Recent policy changes by some lenders are making the arranging of mortgages more complex, and we may find more difficulty in obtaining approvals for some clients in the future.
It should be taken into account that lenders policy changes can seriously affect the long term plans of any investor and although these policy changes cannot always be predicted there often are warning signs to watch for . Lenders obviously must always protect their own interests and outlawing such questionable practices as ‘ wrap mortgages ’ and ‘ two tiered marketing ‘ by most lenders recently was predictable. A less predictable policy change is demonstrated by the following case study:
An investor who arranged a mortgage on a block of 4 flats on what was perceived to be a low market, and was able at that time to borrow up to 80% from the lender. The investors long term intention was to use the expected increased equity due to inflation of that security later to purchase other property.
Two issues arose:
- The lender subsequently changed it’s policy and will now only lend up to 60% of the value on any block of 4 flats on one title.
- The property market at the time remained stagnant and no increase in value was seen on the property for 6 years. It is only with the recent boom in prices that the flats have been valued at a level that the client is now within the banks lending criteria.
Obviously a situation that was not anticipated at the time they first arranged the loan. Any subsequent property purchases have had to be financed through their own personal savings and not the “planned” revaluation of their security.
Although an investor may perceive a block of flats to be a safe bet, with all 4 flats, on one title the lenders have their own views.
Many lenders have recently tightened up their rules relating to: allowable monthly household spending budgets, car running costs & debt servicing ratios. A loan that was slightly borderline previously may now not be approved. Real obstacles to not even ‘border line’ applications are: high credit card limits ( the lenders always assess on 5% of your actual limit not your average monthly spend ) car hire purchase, regular hire purchase , student loans………….
With the recent increase in floating rates some lenders use a sensitivity analysis (sometimes known as a notional rate) which is simply a margin on top of the floating rate to determine whether the loan is affordable or not. This rate is not charged to the client it is simply used in the calculation to help the assessment. With floating rates rising the Notional rate is increasing, and borderline loans will not make the grade.
Another more recent policy change revolves around the ‘leaky building’ fiasco. Some newer properties under 5 years old may automatically need a registered valuation and along with it, builders report with specific reference to moisture test. The lender may look very closely at the results which must fit their recent policy changes.
With the increasing demand of lending under LAQC’s and trusts, some lenders are requiring accountants and lawyers to provide more detailed information as to the structure of Family Trusts, Trading Trusts and LAQC’s by lenders, and in some instances they are required to specifically confirm that the entity is for the sole purpose of residential property investment only and not another vehicle for serious commercialized operations.
The changes can make the loan application process more onerous, and time consuming. This needs to be considered when negotiating finance dates and then settlement dates. It is not uncommon for a client to wish to bring a settlement date forward but due consideration of the time both your lender and solicitor require to complete the final document simply must be considered before making changes. Failure to do so, could result in missing settlement dates and penalty interest being incurred.
The best advise I can give, is to consider entity structures and work closely with the team to have this in place prior to new purchases.
People don’t plan to fail, but simply fail to plan…….