Happy New Year! Expat Borrowing is predicted to become easier in 2019.
As we all return to work after another year’s festivities, we look forward wondering what 2019 will bring in the expat borrowing market.
During 2018 the Australian Finance industry was very much under the spotlight with the Royal Commission into its practices. To be frank, no part of the broader industry was viewed in a very positive light, that included the home lending or debt sector.
The main focus, of the questioning and reports, was based around whether the clients who had previously obtained debt, should have received it, whether the banks and lenders had operated within APRA’s Responsible Lending guidelines.
Over the course of 2018, we observed a tightening of lender policy around clients existing debt and their costs of living. Lenders assessors now proactively review bank statements and credit card statements to ensure what is being disclosed in the application (for cost of living expenses) is what is actually being spent. The knock-on effect of this has been a reduction in the amount people can borrow, effectively a tightening of credit that has led to the media noting we are in a “credit crisis or credit crunch”.
For Australian Expats looking to borrow however, there has been little change, the policies around income and expenses have been implemented for a couple of years now, there was some further tweaking, but ultimately 2018 was business as usual! This is really positive for expat borrowing in 2019.
What can we expect in expat borrowing in 2019?
If we look at the banks broadly, none of them are loaning as much as their shareholders would like, eg if they don’t loan then their profits will be reduced. So, what part of the market will they look to if they need to loan more funds?
The challenge is that lenders can’t be less responsible – the APRA Responsible Lending rules were implemented to protect the public, so lenders can’t now change policy and loan where the clients are not in a position to be able to afford the loan.
If we look back about 3 years, to the point when lenders started assessing risk at a client and loan level, they saw Australian Expats as higher risk. APRA had implemented a 10% cap on the amount of new business a lender could write in Investment loans, as a method of trying to slow the property market, the lenders could hit their 10% target easily with onshore clients, so didn’t need to look at Expats (who were seen as higher risk). As a result many lenders implemented rules to make applicants ineligible for a loan or chose not to loan where the income is not AU$.
If we look more deeply into one lenders income policy for Expats borrowing. In this case the lender implements a policy of discounting income when it’s earned in a currency other than AU$, the income is discounted by 20%. Once the income has been discounted, the lender will then apply Australian Tax rates to the discounted income, this figure is what they then use to see whether they believe you can afford the loan. All lenders have a similar policy, in many cases they will only use your contractual base salary for this formula.
So, if you think the formula through, if you are an Expat in Hong Kong or Singapore, your actual tax rate is approximately 10%, but the lender will apply a rate of nearly 50% (with the AU tax and the 20%). In addition, they may not allow us to use bonus income, housing or school allowances to service the loan.
On a positive note, we are starting to see some lenders start to relax some of their income discounting policies. One lender has started to discount overseas income by 10% rather than 20%. This is great news for expat borrowing in 2019.
More lenders are now allowing us to use bonus income, there seems to be more understanding around the housing and schooling allowances that make up an Expat income package.
The key areas I believe we will see a relaxing of policy over the coming months are:
- Interpretation of Expat income allowances
- Use of bonus income
- Reduction in the discounting percentage of non-AU$ income
- The application of Australian Tax rates against non-Australian earned income
- Allowing the use of income of a non-Australian citizen to assist the servicing of a loan, where the applicants are a couple and one party is an Australian Citizen
I don’t see all lenders making broad changes to policy or implementing all of the above points, some will implement changes to one or two of the above, the challenge for me is knowing who has changed what and how it can positively affect a potential application.
So, broadly in 2019 I see some real positives for Australian Expats borrowing, looking to refinance existing debt or to take on new debt. Perhaps it’s my positive attitude to the industry, but I have already seen lenders willing to review some of the stringent policies they have implemented over the past few years.