You may have heard the phrase ‘tighter lending conditions’ but what does it actually mean?
While the term sounds fairly straightforward, understanding how it applies to you and your finances in 2019 requires a bit of briefing. Let us help you out.
What are tighter lending conditions?
When lending conditions ‘tighten’ it means mortgage providers are reining in their spending. In general, interest rates have risen, loan amounts have decreased, and proving your loan viability has become perhaps a bit harder.
Depending on your income, assets, credit score and savings, you may have found the size or type of loan available to you is a bit more restricted than in previous years.
Why are there tighter lending conditions in 2019?
A significant reason is that the banking royal commission shone a spotlight on lending activity. It discouraged risky lending and encouraged mortgage providers to be extra thorough when considering who to lend to, and for what purpose.
In some major cities there has also been a mismatched supply and demand for housing. As populations grew and foreign investors remained highly interested in many cities, it took time for housing projects to catch up to the demand – leading to high competition and booming house prices. Now that housing is catching up, prices have fallen.
While RBA reports that loan approvals remain consistent and the overall effect of lower house prices on the economy is fairly insignificant at present, lenders remain cautious for the time being as further downturn might have greater economic impacts.
How could tighter lending conditions affect you in 2019?
Several areas are affected by tighter lending conditions:
While loans are still being approved, tighter conditions mean maximum borrowing amounts are falling and rates are rising. It also often means a lower loan-to-value ratio (LVR).
LVR describes the amount the lender is willing to give you against the value of the asset on which they are lending. For instance, tighter lending conditions mean that a mortgage provider may only be willing to lend you up to 80% of the value of the property you’re buying, as opposed to say 90% or more.
This of course depends on your own credit quality, which is typically calculated in accordance with your income, savings, assets and debts.
However, if you’re a first home buyer with no leverage, it has become customary to save at least a 20% home deposit before seeking your loan as the more you save – the better your LVR is likely to be (plus you won’t have to pay lender’s mortgage insurance)! You might also look to a guarantor to negotiate a better deal.
Investor lending has remained low after restrictive measures were implemented in 2015. Despite these measures being lifted, Domain reports investor lending has remained low and that rates on interest-only loans for investors have risen the most in recent years.
Off-the-plan and house and land package purchases
While the RBA reports little change to approval rates – meaning you are unlikely to be declined for this type of housing – they did report a decrease in lending in these properties.
This could be linked to demand, but the RBA also posits that house and land packages are considered a greater risk, and loans on these properties are therefore taking longer to approve. They also reported similar lending resistance to off-the-plan homes.
Higher mortgage rates
Despite the RBA cash rate remaining low and unchanged, mortgage lenders face other financial pressures leading all major banks, for example, to increase their rates.
Domain suggests one such reason is to compensate for formerly dispensed low-interest loans. While these are still being repaid, the banks are forced to transfer their costs to new mortgage applicants.
Words by Rebecca Mitchell.