Two leading mortgage brokers have suggested that NAB’s switch to loan-to-income ratios will “not change much”, adding that a closer look at expenses would go further to reducing mortgage stress.
The NAB group, including Advantedge, announced recently that it had changed its credit policy so that applications for interest-only and principal and interest loans would only be approved if they passed a loan-to-income ratio test.
The new ratio, which aims to determine the “customer's indebtedness to the loan amount”, takes the total limit of the loan and divides it by the customer’s total gross annual income (as disclosed in the application).
Ratios greater than eight will be declined, according to the new policy, for applications assessed on or after 16 September 2017.
According to the Australian Bureau of Statistics, the average weekly earning in May 2017 was $1,543.80. When extrapolated, this equates to $80,277.6 a year.
As such, this would mean that, under the LTI ratio, a person on the average salary would only be able to access mortgages below $642,220.8.
However, several mortgage brokers have suggested that the new credit policy would not make a lot of difference to serviceability as most lenders would not approve loans with such high average multiples of income anyway (with some analysts suggesting that a ratio of eight is still 'too high').
Stephen Dinte told The Adviser that he had contacted NAB following the announcement that they would be implementing an LTI ratio and asked what an acceptable and unacceptable ratio would be.
He said: “The response was: ‘The bank is seeing that if income is below eight times the loan amount, then it would likely fail servicing in any case.’”
However, the principal mortgage planner at Australian Mortgage Planners and co-chairman of the Independent Finance Brokers Forum (IFBF) said that he felt that consumers would be “better served if lenders took a more realistic view of living expenses when determining borrowing capacity".
Mr Dinte explained: “Benchmarks like HEM [Household Expenditure Measure] are flawed, as is any one-size-fits-all approach.
“It is not hard to appreciate why consumers are now complaining of mortgage stress, which comes about as a result that their true living costs never accurately determined.
“Lenders look at the borrowers’ living expenses at the time of the application, but generally fail to make allowances for the additional costs of home ownership, such as council and water rates, home insurances and home maintenance, that these borrowers will soon be incurring.”
Mr Dinte alleged that there is also “an endemic failure by lenders to allocate any income to savings”.
“This is where finance/mortgage brokers demonstrate their professionalism in assisting clients as these 'extras' are factored into most credit assessments,” he said.
“I would be confident is asserting that broker clients are in the lowest percentile of borrowers suffering mortgage stress. I know mine are.”
CEO of My Mortgage Freedom Anthony Alabakov agreed, saying: “I personally would like to see living expenses more strenuously tested... NAB has a reason why it is doing [LTI tests], but I think a much more strenuous conversation with the clients is needed."
According to Mr Alabakov, lenders “should absolutely be requiring more evidence on living expenses”.
He continued: “It’s our responsibility and the lenders’ responsibility to see some evidence on expenses, bank statements or even receipts. There is a certain responsibility that we have to really understand the client's situation. It’s not just about getting the loan set; it’s about ensuring that they are going to be able to afford the repayments going forward.
“There has to be a minimum serviceability. But I think those minimums also have to have some type of evidence. And I think that will be make people more comfortable with the debts they are taking on and would mean they are not stressing themselves if living expenses were more strenuously tested and more detailed."
Mr Alabakov concluded: “Really understanding that side of the client’s living situation, which brokers are doing, is [a] much more prudent way of going about it.”
The focus on expenses has been mounting recently, with ASIC chairman Greg Medcraft stating last week that banks have “no excuse for not challenging expenses”.
Speaking at a hearing by the House of Representatives Standing Committee on Economics last week, Mr Medcraft highlighted that the regulator was taking to court some banks over their use of indexes rather than “proper expenses”, thus suggesting that inaccurate information (at least when it comes to expenses) should be caught by lenders.
He continued: “I do think the message to banks is that, frankly, there's no reason they shouldn't challenge the estimates. Because when you think about it, particularly if your bank account is with that bank, they have a pretty good idea of what your expenses are from the data they have. Even if they don't have your account, they have access to big data.”
Mr Medcraft continued: “They know pretty well how much, in a particular locality, somebody's cost of living is, roughly. So, there's really no excuse for not challenging it if the expenses don't look at least reasonable for the area they're living in.”
[Related: NAB Group changes credit policy]
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