The sudden and unknown nature of COVID-19 has triggered an unprecedented global economic shock and disruption to Australia’s economy and business confidence. Even as restrictions start lifting, we are still well and truly in a national state of economic ‘hibernation’.
Borrowers are seeking to reduce unnecessary expenses to preserve cashflows to survive through these uncertain times. As a result, banks and lenders are grappling with a sudden spike of relief requests from consumer and business customers at the start of this economic shock, and have been forced to respond rapidly to borrowers while navigating new economic stimulus packages.
Banks and lenders have been put in a position where they have to strike a sustainable balance between:
- Demonstrating compassion to borrowers;
- Maintaining capital adequacy; and
- Avoiding exposure to future regulatory risk.
Because of this, many lenders are reducing their risk appetite and tightening the screws with credit policies.
Why are lenders changing their lending policy?
- To reduce their exposure with future delinquent loans
- Protect their balance sheet and maintain a healthy credit rating with rating agencies like Moodys and Standard & Poor.
- Reduce emerging serviceability risk associated with the economic fallout from COVID outbreak
- Provide a more accurate risk assessment to borrowers wanting to get a loan
What are lenders concerned about when assessing your loan application?
When navigating these changes to lender policies, it’s important to understand how lenders assess loan applications. Lenders are looking to compartmentalise their lending risk during COVID-19 based on a set of metrics.
These differ from lender to lender but include considerations such as:
- Is your current industry being heavily impacted by COVID-19?
- What’s your current occupation? if your main responsibility is in sales and unable to perform that task, this may be considered as an added to risk to the lender
- What is your occupation type? Are you currently being employed as full-time, part-time, casual or contractor? Casuals and contractors may be deemed high risk due to uncertainty with the employment arrangement.
Remember: a lender’s main concern is the borrower’s ability to meet their ongoing monthly repayments. This largely relies on continuity with employment.
Other things that lenders might take into consideration include, but are not limited to:
- Has rental income reduced on any of your investment properties?
- Does your salary encompass Job Keeper payments?
- Lenders will also try to gauge a general understanding of your repayment conduct. For example, are you taking a repayment holiday for any of your existing loans? Are you making your scheduled repayments on time?
How are lenders are temporarily changing their lending policies
Lenders are constantly assessing their lending policies to ensure it is in line with their risk appetite.
Some temporary policy changes include, but are not limited to:
- Not taking into account your income if your industry is considered to be high-risk or heavily impacted by COVID-19
- Not taking into account any income for servicing if your occupation type is casual and/or contractor
- An increase in income shading on income such as overtime, commissions, bonuses etc. For example, if the lender typically only uses 80% of your commission income for your loan, the lender may only use 60% of your income under the new temporary change.
- A reduction in rental income used for calculating affordability. As a standard practice, lenders are prepared to use 80% of the gross rental income however some lenders may reduce this from 80% to 70%
- Applying a restriction on Loan to Value Ratio (LVR), which is how much you can borrow against the property.
- Requiring borrowers to demonstrate ‘time in job‘, where you need to be with an employer for a minimum period or no longer on probation
- Reducing the LMI Waiver under Medico or Professional Industry policy from an LVR of 90% to 85%
- Mandatory employment verification where the lender will contact your employer to confirm your employment details
What to expect from lenders as part of the application
- Lenders may request more information once the application has been submitted
- Lenders may request more up-to-date supporting documents such as payslips or bank statements or home loan statements
- You may be required to obtain a Letter from Employer demonstrating continuity with employment
- There may be a delay in service level. It’s now taking longer for lenders to review applications as resources are stretched out.
With all the changes, it’s more important than ever to have a mortgage broker by your side to help you navigate different lender policies. During these challenging times, our team of expert brokers are here to help. Get in touch with us today.