The uncertain economic climate evolving from the COVID-19 pandemic, and the financial complications this brings, highlight what brokers do best.
How has borrowing changed due to COVID-19?
Hundreds of thousands of Australians have lost their jobs or experienced a drop in income – and we may see these numbers increase over the coming months. As a result, lenders are being much more prudent; they have tightened their lending policies and changed the way they’re assessing income. Of course, not all lenders have the same appetite for risk nor do they all have the same long-term strategies for their business. Not only that, their policies keep changing as the economic situation evolves. This is making getting a loan not only more difficult, but also increasingly complicated.
Why are brokers so helpful in times of financial stress?
Before COVID-19, many borrowers just wanted their brokers to get them the lowest interest rate.
Now that more people are facing difficulties with their personal finances, borrowers are asking bigger questions, such as ‘Will I be able to get a loan?’ ‘Do I have the cash resources to do that?’ ‘Will I be able to manage it over the short and long term?’ and ‘Is it in my best interests to take out a loan at all?’ To work out the answers to these kinds of questions and then find a suitable loan, one really needs to know each lender’s assessment criteria and how it relates to their own financial situation. Luckily, this is what brokers do.
It’s not unusual for borrowing to get more difficult and more complicated during an economic downturn. Brokers can help people navigate the complexities of lending in an uncertain and often changing market. They have access to a large panel of lenders and they keep track of – and understand – the various policies and strategies of each. They know who each lender will – and won’t – lend to. Getting good advice from a broker can help you successfully manage your finances through an economic slowdown while minimising any long-term impacts on your personal wealth.
How can a broker help you get the right loan?
- A mortgage adviser will start by assessing your financial situation, including:
- The industry you work in: If you are working in an industry that has been hit hard by the crisis – such as hospitality, tourism, events, aviation, entertainment or retail – you may find it more difficult to get a loan.
- The type of work you do: If you have a casual job or are on a contract, you may not be able to include this income in your serviceability assessment, regardless of the industry you work in. Income from bonuses, commissions and overtime may also be assessed differently.
- The type of loan you need: Whether you are applying for a home loan or investment loan will affect how your income is assessed.
- Next, your broker will help you determine how much you can borrow and which lender will suit you best. This decision may be based on:
- The lender’s risk appetite: Each lender has a different stance on how much risk they want to take on – especially now – and this will affect how much they are willing to lend you. Lenders are changing their policies regularly, so your eligibility may change at any time.
- The lender’s strategy: Different lenders will have different strategies towards their existing borrowers and their new borrowers. In some cases, refinancing with your existing lender may be easier than trying to get a loan with a new lender.
- Your documentation: You can expect to face much higher scrutiny of the security of your job and your financial position, so you may need to provide more documents to show you will be able to meet your loan obligations.
How can a broker help you manage your existing loan?
If you have experienced a change in your financial situation, such as reduced income, you may be wondering if you can adjust your loan(s) to help with your cash flow. A broker can tell you what options are available to you, and advise you on the most suitable way to keep afloat while minimising the damage to your long-term financial position. APRA has recently relaxed its guidance on conducting a new serviceability assessment on borrowers wanting to make changes to their existing loans; it will become easier to make loan changes with lenders who incorporate APRA’s guidance into their lending policies.
Here are a few possible options:
- If you have been making additional repayments, you could move to minimum repayments.
- If you are currently paying off your principal, you may be able to move to an interest-only loan temporarily to reduce your repayments.
- You may be able to access a lower interest rate by refinancing your loan with a new lender, which would reduce your repayments.
- If you have already paid off a substantial portion of your loan, you could consider extending your loan term to lower your repayments.
- If you have multiple loans, you may be able to restructure and consolidate your loans, and refinance them on a lower rate with an extended term.
- You may be able to defer your mortgage repayments for up to six months. Your broker will generally only recommend this option as a last resort, as it is a very expensive way to improve your cash flow. Deferring your repayments increases the overall cost of your loan because the interest you incur during the deferral period will be capitalised (i.e., added onto your mortgage). You will need to either increase your interest repayments after the deferral period or extend your loan term – both of these will increase the total interest you have to pay.
- As any broker will tell you, credit cards are probably the most expensive way to increase your cash flow, so are generally not recommended as a strategy for getting through this difficult period.
How can a broker help you get back on track after COVID-19?
In most cases, when you reduce your loan repayments, you will be increasing the overall cost of your loan. The longer you continue to do this, the more your loan will cost you. A broker can help you minimise the resulting impact on your long-term financial position.
For example, you may want to discuss:
- sticking to a budget to ensure you can meet your new repayments
- what your plan is to get back to full employment and when this is likely to happen
- what to do once your income situation improves – specifically how to increase your repayments again
- the best way to set up your loan for the longer term, based on your new financial circumstances.
Getting good professional advice about the things that matter is almost always a good idea. However, when the chips are down, it’s essential. If you need help finding the most effective way to manage your finances throughout this crisis, please get in touch with me.