Credit regulations are tightening and credit applications are under more scrutiny than ever before.
A relatively straightforward application; or at least what, 18 months ago, would have been a relatively straightforward application, is at worst rejected, and at best requires significantly more supporting information and discussion.
And it’s causing accountants across the country a huge headache. It’s draining their time, and it’s affecting the service they can provide their clients.
Of course, no-one can argue that credit should only be provided to those who can genuinely afford to repay.
However, there’s increasing anecdotal evidence of credit applications from good, if not great, clients being turned down because they don’t automatically tick the right boxes.
And if that’s your client that’s being rejected, they won’t be coming back to you in a hurry next time they need financial service.
“Understanding that credit appetite has changed, and how to manage that with lenders, is without doubt the leading issue that is impacting our accounting clients at present,” says Distinctive Finance Director Christian Goodall, who has over 20 years’ experience in the sector, having worked for the likes of NAB, Commonwealth Bank, St. George and Bank of Queensland.
The immediate need to fit into servicing rules – and how to avoid rejection
Goodall explains that lenders are increasingly seeking more and more evidence to support applications, and in many cases rejecting them if they don’t immediately fit APRA servicing rules.
“If you went back 18 months, a client would sign a declaration and say, “My living expenses are $2500 dollars a month.
“Typically, if the $2500 was in line with the index, it was fine, off we go.
“Now, many lenders are requiring credit card statements and transactional account statements, and they go through them line by line. So if you’ve declared that you’re spending $2500 a month, they’ll go back through your statements for the last six months and figure it out. If they see you’re spending significantly more than that it’ll get rejected immediately because it doesn’t fit into servicing rules.”
However, there are many clients out there, clients who are eminently capable of meeting the credit repayments, that don’t automatically meet the lending criteria.
And, in today’s climate, they need additional help.
When preparing credit applications, the Distinctive Finance team will sit down with the applicant before submission and go through their complete financial picture to build the most compelling application.
It’s a lot of work, but vital for a successful outcome.
“Our knowledge of working with the banks, and who we’re putting the client into, means we know exactly what policy we have to adapt and navigate our way through.
“We may have a client who says they spend an average of $3000 a month, but in reality, when we look through their statements, they’re spending more.
“In that situation, we’ll go through the statements line by line and see if there’s anything in there that is unusual or exceptional; a holiday, school fees for example. We’ll provide the context as well as the facts to the lender – we answer their questions before they even identify them.”
Credit refusal is hitting the top of the market, too
It’s not just a scenario that’s affecting the lower end of the credit market. In late July, the Australian Financial Review reported that Christian Beck, 99 on BRW’s Rich List, and worth an estimated $775m, was refused credit of $4-6m against property, because he didn’t, on paper, meet the serviceability criteria.
Distinctive Finance has encountered clients with similar issues.
“I recently had a client come to us who’d been a longstanding client of one of the big four’s private banks,” says Goodall.
“They come to us with a scenario where they wanted to knock down their primary residence and build a duplex facility, two properties side by side. They also had an existing investment unit.
“The client approached their private bank, the private bank looked at his income and the servicing required during the period of construction, and they couldn’t get the actual transaction to service at peak debt, failing to understand the take out.
“He went and engaged with an independent broker who was referred by a friend. As it turned out the broker had only been in the industry for just over 12 months and had no idea of how to actually help the client and get it done.
“He came to us, we’ve got that transaction approved, documented and we are already going to construction this week as the client had approved council plans.”
“It’s about how you submit the transaction, when you’re looking at peak debt, the take out and the clearance. It comes down to the experience and how you present the deal when you’re representing the client to the bank.”
Ultimately, it’s about delivering the best service for your clients, and working with them over the long term.
And, in today’s market, expert knowledge and proven experience is vital to help you achieve that.