be careful as this will not be viewed favourably. Most lenders prefer six-12 months in a current role (if less than one year), and more than two years in the same industry/role experience.
• Genuine savings – this change has meant most lenders want to see home buyers with a cash deposit (or equity) amounting up to 5% of property purchase in the form of genuine savings demonstrated over at least a six month period. This is good common sense in my opinion. If you've been able to set aside savings over a prolonged period, you are demonstrating you can live within your means. This criterion gives the lender ability to see demonstrated 'delayed gratification' of the borrower, who is most likely and importantly willing to repay the loan in the future. The key is for young borrowers to start planning and saving sooner, if they wish to buy.

I honestly believe, now more than ever, that most borrowers need to seek experienced advice from a good accredited mortgage broker, who has full access to a range of lending solutions. Lenders' appetite for different types of borrowers and loans is changing frequently and is almost impossible to keep up with. And what's even more important – knowing which lender to approach first! The last thing you want is multiple CRA enquiries because you went to the wrong lender first.

The best thing you can do is be prepared. Do your homework and ask around for a good mortgage advisor to help you.

Michelle is the owner of Money Advantage. www.moneyadvantage.com.au