Clients in financial difficulty worried about being refused loans, says broker
Fear of being refused a loan by banks in the future is one of the key reasons why mortgage-holders are reluctant to tell their lender they’re in financial difficulty, says Sydney brokerage owner Ashik Rahman.
The director of Sydney brokerage Raen Capital was reacting to new research published by ASIC’s Moneysmart program which revealed that 47% of Australian adults with debt, equating to 5.8 million people, have struggled to make repayments in the past 12 months due to cost-of-living pressures, reduced income, and unexpected expenses.
The data showed that 30% of Australians said they would not seek hardship assistance from their bank or lender but would prefer to sell belongings and assets (42%) or obtain a second job (40%) before applying for such assistance.
The ASIC research also revealed that 55% of respondents were unaware they could request financial hardship assistance and only 20% had ever done so.
Rahman (pictured above) set up Raen Capital in August 2023, after working as head of lending at Landen Group. The brokerage focuses on residential lending, with the majority of Rahman clients being mum and dad investors, and some first home buyers.
Rahman said he loved to educate his customers about their finances, he had built a personal rapport with them and they were comfortable talking to him about their financial situations.
But he understood why borrowers didn’t want to approach their bank and tell them they were struggling financially and in danger of missing mortgage repayments.
“There’s a fear of future refusal,” Rahman said.
“You're going to the bank and you are telling the bank, I cannot afford the lending that you have given me. A lot of people have that fear that if I open up to the bank, I may not get lending in future because there’s a note against my name in their system that's saying I struggled.”
Rahman said another factor that prevented home loan customers from talking to their lender was credit rating.
“No one knows whether it's going to impact your credit rating. Somewhere it will be written that you failed to make that repayment.
The third factor was perception, said Rahman.
“What would my lender think, what would my bank think? In most cases, people don't like to really open up and talk about their problems … in this day and age people would rather just keep it all bottled up and then move on.”
Rahman said he couldn’t approach the client’s lender about their financial situation, but one of the biggest tools at his disposal was the Moneysmart budget planner.
He used this free tool to show clients their spending habits and help get them in savings mode, whether they were wanting to refinance or preparing to buy their first home.
Rahman said he had used it to help clients understand their finances and live more sustainably.
He applauded banks for their use of the household expenditure measure (HEM) table when considering loans.
“If you look at the HEM table versus what customers declare as expenses – the HEM table in most of the cases is higher, that’s a good thing … banks don’t want customers to be in hardship.”
Case studies
Rahman shared examples of clients who had struggled due to interest rate rises, including coming off low fixed rates onto interest rates that had tripled, cost of living increases, reduced borrowing capacity and serviceability challenges.
Older couple with two properties
One example involved a couple in their late 50s who owned both an owner-occupier property and one investment property.
Rahman said the loan on their investment property was with a second-tier lender with a rate in the mid-7% range.
“This is a high rate and the interest rate on the owner occupier wasn’t fantastic either,” he said.
The aim was to try to refinance and reduce the interest rates on both loans.
“After running the calculations, I couldn’t service the loan – it just wasn’t possible.”
Rahman said the husband and wife made the hard decision to sell their primary residence, which had the higher equity of the two, to “alleviate the pressure” of increased interest rates.
The couple moved into their investment property and are now looking at refinance options to reduce repayments.
Rahman said this was a perfect example of a couple whose kids had moved out of home, they were both earning but struggled to make mortgage repayments, with the rental income not being enough.
Younger couple with one property, multiple loans
Rahman said he recently spoke to a younger couple with children who had one home with an LVR of about 75% – the low LVR was not due to making extra repayments but rather the rising value of the property.
He said the couple also had two car loans, two personal loans and a credit card that was “maxed out”.
“They had a conversation with me about what to do. They asked ‘can I consolidate my debt and bring it all under my home’ but the borrowing capacity was not there.”
Rahman said with both parents working full time and little time to cook meals, he looked at what they spent on takeaway food in 14 days and it came to about $900.
“I understand why they did what they did – that’s the only time they have with their kids, pick up the takeout food and come home and sit down with their children.”
Rahman said he spoke to the couple about changing their behaviour and they were now working on this, including paying down the smaller of the personal loans first.
“Pretend you’re spending $900 a fortnight on your groceries – put that $900 onto your personal loan.”
The couple bought their $1.2 million house post-COVID on a 2% servicing buffer when interest rates were around the 2% mark.
Rahman said the value of their home had increased about $200,000 but living expenses had also increased.
Behaviour hasn’t kept pace with reality
It’s clear there’s a growing number of borrowers who have missed one or more mortgage payments. A recent survey by Finder, involving more than 1,000 people, showed 12% have missed one or more payments in the last six months.
Rahman said higher interest rates and cost of living increases had contributed to the number of mortgage-holders who were struggling.
“Some people are moving from a fixed rate of 1.99% to suddenly over 6% - you’re looking at triple the amount of repayments but behavioural change, that hasn’t happened.”
Rahman said borrowers weren’t cutting back on their spending to match the reality of their current financial situation.
He said three years ago a high-net-worth professional client received a property loan on 95% LVR, no LMI on a 2.5% variable rate.
Recently that client had approached Rahman saying he wanted him to explore options to reduce his rate, which was now at 6.5%, and he also wanted to purchase another investment property.
“I said, ‘I’m lucky to be able to service your existing loan, let alone give you additional funding for your new investment purchase.’ It’s expectation versus reality – their expectation is still at three years ago in terms of borrowing capacity.”
Customer retention
Retaining customers was incredibly important for brokers, said Rahman.
“If I write a loan, I want the customer to stay with me.”
Rahman said he would do his utmost to help customers and he always encouraged clients to seek out the lenders retention team first before he looked at a solution for them.
