The biggest painpoint is living expenses
Are you getting frustrated trying to get loans to service? You’re not alone!
The serviceability requirements put in place by APRA are a challenge for mortgage brokers but they’re absolutely necessary if Australia is to have a stable housing market.
Sydney and Melbourne
Nowhere is this more of a problem than in Sydney and Melbourne.
House prices and borrowers expectations have far outstripped any growth in wages. So what can you do?
There’s not a lot you can or should do to increase what a customer can borrow.
Instead you should focus on lowering their expectations until they’re in line with reality!
Our parents didn’t buy their dream home right away.
It’s called a property ladder for a reason: you start on the lowest rung.
For Sydney and Melbourne borrowers that won’t lower their standards, the next best option is for them to buy their ideal home as an investment property.
They should rent it out until they’re in a stronger financial position and able to handle the repayments without hardship.
This works well with higher income borrowers or borrowers that have income types that lenders can’t always include in their assessment.
As rates are low, you’ll see that negative gearing benefits don’t have as big an effect as they used to so some borrowers will need to lower their expectations regardless.
If a home buyer has some small debts, consider consolidating the smallest debt with the highest repayments.
Usually this is a car loan that is near the end of its term.
That gives you the biggest improvement in borrowing power with the smallest outlay of capital.
If a borrower has existing home loans, it pays to understand how these are assessed because each lender takes a different approach.
It’s also important to understand what effect interest only payments will have on someone’s borrowing power.
Sometimes we ask a customer to switch to a more suitable repayment type which can improve their borrowing power and get them a lower rate.
You’ve probably noticed that most lenders no longer just rely on the Household Expenditure Method (HEM) but instead scale this with the borrower’s income.
Someone with an income of $200,000 will be assessed as having higher living expenses than someone with an income of $50,000 even if their family size is the same.
Some lenders such as CBA have living expenses well hidden in the back end of their calculator which makes it hard for mortgage brokers to compare lenders.
I’ll be honest, I think some of the lender’s calculators go too far with this.
In particular, I see a lot of high income self-employed borrowers who have many expenses subsidised by their business and rich customers who aren’t materialistic.
In these cases, you may find that comparing different lenders may help you to get a better outcome for your clients.
You need to have a meaningful discussion about living expenses with your clients.
Most banks are auditing the living expenses that brokers put in their submission and may cut your accreditation if you don’t take it seriously!
The least acknowledged expense that can have the biggest impact on someone’s financial position is private school fees.
Make sure that your fact find includes education expenses otherwise you may accidentally give your customer more than they can afford.
Sometimes you’ll get a customer who wants to buy a house with their friends or with multiple family members.
These solutions rarely work and, even if they do, life tends to take the different groups of people in different directions and then they are at risk of one wanting to keep the property and the other wanting to sell it.
Just keep it simple. Tell your customers to borrow less!