A tightening cycle

With the banks’ bad behaviour in the spotlight, they’ve been quick to respond to prove they’re making measurable changes to their lending practices and standards, forcing brokers to quickly adapt.

According to UBS, the royal commission will likely result in the banks’ increasing their due diligence and reining in customers’ borrowing capacity. They have already started rolling this out in the way they calculate living expenses. In April, Westpac increased the number of living expense categories from six to 13, and it has begun requesting potential borrowers’ online banking details to check income and expenditure habits.

Sam Ghoreyshi, a Smartline broker based in the Sydney CBD, says he’s observed the banks becoming slower in responding to loan applications because they’re applying a more careful approach to checking documents, transactions and living expenses, and crossing the t’s and dotting the i’s for both new and existing loans.

“In terms of verification of expenses, they have gone over the top,” he says.

Ghoreyshi was recently applying for a mortgage on behalf of a client making $700,000 a year, and the assessor was “hell bent” on a $100 deduction coming off her monthly pay cheque for taxi credit. This is something that never would have happened in the recent past, he says.

Another example of the “fine-tooth comb” assessors are using to verify expenses had to do with one of Ghoreyshi’s clients who’d made two repayments to their mother for some grocery shopping she’d done for them. The assessor wanted to know if this was an ongoing commitment.

“If you have your heart set on buying a property that you might not be able to afford now, it almost comes back as the broker’s fault, whereas it’s not” - Sam Ghoreyshi, broker

For the last few years, Smartline brokers have been emailing clients a list of living expense categories that they have to fill out so the broker can have a more informed conversation with them and begin the verification process.

Apart from the increased scrutiny around household expenses, one of the biggest changes Ghoreyshi has noticed in the last two months – perhaps as a result of the royal commission – has to do with property valuations coming in short on refinances, top-up loans and even some new purchases.

“The banks are either mandating a more conservative approach to the valuers, or the valuers are obviously a lot more careful to make sure they’re not overvaluing anything right now,” he says. He’s seen clients’ valuations come in short by anywhere between $20,000 and $200,000 of the price they bought the property for or estimated it was worth. That can have a huge impact on a client’s LVR calculation.

“It might mean that the bank will lend them less money or it might push a client into LMI territory, which costs the customer more. On a couple of occasions it’s made it difficult for customers to make the purchase, because now they don’t have the money to make up the difference,” Ghoreyshi says.

Once brokers explain that the lending market is changing, most clients grasp the dynamics at play, but not everyone responds with understanding towards their broker.

“If you have your heart set on buying a particular property that you might not be able to afford now, it almost comes back as the broker’s fault, whereas it’s not. It’s literally that the calculators that the banks use are tougher to get through. … The positive side for the banks is that the loans that they do put through should be of better quality.”

While most clients are not calling brokers outright demanding to know about the royal commission, brokers should still be proactive about communicating any relevant changes to them, Ghoreyshi suggests.

But an element of calm reason is also needed: “With all these things they come in cycles; we’re just in a tightening cycle at the moment”.