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Lenders are getting tougher on older borrowers

Australian banks this month started the largest ever customer contact program in the industry's history.

 

The mammoth program involves banks contacting more than 900,000 borrowers who have needed to defer making payments on their loans as a result of the COVID-19 pandemic.

Among them are hundreds of thousands of home loan borrowers around the nation with owner-occupied and investment property mortgages.

The first stage of this contact program coincides with the initial wave of six-month loan payment deferrals coming to an end, and will involve the assessment of around 80,000 mortgages by the end of September.

A further 180,000 customers with deferred mortgages will be contacted before the end of October, and the program will continue as the banks work through their customer lists to determine whether further payment deferrals are required.

In short, lenders are seeking to mitigate their potential loan defaults.

Tighter loan serviceability guidelines

But there's a lot more going on behind the lending scenes than immediately meets the eye.

Some of this is directly related to COVID-19, but there also have been developments that follow recent regulatory updates in responsible lending guidelines.

Following the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, at the end of last year the Australian Securities and Investments Commission updated its guidelines for how it expects lenders to deal with borrowing applications.

Those updates are still filtering through the lending system.

In its detailed guidelines, ASIC outlines that lenders should specifically be noting whether there are "foreseeable reductions" to the amount or frequency of a loan applicant's income.

What the regulator means is that it wants lenders to pay particular attention to older borrower applicants who are at an age where the loan they are seeking would mature beyond their retirement age.

ASIC recommends that lenders should be proactively asking these applicants how they intend to pay off their loan.

"For example, if a consumer is approaching retirement, and will still be making repayments on the credit product after their expected retirement age, you will need to determine whether this event is likely to change their income, and information about the amount that is expected to be available," ASIC states.

"And, if the income is of a kind that has a known end date which will occur during the term of the loan...you should have regard to the effect that change to income is likely to have on the consumer's overall financial situation."

These are general lending guidelines, however what's changed in recent months is that some lenders have strengthened their loan serviceability criteria – especially in relation to home loans.

They've done this by instructing their internal loan managers and external mortgage brokers to ask borrowers approaching retirement age to document their actual loan exit strategy, including the age they intend to stop working.

One large bank has recently issued instructions that if a loan applicant is aged over 55 or intends to retire in the next 10 years, their application will need to include:

  1. "At least one co-applicant under the age of 55 or within 10 years of their intended retirement with "sufficient income to service the home loan at drawdown.
  2. "Evidence of financial assets worth at least 100 per cent of the loan limit; or
  3. "Evidence of a plan to downsize an owner-occupied home (with at least $200,000 in available equity at drawdown) once the applicant retires."

Loan exit strategies to consider

ASIC's responsible lending guidelines state that borrowers should preferably be able to meet their payment obligations from income rather than from the sale of assets.

But the regulator recognises that may not always be possible post retirement, and that asset sales may be required to extinguish a loan.

One important point to note is that most lenders are unlikely to consider the future sale of your principal place of residence as an acceptable loan exit strategy.

However, the intended future sale of an investment property, or being able to gain access to equity in a property through an equity release facility such as a reverse mortgage, are likely to be considered as viable exit plans.

Other assets that lenders will take into account when assessing pre-retirement loan applications are superannuation (if it is sufficient to pay off the loan balance), and investments outside of super such as shares.

On the income level, lenders will consider any plans to continue earning income on a casual of part-time basis, rental income derived from investment property, and dividend income from shares.

The key for those close to retirement who may be contemplating borrowing money for a property or other investment purposes is to be prepared to answer some hard questions during the application process.

Having a well-defined loan exit strategy has become a much more important part of the lending process for older Australians.

 

 

Tony Kaye
Personal Finance Writer
15 September 2020
vanguardinvestments.com.au

 


David Forrest Download David's Adviser Profile

David Forrest

Director
BEc (Acc), MBA, CPA, FFin

David has been in the Financial Services Industry for nearly 30 years. He was one of the founding Directors of the successful Financial Planning and Stockbroking Practice, Henderson Gregory Forrest, for a decade. Prior to that, he held senior roles in companies such as ING, KPMG Accountants and AMP. David was previously Chairman of OAMPS Superannuation Trustee Board and currently serves as an independent Board Director for several companies.

David’s extensive experience in all forms of superannuation, including Self Managed Super Funds (SMSF), Defined Benefit Funds, retirement funding through Account Based Pensions, stockbroking with a focus on Direct Share Investment, Taxation/Remuneration Planning, Centrelink, Aged Care and business management, equip him to advise expertly on all aspects of Financial Advice.

Those with a particular interest in superannuation/SMSFs, direct share investment, salary packaging or applying for the Centrelink Pension will find his knowledge and ability in formulating and implementing creative, logical and simple wealth creation strategies a valuable asset.

