How much will the rate cut matter to prospective buyers?
With recently released statistics showing that almost 50% of bonds are still being declined despite banks reportedly relaxing their criteria slightly Rudi Visser, General Manager of BondBusters, believes it's important to remember that the decline rate needs to be seen in context.
"The decline rate must also be understood in the context of how credit assessed and granted on a home loan," Visser said.
There are two main factors - first the clients creditworthiness and affordability and secondly the underlying security and the perceived value from the banks perspective of the underlying security.
With property prices only recently starting to pick up the banks are still conservative about the value of the property. It is always a more cautious valuation from the bank than from the estate agent or seller.
So, where on the one hand the market conditions have created affordability - on the other hand, there are still property value factors that banks need to take into account. These relate to the consideration that, should a bond holder default on the home loan, would the bank be in a position to offset the default by disposing of the asset?
With savvy buyers looking for bargains and properties staying on the market for longer, banks want to get the best price for the property quickly and have thus turned to auctions. While the Auction Alliance has recently reported better prices being reached off the auction blocks - these are still at a discount to the open market value and to the amount owed.
It is important to note the difference between decline rates and not taken up rates. If the bank refuses to lend to a particular client (due to affordability or credit worthiness) on a particular deal (due to the underlying security not meeting the banks criteria) this is a bank decline. If the client refuses the deal due to an unreasonable interest rate or deposit requirement - then this is a "not taken up". These are two very different issues to deal with in relation to property finance.
"It must however be noted that valuation results, interest rates and deposit criteria are also tools used by the bank to manage acquisition risk and to raise the qualification bar. This can be seen as an indirect decline mechanism. Last month all declines we experienced were due to valuations - so an approval was offered based on the creditworthiness and affordability of the client - but insufficient value was found by the bank to grant the required amount requested by- and affordable to - the client," Visser added.
So the question is - have the banks criteria really eased or has the decline mechanism simply shifted from affordability to focus on the value of the underlying asset and will the drop in interest rates really make that much of a difference if the latter is the case?
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