Has the sub-prime crisis killed riskier loan types?
With international financial markets in disarray, many are unsure as to what effect this is having on the Australian mortgage industry.
In other words, everyone is asking what loans are still available?
In October 2008 Aussie John announced the death of the low doc loan, despite the fact that all four major banks are still offering low doc loans. So what is really going on?
Low doc loans
A low doc loan is designed for self employed borrowers that cannot prove their income. Instead of providing tax returns, they sign an income declaration form and the bank uses this to assess their borrowing capacity.
So what has become of the low doc loan in recent times?
- Major banks: All four major banks still offer low doc loans. However, there have been some minor changes. ANZ has withdrawn their lo doc 80 loan & CBA has reduced their discount on low doc loans over 60% of the property value. Westpac & CBA are now requesting that all borrowers provide an ABN, as proof that they are actually self employed. Many lenders are asking for BAS statements & are restricting equity releases on refinance loans. Overall, low doc loans are very much still available.
- Non-bank lenders: Although low doc policy has become more stringent and ABN requirements are being enforced, low doc loans are still readily available. The old Rams (RHG) has increased the interest rates of their old low doc loan customers, by as much as 1%. This has forced many customers to refinance with other lenders.
- Non conforming lenders: Liberty Financial and Resimac are all still offering low doc loans, albeit at a higher rate.
No doc loans
A no doc loan is where the borrower signs a declaration that they can afford the loan. They do not have to declare any income (and in some cases, do not have to declare any assets or liabilities).
So are non doc loans still available?
- Major banks: Even before the credit crisis, none of the major banks offered a no doc loan. This has not changed.
- Non-bank lenders: Policy has tightened for no doc loans. Some lenders require that borrowers have an ABN for at least one year, and other lenders such as Citibank have increased the rates of their current no doc customers. No doc loans are still available for up to 70% of the property value, but at much higher rates.
- Non conforming lenders: Liberty Financial’s no doc asset lend is still available although funding for this product is in doubt. Private no doc lenders are usually funded by private investors so as always, they vary significantly. Many are actively advertising that they have plenty of money available to lend. Private lenders tend to be opportunistic and have increased their rates in response to lower competition.
No deposit loans
100% home loans for first home buyers and investors have become very popular since 2003. So how are they faring now?
- LVR (Loan to Value Ratio) for their home loans. Banks such as Westpac and CBA offer 90% loans for most customers and 95% in some cases. However, ANZ will no longer lend more than 90% of the property value (90% LVR). St George & Rams recently withdrew their no deposit loans, leaving guarantor home loans as the only possible way to borrow 100% of the property value.
- Non-bank lenders: Policy has tightened and some lenders have reduced the maximum loan amount to 90% of the property value. No non-bank lenders currently offer no deposit loans.
- Non conforming lenders: These lenders did not offer no deposit loans before the credit crunch. You must have a clear credit history to access no deposit finance.
Credit impaired / non conforming loans
Lenders that specialise in lending to people with defaults, bankruptcy history and missed home loan repayments are known as non conforming lenders.
They tend to be non bank institutions such as Liberty Financial, Bluestone, GE Money and Mobius. So who is still left in the game?
- Major banks / Non-bank lenders: All of the major banks have become more conservative when lending to someone with a bad credit history. ANZ in particular will not consider any exceptions to policy. You can only get approval if you have a very good reason for the credit problem and you supply evidence to support your explanation. A letter explaining your default will help, but there is no guarantee that your loan will be approved.
- GE Money: GE appeared to be the most stable of the non conforming lenders, but have since withdrawn from the Australian mortgage market.
- Bluestone Mortgages: Bluestone has ceased offering new loans and can only service existing customers, due to funding constraints.
- GMAC RFC: GMAC has wound down their Australian operations and sold off their distribution platform Capital First. No new loans are being funded.
- Mobius: Mobius ran into trouble when its parent company Allco Finance Group suffered losses due to the credit crunch. Mobius has ceased originating new loans.
- Liberty Financial: Liberty is still operating, however is having great difficulty funding its loans. Their rates have increased significantly and they have issued notices to brokers that settlements will be staggered, to give them time to raise more funds.
- RESIMAC: Resimac continues to offer loans, however their current financial position is unknown. Interest rates have significantly increased, when compared to the bank standard variable rate.
