Borrowing money for real estate in Australia has become almost impossible for investors, when borrowing money from a bank in Australia was once relatively straightforward.
As long as the borrower could demonstrate they were a responsible individual and had the ability to make repayments up to 30% of their gross annual income, they were likely to be given a loan for even a negatively geared property. But then the GFC (Global Financial Crisis 2007-08) hit and banks closed their doors, restricting lending to certain sectors and borrower types. A few years on and the fallout appears to have resulted in tighter lending policies and a restructuring of how loan applications are considered and processed. The insertion of APRA (Australian Prudential Regulation Authority) as the statutory authority of the Australian Government and the prudential regulator of the Australian financial services industry, forced more compliance upon Banks and in turn Loan Applicants, however it was the Banks who benefited from the move by bolstering the balance sheets of most lenders, a fact reflected in the escalation of Bank share prices on the stock market.
How times have changed. Back before the GFC, a bank manager would be given “discretion” to approve funding up to a limit of say $2mil without head office approval. Nowadays all applications are assessed by a credit department, dominated by data operators out of university with no sense for investing and little knowledge of real estate, but who can follow rigid input protocols. With little consideration for the quality of the investment property, credit departments appear to lack logic as loans are assessed on a broad brush approach rather than on a case by case basis. Borrowers commonly find it difficult to get a straightforward answer, or get declined for finance on the basis of some obscure policy that makes little sense in the market. Additional mechanisms have also been imposed by Banks to control commercial lending, which in part, has encouraged borrowers to engage mortgage brokers to help sort through the ever changing policies of each lender.
To sum things up however, Australian Bank Lending has been and is still undergoing a credit squeeze brought about by Central Bank agendas that work hand in hand with Government policies under the guise of “managing the economy”.
Essentially, banks have made borrowing difficult by manipulating criteria related to loan assessment such as: serviceability, valuations and documentation. For example; Banks may value a property less than the contract price, so the borrower/applicant is forced to put more cash into the deal than what they calculated for the deposit. Another is discounting the actual rent by 10%-20% to reduce the income performance on an investment property, they can then argue the borrower needs to include their wife or family member as guarantor on the loan, thus implicating the borrower’s family in the deal that would previously be unnecessarily.
For a few years, at least since the GFC, interest rates in other countries have also been on the decline. As of 2020, the wholesale interest rate in Australia is 0.25%, effectively the lowest rate in history. While you’d be excused for thinking its a great time to be borrowing from banks, cooling the attraction of low interest rates, ASIC has imposed “Responsible Lending Policies” upon financial institutions. This has had the effect of making the process of applying for a loan, even more difficult and onerous for the borrower, as the increased demands for cash or equity from other properties could be considered excessive security for banks, which in turn leaves the borrower exposed if they are unable to service the debt for any reason down the track.
Veiled by Government regulations aimed at more “prudent lending practices” in the wake of the GFC, Banks are able to cherry pick the deals that will provide the greatest level of security and serviceability. The risk balance has shifted greatly to the Borrower, who stands to lose everything they own in the event of a default or negative economic conditions.
For most people including self employed, Immigrants, first home buyers, employed single parents, seniors and those with a small deposit, borrowing money from a bank is harder now than it ever has been and that has left a greater number of buyers out of the market for buying property. Interestingly, the Government tells us they are committed to “affordable housing” strategies to make owning a home more accessible to all Australians, but at the same time, they ratchet up the pressure on banks to restrict lending, even though interest rates are at record lows. Go figure!
Sellers would be wise to therefore consider different strategies that entice buyers into purchasing without the reliance on bank finance. There are a multitude of ways property can be transacted, many of which have been used since Federation, and many alternative forms of transacting property are just as secure as borrowing from a bank.
Please refer to our other articles on this topic. You may like to read Sell Your Home Fast.
