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We're in a credit crunch - here's 5 strategies to deal with it
Season 1
Episode 45
Published 7 years, 8 months ago
Description
There has been a lot of commentary in the media about the “credit crunch” that we are in at the moment. Why is the credit crunch going to impact you and your plans? And what can you do about it?
Why has credit tightened?
Over the past year I have written (here and here) about how the government has tightened up lending standards in an effort to cool the property market and reduce the volume of interest only loans. The reason for this is that they didn’t want Australians over-borrowing whilst interest rates were very low, and they didn’t want investors speculating in the property market. They have certainly achieved their aims. The property market has cooled and investor and interest only loans have fallen dramatically.
The RBA is out of touch
The RBA seems to be comfortable with the credit tightening as noted in its most recent minutes:
“They noted that most borrowers took out a loan that was substantially smaller than the maximum loan that lenders were prepared to offer; three-quarters of borrowers had taken out loans that were less than 80 per cent of their maximum borrowing capacity based on serviceability considerations. This suggested that relatively few borrowers would have been constrained by the tightening in lending standards that had reduced maximum loan sizes to date.”
The RBA’s comment is ridiculous because this statistic doesn’t include the fact that many borrowers would have had loans declined. And, of far greater importance, many prospective borrowers would have been told that they would no longer qualify for the borrowings they desire by their mortgage broker or banker and in these cases would never proceeded to a formal application. So, to say that relatively few borrowers have been constrained by the credit tightening shows how out of touch the RBA is and that is a worry!
Anecdotally, I estimate that a least 30% of our clients have been impacted by the credit crunch i.e. they are willing and able to borrow more but cannot do so. Given that our clients almost always have higher than average earnings, the broader market has definitely been significantly impacted.
Applying for a mortgage can be like a criminal forensic investigation
Unfortunately, in many instances, I liken the loan approval process now to a criminal forensic investigation and the applicants are assumed to be guilty until proven innocent. The lender will trawl through your bank and credit card statements and ask questions about where you are spending your money and why. They will want third-party documentation to verify the existence of every asset, liability and commitment (and sometimes they want multiple forms of verification!). These days it can be an intrusive and laborious process.
To me, what is going on feels a lot more severe than just prudential lending standards. I wonder if this is how the banks are repaying the government for introducing the 'major bank levy' (tax) and the Royal Commission? Maybe the banks are thinking “we’ll show the government whose boss… we’ll restrict money supply and potentially cause economic problems such as a falling property market, lower confidence, etc.”. Maybe they are using the excuse of “tighter credit” to show how much power they have?
Some stories from our office that will blow your mind
I would like to share with you some stories that demonstrate just how crazily tight credit has become:
§ A client