Pre-approved clients may be impacted by lending restrictions

Some could be forced to re-evaluate their plans after APRA’s announcement

Pre-approved clients may be impacted by lending restrictions

Borrowers in the pre-approval stage could be forced to re-evaluate their purchasing plans if they don’t reach unconditional approval by the time APRA’s new lending restrictions take effect, according to members of the mortgage industry.

Speaking to MPA, mortgage advisor at 1st Street Financial, Justin Baboucek said while the change wouldn’t have a massive impact on brokers, it could impact some of their pipeline work.

“The real impact will be for those, whether it be brokers or borrowers, who are looking at getting pre-approvals or are halfway through the approval process,” he said. “I think that’s where, for some lenders, there is going to have to be consideration from the broker and the borrower point of view around whether this will change the eligibility of the client moving forward.

“If you’re halfway through putting together the paperwork, you’ve made your assessment and then the banks pull a lever on you, particularly if it’s tighter, then that is going to be relevant.”

Connective executive director Mark Haron told MPA brokers would need to look at existing pre-approvals for their clients to ensure they still qualified for the same amount given the adjustment.

“I would think that the majority of them would without too many problems,” he said. “But it’s something brokers will need to look at.”

Anything that has not been approved unconditionally by the end of October, when the change takes effect, will need to be examined, he said.

“For some borrowers, if they were looking to borrow the maximum they could afford from a serviceability perspective, then it may reduce the amount they can borrow moving forward,” he said. “If that is the case, brokers getting in contact and working back through that with them would be an important thing to do.”

Read more: APRA ramps up serviceability buffer

According to APRA, the 50-basis-point increase could represent a 5% reduction in the maximum borrowing capacity of a typical borrower. But since some borrowers are already constrained by the current floor rates that lenders use and many borrowers don’t borrow to their maximum capacity, the regulator expects the overall impact on housing credit growth to be “fairly modest.”

APRA announced on Wednesday that it expected ADIs to use a serviceability buffer of 3%, up from the existing 2.5%, when assessing all new loan applications. While it expected property investors to be more impacted than first home buyers due to this market segment typically being more leveraged, Baboucek said the change would impact all borrowers across the board.

“It’s a fair point, but I think it applies broadly across anybody,” he said. “The nuts and bolts of it is, if you’re tight on servicing, whether you are a first home buyer or you’re an investor with five properties, it’s going to impact you regardless at the end of the day.”

According to Haron, however, the regulatory change, alongside an increase in real estate listings following lockdown could lead to a normalisation in property prices which would ultimately benefit first homebuyers.

Read more: Listing spike, lending restrictions could balance market

“For first homebuyers, serviceability is generally not the issue,” he said. “It’s the deposit and stamp duty. Higher price values are more of a challenge in terms of those things than serviceability, so I don’t think it’s going to affect too many on the serviceability side of things.”

Top 100 broker Daniel O’Brien told MPA that the change could impact brokers both now and in the longer term.

“It will just make things a bit harder and force us to look further afield lender wise to exploit policy niches,” he said. “Longer term, it will also lead to less word of mouth, potentially. Whether it’s my fault or not, clients will be unhappy about getting less than they want or paying more at a second or third tier lender.”

He said clients were “sick of having the goalposts moved” after five years of shifting policy following the Royal Commission and during COVID.

“It will lead to less satisfaction,” he said. “Clients are over being dictated to and want more flexibility.”

Haron, O’Brien and Baboucek all agreed that brokers should now focus on educating their clients around the change and what it could mean for them.

“Communicate the changes and make sure everybody knows where they stand,” said O’Brien. “Better to have the bad news now versus a cooling off period in a month’s time.”

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