David maintains a strong personalised client service focus, providing tailored solutions for clients.

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David Forrest is an Authorised Representative of Integrity Financial (SA) Pty Ltd ABN 16 133 921 187 — AFSL No 334846

Michelle Forrest

Michelle Forrest

Business Finance Manager
B Bus (Acc), CPA

Michelle’s career has spanned across the Financial Services, Retirement Living and Aged Care industries working in the private sector, not for profit and more recently with the state government for over 20 years. Her experience extends to many facets of the financial services industry, having worked in superannuation administration, technical support and financial planning practice administration.

Commencing with AMP and subsequently working in commerce and accounting roles with companies such as Brambles, Adelaide Bank Retirement Services, ECH Inc and SA Health and Wellbeing, Michelle returns to financial services after working in practice financial management at Henderson Gregory Forrest. This wide range of experience from senior accounting and management roles has provided Michelle with a strong background in business administration.

With an astute financial acumen and keen interest in business improvement strategies, Michelle ensures the smooth running of the Integrity Financial Advisory practice providing valued management support to our personalised client service focus.

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Darren Chalk Download Darren's Adviser Profile

Darren Chalk

Financial Adviser
B Com, Dip FP

Darren joins the Integrity team as a strong technical specialist with almost 20 years’ in the Financial Services industry. He has extensive experience advising clients on how to build and protect wealth, prepare for retirement and retire comfortably.

Commencing with advising clients on direct equities for over 10 years at Baker Young, Tolhurst Noall, and ABN AMRO Morgans, his career expanded to providing holistic client advice, having operated his own financial services licence and company. Most recently having worked for a 'Big 4' bank, he has welcomed the more personalised ‘client first’ approach that is evident at Integrity Financial Advisory.

With a deep understanding of investment markets, he is appropriately qualified and authorised to provide direct share advice, as well as superannuation/SMSF advice, encompassing both investments and insurance.

Meticulous in his approach, he aims to deliver quality outcomes for clients by understanding their financial situation and needs before providing advice which is central to our advice process. Darren supports David in tailoring solutions for all client financial advice needs.

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Darren Chalk is an Authorised Representative of Integrity Financial (SA) Pty Ltd ABN 16 133 921 187 — AFSL No 334846

Natasha Bartlett

Natasha Bartlett

Client Service Manager

Natasha commenced working in the financial services industry in June 2008 and is a new addition to the Integrity team. During the past 11 years, she worked closely with advisers providing administration support in a share broking and financial advice business.

Having successfully completed her RG146 accreditation in securities and managed investments and continued her studies to complete her competency in Superannuation, Natasha can ably assist with all aspects of fixed interest, cash management, portfolio administration, direct shares and client advice implementation.

Natasha takes time to ensure she understands our client’s financial goals and needs and believes in creating, preserving and utilising wealth through effective financial management as a key objective in helping clients.

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Kelly Collins

Kelly Collins

Client Service Manager

Kelly has worked in the Financial Services Industry for over 10 years and has supported David since 2013. Kelly’s primary background is in customer service and administration.

On starting in the industry, Kelly initially focused on direct shares, stockbroking administration and client liaison. Since moving to the Client Service Manager role, Kelly has developed skills encompassing all aspects of financial planning including client advice implementation and term deposit management.

Kelly’s experience in the direct share environment, especially management of estates, provides a key part of the direct equity expertise in Integrity’s Client Service Team.

Returning from Parental Leave following the arrival of her second child, Kelly has developed further honed multi-tasking skills after juggling the demands of a growing family.

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Jasmine Smith

Jasmine Smith

Client Service Manager

Jasmine has worked in the financial services industry for over 12 years in all areas of client administration, working with David since 2013.

Jasmine has extensive knowledge and experience in client service including implementation of advice, portfolio reporting, assisting with the establishment of Self Managed Super Funds (SMSFs), term deposit management and a long history of helping clients with their enquiries.

Jasmine’s attention to detail, yet gentle approach, means she is able to solve the trickiest of questions for our client community.

Jasmine has gained her Certificate III in Financial Services qualification.

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Merrilyn Smith

Merrilyn Smith

Client Service Manager

Merrilyn has worked in the financial services industry for over 11 years in all areas of client administration, and is a new addition to our client services team, returning from Melbourne to join the team in June 2019.

Merrilyn has extensive knowledge and experience in client service including implementation of advice, managed fund administration, assisting with the establishment of Self Managed Super Funds (SMSFs) and process improvement for the previous practices she has worked with. Merrilyn’s experience with direct shares constitutes the other part of our administrative support for direct equity investments.

Merrilyn’s warm and caring nature continues to endear her to our clients and she has already established herself as a valued member of our team.

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