- Challenger / Interstar: Interstar has priced themselves out of the market but continues to offer new loans. It is unknown what financial position they are in.
Effectively the non conforming market is in big trouble. Take care to avoid getting a default that may taint your credit file and leave with no option but to take whatever rate you can get!
Investment loans and business loans tend to be one of the first loan types to be withdrawn or limited during financial meltdowns.
So is it still possible to borrow to invest in property?
- Major banks: All major banks offer investment loans for 90% LVR (Loan to Value Ratio) and 95% for stronger applicants. These major lenders still actively pursue investors and offer competitive interest rates.
- Non-bank lenders: Policy has tightened and most lenders have reduced the maximum loan amount to 90% of the property value for investment loans.
- Non conforming lenders: Some non conforming lenders have reduced the maximum LVR for investment loans to 90% or 80% of the property value. Other than that, investment loan finance remains unchanged.
Fixed rate loans
Fixed rate loans are more difficult for banks to fund, when compared to variable loans. This is because the bank has to secure wholesale market funding. In normal economic conditions, the price of fixed rate funding fluctuates more than variable rate funding. So there is likely to be even more fluctuations now.
- Major banks: The major banks have significantly different fixed rates as some try to profit from the market uncertainty, while others try to gain extra market share by offering discounts. CBA has recently increased their 10 year and 15 year rates as more people take advantage of low rates and lock in for the longer term.
- Non-bank lenders: The majority of non-bank lenders have seen significant increases to their fixed interest rates, which has forced them out of the market. Some lenders only offer fixed rates on a “price on application” basis.
- Non conforming lenders: The majority of non conforming lenders do not offer fixed rate loans. The ones that do have seen large increases in their fixed interest rates.
Non resident lending
Foreign citizens investing in Australia have recently come under government scrutiny with the introduction of anti money laundering and counter terrorism legislation.
Are the banks still interested in lending to people from overseas or those that are here on a working visa?
- Major banks: All of the major banks have kept the same policy for non residents who are buying property in Australia.
- Non-bank lenders: Policy has remained the same for non bank lenders, and most non-bank lenders will not bend their policy. In other words, if you don’t fit the box then your loan will be declined.
- Non conforming lenders: Few non conforming lenders offer loans to the non resident market. However, Australian lenders do not assess your overseas credit history! So you may as well just apply for a loan with a bank.
Which lenders have been affected by the credit crisis?
Plenty of lenders have been unable to stand the heat and have left the kitchen! Luckily for us, the Australian government learnt lessons from the problems we had in the mid 90’s and have since introduced legislation to prevent the failure of our major banks.
With any luck, our banks will be ok and non bank lenders will soon be able to compete with the major lenders. However, not every lender has survived the storm. These are the lenders that haven’t:
- Macquarie: Macquarie bank had ceased all new loan applications for wholesale and retail residential loans, except for limited lending to existing customers. This meant that lenders such as Aussie and Mortgage House, who were funded by Macquarie, had to find new funding partners such as CBA or Westpac. Macquarie has since returned to the market after finding new funding sources, and is now offering a competitive alternative to the major banks.
- Rams (RHG): The old Rams ran out of money and could not extend their wholesale funding lines. The company was divided up and the brand was then sold to Westpac. Existing customers rates were increased and the company name was changed to RHG Limited.
- Mobius: Owned by Allco, Mobius ran out of money and has stopped funding new loans.
- Bluestone Mortgages: Bluestone ran out of cheap funding and have ceased offering new loans. However, we hope they return when the credit crisis is over.
- GMAC RFC: Global giant GMAC was forced to shut down their Australian operations due to an inability to source funding, despite writing record numbers of loans.
- Liberty Financial: Liberty isn’t out of the game entirely, however their ability to source funds is limited and they are at risk of having to withdraw from offering new loans.
- GE Money: GE has withdrawn from the Australian mortgage market. This is a huge blow to the non-conforming industry as they were one of the few main players left in the market.
What is likely to happen in the future?
That is anybodies guess! The market is very volatile at the moment and it is unknown how long it will take for some of the lenders to recover. There is some speculation that low doc loans will be withdrawn from the market, however they are currently still available.