The current worldwide credit crisis has started to have an effect on the lending policies of some financial institutions in Australia. There have been a number of changes put in place that will in some cases make it more challenging to obtain finance in the near future. A few of these recent changes include…

• One of the major banks reducing their maximum LVR (loan to valuation ratio) to 90% (previously 95%) for standard loans.  This same lender has also reduced their maximum LVR for low doc loans from 80% to 60%.  For those of you not familiar with low doc loans, they are loans designed for self-employed people who provide a written declaration of their income rather than supply past financial statements to a lender.
• A couple of major lenders, whilst still offering 80% LVR low doc loans, now require that loans above 60% LVR be supported by the previous 12 months BAS statements. One of these such lenders no longer offers professional package discounts (up to 0.7% off standard variable rate) for their low doc products where the LVR exceeds 60%.
• Another lender has decided to only refinance any existing low doc loans away from a select group of major lenders, not provide lines of credit on a low doc basis and will only allow cash out (i.e. funds provided without a specific current purpose) up to a maximum of 10% of the overall loan amount or $50000, whichever is lesser.
• A different lender has declared that they will no longer refinance any investment loans on a low doc basis.
• No doc loans, which are those where a lender does not require a specific income to be stated, have at this time vanished from the market. Up until a few months ago there were several lenders providing these products, however they have been gradually shrinking in number, with the last of these withdrawing their product in the last few days.
• A number of these changes to credit policies have been instigated by the mortgage insurers used by the banks, rather than their own internal credit policy departments. Generally where a standard loan is above and 80% LVR or a low doc loan is above 60% LVR then mortgage insurance will apply, with the insurers policies coming into play as well as those of the lender.

So whilst is some cases the tightening of credit policies will make borrowing more difficult, there are a number of finance providers that have made little or no changes to their credit polices, at this stage. Whether they will do so in the near future is of course impossible to predict. In this current climate it is quite reasonable to expect some further restrictions may be imposed, particularly in the low doc area.

Having said all of this, there is a big positive at the moment for property investors, which is of course the recent large reductions in interest rates (with more expected to follow). For many of you this will have greatly increased your borrowing capacity, so now would be a good time to have this reviewed and determine what may now be possible that was not just a few months ago.

If you are looking to purchase property further into the future and are unsure as to what effect credit policy changes may have on you; i.e. you have contracted an off the plan purchase or are perhaps considering a purchase in the New Year, here are a couple of steps to consider taking NOW that could assist you later on:

Setting up new lines of credit (or increasing existing ones) against existing equity so that you will have access to higher level of funds at a later date should LVR limits for new loans be reduced.

If you have limited equity available to take the step above, work on building up your cash resources so that you will have a greater level of funds to meet deposit requirements on your new property purchases.

Obtain an ABN and register for GST (if you are eligible). For low doc loans, most financiers require you to be ABN registered for 2 years (in some cases only 1 year) and GST registered for 1 year (assuming you are declaring an income above the GST threshold, which is currently $75000). Eligibility details can be found at the following Australian Taxation Office web addresses:

ABN or GST (click whichever is appropriate)

NB: Any questions regarding ABN or GST matters should be addressed to your accountant or with the ATO directly.

The above information is designed to give you a general overview of the current lending environment, and whilst every effort has been made to give you accurate and up to date details there will no doubt continue to be at least a few changes in the weeks and months ahead. Whilst there are some difficulties in a tightened credit market, there are also opportunities in a falling interest rate environment. Please note that this is general information only and is not to be taken as specific or personal financial advice.

Craig Bergin

Footnote from Nick:
Craig is an Independent Finance Broker that has supported various mrd clients over the past two or three years. Thanks for your insight (and client support) Craig, much appreciated. Please blog any questions you may have for Craig below.

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