The Reserve Bank has issued a couple of words of caution in recent weeks that should cause all of us mortgage brokers to pause for thought.
Both the strong property market, as well as the potential of loosening lending standards, have been highlighted by the central bank as two key issues on its radar.
In its latest Financial Stability Review, the RBA reminded Australians that a cyclical upswing in property prices when interest rates are low “cannot continue indefinitely”.
Additionally, it expressed concern that some lenders’ less conservative lending assessments could be bringing with them greater risks.
While there are still plenty of reasons to be bullish about the prospects for the property market and borrowing activity in 2014, the RBA’s comments provide a good opportunity to stop and take stock.
With NCCP firmly in place, we’re all well across our responsible lending requirements. But what about going beyond that?
At PIPA, our members are all about the client – putting their best interests ahead of any other. And fortuitously, putting your clients’ best interests first is actually the best single way to win repeat business.
During times of strong market activity and early evidence of more relaxed lending criteria, as a broker it may be tempting to secure your client that bigger loan in order to secure that bigger and better property, or to avoid missing out on that property they believe is ‘the one’.
But bigger is not always better and success in property requires a sensible head, plenty of breathing room by way of good cash flows, and a safety buffer.
Though your client may not sing your praises now, when interest rates rise or price growth slows, it may be a different story. There could be no benefit to your client - or to you - financially if they are forced to sell only 12 to 24 months down the track.
Certainly, there are instances where high LVR loans are appropriate, but it’s important to consider each client’s individual circumstances. Clients are looking to you as their professional adviser and they need to hear positive benefits as well as the negatives and potential risks.
Brokers who work with clients to make strategic financing decisions based on a longer term approach to finance will not only be doing the best thing for the client but also laying the foundations for a long-term client relationship.
Of course, you’ll need to take the time to explain this to your clients. Discuss the importance of budgeting and cash flow forecasting, savings buffers and long-term planning, as well as the fundamentals of the macro property price cycle.
They are coming to you for guidance and advice, and they may not always like what you tell them, but at least you can sleep with the comfort of knowing you’ve offered them a balanced assessment of their options and put their best interests first.