DISCRIMINATORY LENDING – WHAT IS IT?
It’s April 2021, the property market is booming, agents are rubbing their hands together at the sheer numbers of people inspecting open homes, buyers are frustrated that they are being walked over for a higher price and banks are telling us their approval times have blown out to 30 days in many cases.
But even if you’re in the market for a home and you make it past the gatekeepers and are lucky enough to sign a purchase contract, the next step towards getting finance might just freak you right out.
At this stage, borrowers generally were being told that it might take at least 21 to 30 business days to get finance approval. You will be in a good position if your lender has pre-approved your loan and you are NOT self employed.
In Australia, it seems the word self employed is becoming noxious to the lending system. While most self employed people have fared much better than employees during the China Virus restrictions, the rebound in the property market, low interest rates and the need to borrow money from mortgage lenders is exposed where the problems exist, for borrowers as well as banks and the Government.
We all know about the sub-prime mortgage collapse in the USA in 2008, which led to the Global Financial Crisis. Well to avoid a similar collapse the Governments and central banks decided to restrict mortgage lending by imposing rules that forced borrowers to provide more equity or capital and therefore reduce the lender’s risk. Remember APRA?
Now we also know how, that even when interest rates fell to record lows, it was almost impossible to get a loan because the Government was restricting the types of borrowers and loans that banks could deal with. It would be easy to guess that the banks knew they were onto a good thing. The new APRA rules meant they could “cherry pick” borrowers for apparently lower risk mortgages.
Well those mortgages, are packaged and sold to investment markets around the world in a process called “Securitization”. The less perceived risk in the mortgage, the higher the rating, and therefore the better return to the bank when they sell the mortgages as a security. Most likely a AAA rating is what the banks aim for.
Is Being Self Employed a Disadvantage?
What does this mean for borrowers who are self employed? The “self employed” borrower compared to a white collar employee, might earn more money, have greater wealth, less debt, better investment or business skills and has a closer relationship with the market, but unfortunately, a mortgage backed security serviced by a self employed borrower might only rate as a B or B+ security.
Herein lies the crux of the discrimination problem. Banks and most lenders, are reluctant to lend to self employed applicants and their assessment departments are stacked with people who have no clue about how to assess business derived income. So the lender puts policies in place to make the bar higher for the self employed applicant. The poor self employed applicant doesn’t find out they cant get a loan because the sales staff have no idea of the policies that the lender has imposed until it reaches a point in the application process where they raise an impossible, illogical question, so ridiculous that it prevents the applicants file progressing, and that’s even if it gets looked at in the first place.
Things to be Aware of
We all know that banks and lenders tend to stall applications when the credit department is dominated by morons who cant assess business derived income, but in reality, the bank’s avoidance of lower rating mortgages is the discrimination factor we experience in the market place when it comes to borrowing for a home as a self employed applicant.
What can be done about it. Nothing! As long as Government support stupid, ill conceived regulation that disenfranchises a major portion of the community and allows banks and other lenders to rape and pillage the market under the cover of “self assessment”, we have no hope.
What should people do if they still want to apply for a loan as a self employed? Go hard or go home! Here are a few ideas:
1. Get all your business income and accounts up to date;
2. Make sure your net income from all sources is available to service the proposed loan by at least 50% more than needed;
3. Know what you want from the loan, do your homework and get educated before moving forward. eg Interest rate, facility type etc
4. Engage with a reputable mortgage broker to guide you to the most likely lenders and collate the information you will need;
5. Put all your application documents in a dropbox.com folder (its free) so you can easily share it with multiple lenders;
6. Once you have the broker working on a lender, go find several other lenders to apply to by using a second broker and going direct to lenders personally.
7. Ensure that you don’t authorize brokers or lenders to access your credit file until the loan is at the approval stage. this will prevent unnecessary footprints on your credit file that will reduce your credit rating;
8. Make certain you have sufficient time in the purchase contract for a) finance of at least 21 days with agreed extension if needed, b) Settlement following approval of at least 21 days.
9. Record all discussions with each of the lenders and brokers and keep records of who you have provided access to the dropbox.
10. Dont let them push you into a corner and use up all your contract time so that you have to request more time. In a hot market you might not get it.
11. As a self employed applicant, the cleaner your background the better, but it will take a seriously determined and diligent broker to get you a loan. It might also mean you get what you can, then look to refinance soon after with a better lender.
12. Refinancing is easier then a new loan application and Banks are currently offering the applicant $2K to $4K cash incentives to churn you away from your current lender. (refer point above)
This article is all about exposing the reality behind mortgage lending in Australia. Shockingly, not even most of the lending team staff understand what’s really happening. They have no idea that they are helping facilitate discriminatory lending tactics upon worthy Australian applicants, who the lenders consider as high risk and less desirable to their business model. After all, its more about getting that AAA credit rating on their loan book which will be sold off as securitised mortgages.