Despite massive interest rate cuts, and the positive jump in the number of first home buyers entering the market, those that are looking to refinance are getting rejected at a rate of knots due to reduced equity in their homes, according to JP Morgan. Banks are being choosy about who they lend to, and those that are trying to refinance their first home are doing it tough. They say this will dampen our housing market for some time. We look at this issue, and other issues around credit history which may impact on a successful refinance.

By Graham Doessel, Founder and CEO of MyCRA Credit Rating Repairs and www.fixmybadcredit.com.au.

The JP Morgan Mortgage Industry Report Vol 16′ focuses on recent mortgage approvals data. It paints a rather gloomy view of our housing market in Australia.

The executive summary of the report details that although lower mortgage rates have meant borrowers have been able to reduce debt, the cuts are not spurring on mortgage approvals.

“Interestingly, not only are the volume of approvals weak, but the average value of approvals is declining. While this may simplistically be dismissed as a broader indication of stalled house prices, we conclude that a degree of tightness for refinancings is evident – particularly for First Time Buyers,” it is reported…

“Growth in the average value of each form of owner occupied approval is now in negative territory. This is the first time this has occurred since data became available in the early 1990’s! One key reason we offer is a significant reduction in the LVR at which refinancings are taking place.”

Housing credit growth is at its lowest level since the mid-1970s, and JP Morgan is expecting low rates of credit growth to continue or to at worst decline rather than do a “quick rebound off the back of lower interest rates.”

They say first home owners are facing the bulk of the rejections. They are increasingly finding themselves trapped in their current home loan as banks refuse their applications for new ones.

“Specifically they haven’t absorbed enough loan devaluation ratio in terms of the house prices being flat and they haven’t had sufficient time to actually make a dent in the mortgage through repayments,” Scott Manning, Banking Analyst with JP Morgan told ABC’s The Business last week.

This report is in keeping with RP Data information released in July that showed more home owners were slipping into negative equity. The Sydney Morning Herald reported in it’s story ‘More homes slipping into negative equity as prices fall’ that in the three months to December last year,  6.4 per cent of homes were valued at less than their purchase price, a rise of 1.5 percentage points.

“Within the 6.4 per cent, 27 per cent of people who owned a home for one to two years had properties worth less than their purchase price.

By contrast, only about 1 per cent of owners holding their property for between nine and 10 years were in the same situation, according to property analysts RP Data.

So with many consumers experiencing reduced equity which is leading to more rejections by lenders, the other factor that comes in to play is rejection for refinancing because of bad credit history.

Surprise bad credit that prevents refinancing

Many times people don’t know they have bad credit history until they apply for finance.

Bad credit history can ruin plans to refinance even if people think they have been up to date with all of their repayments – due to errors or inconsistencies on the credit file.

Phone companies, utility companies and stores can all default consumers for late payments. The consumer may or may not be aware this has occurred (although they should be) and it may or may not be a legitimate listing (but it should be). Yet once that default, or other credit listing is placed on the consumer’s credit file, they are locked out of credit for the term of the listing – between 5 and 7 years – even if they have plenty of equity in their home.

This can be a valid reason why people can apply to refinance and be declined, despite being able to demonstrate consistent repayments on their current home loan.

If banks continue to err on the side of caution with their lending criteria – then a clean credit file will remain essential to meeting any risk assessment a bank can put up.

So how many credit files contain errors? The volume of credit file errors on Australian credit files is uncertain.

A spokesperson from credit reporting agency, Veda Advantage estimated 1% of the 250,000 credit reports they give out as a credit reporting agency to Australians every year contain a material error on the credit file.

But the Australian Consumer Association (now Choice) survey from 2004 revealed that 34% of the credit files surveyed in their small scale study contained errors or inconsistencies.

And the real numbers? They may be somewhere in between.

Approximately 63% of the incoming clients with MyCRA Credit Rating Repairs have defaults, writs or Judgments which are listed in error on their credit file.

We have clients who are facing identity theft; some are caught in issues over separation from their spouse; some have been disputing the bill which went to default stage and many people are just victims of the fallout from inadequate billing procedures – wrong names, wrong addresses, human and computer errors.

Listings such as defaults, writs, Judgments and clearouts are not removed by creditors unless the credit file holder can provide adequate reason and lots of evidence as to why the listing should not be there.

Credit repair requires knowledge of the legislation, lots of evidence and perseverance. But if the consumer’s financial freedom is hindered because their credit file contains errors, it is a point worth fighting for.

If you need help with credit repair call us on 1300 667 218 or visit our main site: www.mycra.com.au.

Image: YaiSirichai/ www.FreeDigitalPhotos.net

Image: David Castillo Dominici/ www.FreeDigitalPhotos.net