A common question raised in the world of NCCP compliance - why should you, a mortgage broker, complete more than the lender's serviceability checks?
As far back as ASIC's Report 262 in 2011, the instruction has been clear - while ASIC sees lender calculators as a helpful tool for demonstrating serviceability, they are not a replacement for the broker's own math without a reasonable basis for relying on those lender calculations.
So what does this mean? Unless you know and can adjust the key figures and assumptions like interest rates, rate buffers, and expense benchmarks in your serviceability calculations effectively, you are only demonstrating serviceability for the LENDER, not for yourself. completing a lender's serviceability calculator you ARE demonstrating serviceability - for the lender!
How complex should your Serviceability Calculations be?
In September 2016, ASIC Report 493 shed some more light on the topic - whilst you need to demonstrate that your consumer clients can afford the loan they are being set up in, there are a few key factors you should consider:
Interest Rate Buffers:
Especially as we look to be moving towards a period of gradual rate rises, it is expected to show that the client can't only afford the current rates but also any rate rises in the foreseeable future - if teaser rates apply to the loan, you should also be able to demonstrate the ability for the loan to service after the rates expire.
When considering what kind of interest rate buffers to apply, one place to look is the proposed updates in APRA's Prudential Guide 223 - stress testing for lenders is expected to add 2%, to a minimum total of 7% (although, good practice would use a higher minimum). The perk of not being a lender, is that you are able to set your own credit policy - but this is a good starting point to think about the level of testing you want to do.
A common mistake many brokers make is stress testing the existing loan, but not applying these same stress buffers to other loans the client is repaying. It is important to make sure that as well as finding out what liabilities your client will need to continue repaying, you are making the same assumptions around potential rate rises that you are making for the loan itself.
Relevant enquiries as to expenses, and use of benchmarks:
You MUST be able to demonstrate that you have had an in-depth discussion with your client in order to break down their expenses - just writing a standalone figure is not sufficient. This being said, one tool that should be used to make sure that the expenses themselves are reasonable is developing a benchmark, such as one derived from the Household Expenditure Measure.
Another key tool you can use to 'stress test' - cash buffers:
Applying a cash buffer into your serviceability calculations can provide you with the ability to further demonstrate additional savings outside - this helps to show that the client is able to comfortable afford their loan, while also building a nest egg if there is any temporary disruption to income.
How can you Stay Compliant?
ASIC's standards are continually raised in tandem with their expectations of broker compliance, so it is important to work at being ahead of the curve for your key compliance documents.
To assist, QED Risk Services make many great tools available within the ‘Broker Tools’ section of QED Complifast to help brokers meet their responsible lending and general obligations. Among these, QED have also launched a new, easy to use serviceability calculator with all the math completed – you just need to enter the numbers!
Compliance isn't supposed to be overly difficult, if you're having trouble there IS a better way. The use of tools like this let compliance work FOR your business instead of against it.
For more information, call our offices on 1300 817 662