The lending landscape

a changing scene

BY GEOFF BAWDEN, PIVOTAL FINANCIAL

In recent months, feedback from both sides of the Tasman implies that those involved in providing home mortgage finance have changed their lending policies to make it more difficult to borrow money.

It seems important that we put some context around that, because while there has been some tweaking of policy, the significant changes have more appropriately evolved for two reasons, neither of which have much to do with individual Bank policy.

Firstly we have seen much more intervention at central government level. Regulators have (sometimes quite aggressively) introduced new regulation aimed specifically at controlling both the volume and quality of new lending.

This has all been designed to protect the consumer and, while it has done that, the outcome is that in many instances it has become much more difficult to borrow money.

Secondly, and in part because of the regulatory framework banks are now required to conform to, we have seen them tighten their assessment processes.

Don’t confuse that with policy. I am talking about the process they follow to assess applications and customer ability to pay. There is a difference.

It is also true that cheap funds (originating largely in the USA) are not so easily obtainable for local banks to on-lend. When you can’t make the same profit margins, you don’t have the same desire to lend money and you become more selective about who you lend to.

In essence, we have moved from a free market where it was as much about price as anything else to a much more controlled environment where it is now more about credit fundamentals and demonstrating clear ability to pay in a timely manner.

I hear you ask - if the Global Financial Crisis is over why is it becoming more difficult to borrow money?

To understand the reason for that you have to understand just how close we came to a worldwide economic meltdown caused primarily through irresponsible lending.

If the USA Government had not moved to bail out the American banking system when it did, the outcomes would have been more farreaching. And many say catastrophic.

The new regulatory frameworks being introduced by central governments throughout the world are a direct outcome of the Global Financial Crisis, and even though that may have long passed they are being introduced specifically to avoid the mistakes previously made.

And where to from here? Well, it is just my opinion but I don’t see it becoming any easier to borrow money any time soon. And what that means if you are in the market to borrow money to buy a home is that you need to prepare much more thoroughly if you are to avoid disappointment.

In the same way that you go to an accountant for advice on how to run your business, or a solicitor for advice on all things legal, the good oil suggests you should also go to a finance specialist when you are wanting to borrow money.

Don’t leave that to chance. Use a finance professional who deals with a variety of lenders. They know the options that might suit you best; and, unlike the bank, they present more than a single opportunity.

Disclaimer: While all care has been taken in the preparation of this publication, no warranty is given as to the accuracy of the information and no responsibility is taken by Pivotal Financial for any errors or omissions. This publication does not constitute personalised financial advice. It may not be relevant to individual circumstances. Nothing in this publication is, or should be taken as, an offer, invitation, or recommendation to buy, sell, or retain any investment in or make any deposit with any person. You should seek professional advice before taking any action in relation to the matters dealt within this publication. A Disclosure Statement is available on request and free of charge.