Why lending criteria changes
Brett Alegre-WoodChairman, YPC Group
Hey guys,
This blog will be an oversimplification of what is an extremely complex field of underwriting. Underwriting is what lenders do to decide on what risks to take and what ones not to take.
When a lender says you require 15% deposit, this is underwriting. When a lender says you cannot include a certain type of benefit as income, this is underwriting.
Having a set lending criteria is important if you want to write a volume of mortgage business.
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So why is criteria important to understand?
It's all about risk. During times of high capital growth and low interest rates it is unlikely that you will be unable to afford your property and even if you do run into trouble the lender will be able to sell the property and make their money back because the price is rising so quickly. This is quite a safe risk for the lenders.
Now lenders only make money by selling loans so if the risk is low they want to lend as much as possible. The way they achieve this is by loosening lending criteria and buying more market share.
The opposite is also true. In times of high interest rates and stagnant prices they will tighten their criteria as the risk is higher. Now this is not true in all cases as while some underwriters are saying tighten some directors and shareholders are saying loosen. Loosening creates more business which directors love, loosening too far can increase arrears which doesn?t impress anyone.
In my experience it doesn't matter what the market is doing you will always find someone to lend you for a mortgage. It's just a question of rate and costs.
Live with passion,
Brett Alegre-Wood
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