Why is the bank saying I don’t have Enough Borrowing Capacity?
A question we often get goes something along the lines of: ‘I make my repayments on time, and I save $1,000 per month, why is the bank saying I can’t service a loan?’ Here’s how banks conduct loan serviceability.
When a bank calculates loan serviceability, they are essentially evaluating your ability to pay back a loan.
Lenders base this decision on a number of factors, including your income, the loan amount, and other commitments or extra expenses.
With all of these things in mind, the bank figures out a debt service ratio (DSR). In a nutshell, the DSR is the percentage of your monthly income expected to be spent on debt expenses.
Lenders usually cap this at 30 or 35%.
How banks conduct loan serviceability
Of course, the borrower’s standard salary is considered here. But so too are bonuses like overtime, commission, and even company cars.
For nurses and the emergency services, all overtime payments are included in serviceability calculations.
For other professions where overtime payments are more infrequent, only a proportion of overtime is included.
If you have a second job, you must be employed there for a year before this income affects serviceability. And for investment properties, most banks will consider just 75% of the rental income (to allow for associated fees).
Lenders can also take into account Centrelink benefits like Family Tax Benefit if your children are younger than 11-years-old.
Reasons why loans can’t be serviced
If you have been making all of your repayments on time and saving a decent chunk of your income, you may well be wondering why a bank has just knocked back your loan application.
One explanation may be that lenders calculate repayments by adding a margin of 2.5% or more to the variable rate. This is known as an ‘assessment rate’. It’s used to predict whether you would be able to meet repayments if interest rates rose to 7.5 or 8%.
Unfortunately, this – as well as credit card debt, student loans, car loans and the number of children or dependents living in your home – can negatively affect loan serviceability and make it much harder to get the finance you need.
Bearing these factors in mind we can help you rearrange your finances and improve your chances.
How we can help
If you’ve recently been advised by a lender that you can’t service a loan, don’t hesitate to give us a call.
We’d be more than happy to look into your individual situation, help you address any issues, and line you up with a lender that’s offering a great home loan.
Existing and would be investment property investors and homeowners have been stung in recent months with increased interest rates for both investment and owner occupied loans. Most are wondering, what’s really going on?
The reality is that loans for investment properties overheated in the Sydney and Melbourne property markets, so APRA (Australian Prudential Regulatory Authority) stepped in and told lenders to cool it.
Apparently, their rule is that lenders are not allowed to let investment property lending exceed growth of more than 10% per year. It appears that a number of banks had breached that threshold and were warned to rein it in.
Banks Stretch the Limits of Incredulity
Additionally, the banks were told that they needed to increase their cash reserves in order to reduce their risk exposure in the overheated property market. What does that mean? Simply they needed to find extra cash from somewhere to bolster those cash reserves. Of course, they went to their shareholders to achieve that didn’t they?
No they didn’t, why should they, when they could just simply shoot sitting ducks in the barrel? The banks simply put out a few press releases, bemoaning how ‘hard done by’ they were and increased the interest rates on all their existing customers. In some instances not only those with investment property loans, but owner occupier loans also.
My take on that is, they should have gone to their shareholders. Because, now the customer is subsidising the cash reserve increase, are the banks going to refund that money when and if those inflated cash reserves are no longer required? I don’t think so!
How Much Money are They Making?
Prior to the Global Financial Crisis lenders existed on margins of 1.5% and sometimes a little less. The property market was reasonably flat, especially in Sydney and Melbourne. The mortgage market was extremely competitive. In fact we all know if you could have ‘fogged up a mirror’ there was a lender out there ready, willing and able to give you money. Of course that kind of loose monetary environment couldn’t last forever, so it eventually came to a crashing holt.
However, during that time banks have become extremely clever. First, the regulators banned banks from charging exit fees on loans. What did the banks do? They increased interest rates outside of the normal RBA wholesale cycle. Westpac was the first one to try that on and got away with it. Was there a huge exodus of customers from Westpac. Not a chance, most of their customers went along with it with only a slight whimper.
To that end, the four major banks are now enjoying substantially increased margins on all of their home loans.
Are the Banks Guilty of Bait and Switch Tactics?
One thing we can all be sure of is that lenders might give with the one hand, but will always try to find a way to take it back with the other hand. It should be obvious to most by now that the name of the game with banks is to continuously increase their profits. Hence, we have seen ever increasing record profits declared by the banks over the last few years. So, I would suggest to you to expect more of the same in the coming years.
The other important point that some lenders have been accused of lately is, luring customers in with low interest rates and then increasing those rates outside of normal RBA rate cycle changes. Where are the regulators when this stuff happens (out to lunch I guess)?
So, it’s extremely important to thoroughly research the integrity of the lender you are considering going with in regards to their trust level. It doesn’t matter whether you’re going for a new loan to purchase a property or refinancing an existing loan.
What You Should Know About Current Interest Rates
The current interest rate landscape has changed considerably in recent times to the extent that there are different interest rate levels for the same loan. For example, if you are applying for an owner occupied loan your interest rate with some lenders could be higher should you choose to make the loan ‘interest only’, as opposed to paying principal and interest. The same can apply for investment property loans.
What the rationale is for doing that I don’t know. But being a natural cynic, I can’t for the life of me see how the banks can justify doing that. Other than it’s another way to increase their profits. If you’re trying to slow down investors from taking out investment property loans, why put up interest rates at all. My take on it is, it would be just as effective to reduce the Loan to Value Ratio on investment loans.
Is it Time to Fix? Even though it’s difficult to predict interest rate movements there are some tempting 3 year fixed interest rates around at the moment. Currently on notable lender is still offering 3.99% for an interest only investment property loan.
Currently Australia is experiencing a two speed economy (no not that one), slow and slower is what it is at the moment. The Aussie dollar is edging back up as did unemployment slightly. My guess is that interest rates will probably stay pretty much where they’re at until after the coming election.
The property markets in both Sydney and Melbourne did slow down a bit over Christmas and just after for a few weeks. However, the property markets now showing that they still have a little bit of steam left in them. So, while that’s going on I don’t see the RBA reducing rates any further.
Should you be in the market for considering home loan options, give us a call and we will be happy to help you explore your possibilities.
Bio: About About Dave Fleming
Dave is enthusiastic and fascinated by the digital and social media worlds. He is passionate and enjoys entrepreneurial pursuits, wealth creation financial strategies, health, fitness as well as cooking. Dave is the webmaster at www.mastermortgagebrokersydney.com.au, which is an information website pertaining to loans. He has a deep commitment towards writing about and helping people understand the basics of how the financial world works.