I have been working as the lender for one of Big 4 banks for many many years. Feel free to ask me any question!
[AMA] I am a bank lender, Ask me anything
LMick1234 on 22/01/2019 - 22:26
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Happy borrow happy lending
Banks can do that, see a mortgage broker, they may be able to make the dream with more products offerings… fewer bedrooms and land size but still a dream…
They say bank creates money out of thin air when giving out home loans.
How does that work ? Someone has to get paid at the other end ?
"How does that work ?"
I doubt the OP would know. Check this for a summary though.
This one is shorter and might be easier to understand for those new to the idea. https://youtu.be/KvpbQlQwl0A
Basically it works like this:
If I have $5,000 in my bank account, and the bank then lends out that $5,000 - My $5,000 is still there, but someone else now also has $5,000 more cash to use. Net it's the same, but in practical cashflow terms, there's an extra $5,000 in the economy.
It's called the Multiplier Effect, and it's basically 1/[bank reserve limits]. My example is flawed in that if banks can lend out 100% of the savings they manage, the multiplier would be infinite. In reality, they keep a percentage of all deposits "in reserve" - although no hard limits exist for Australian banks, this is in effect around 1%. So in Australia, the multiplier effect is 1/0.01 = 100x.
Perhaps no hard limit, but APRA do require them to hold a certain amount Tier 1 capital (CET1). Which is just above 10% I believe. While that might not be all hard aussie deposits/cash, I think a large proportion of it is.
https://en.wikipedia.org/wiki/Tier_1_capital
The banks do manage this more through a risk weighted approach where APRA will give them a better weighting if the bank lends to owner occupiers as opposed to lending to a discretionary consumer goods segment or coal miner etc. So they try to screw the risk weighting towards stuff that the regulator feels is less risky so they can hold less capital and make a better return on the capital held.
The weighted affect also works on the capital held side, so aussie dollars would be weighted more favourably then some fancy account quasi-reserves style stuff or interesting hybrid/debt instrument arrangements.
Sorry if this explanation is a bit basic/broad, there is a lot of detail you can go into down this path.
Thanks for the elaboration. Yeah I tried to simplify it as much as possible - but it is definitely a lot more complicated than just "Banks keep a certain proportion in reserve".
This isn't a constraint, either. For example, a bank could issue a loan to a customer who then uses the money to buy newly issued shares from the bank itself. The liability-side of the bank balance sheet expands due to issued equity (and improves their CET1), and their asset-side expands with the loan.
I still don't get it. Home loan is not personal loan so someone has to get paid, no?
Buyer get homeloan to buy house from Seller. Buyer's Bank has to pay the whole homeloan amount upfront into Seller's account or Seller's loan discharge from another bank. Then Buyer slowly pay back the Bank plus interest.
Ok, the core of this is the fact that banks don't operate like you or me. They work (roughly) on a fractional reserve system.
You know how the it's the bank that pays you interest on your money, even though they're holding onto and looking after it for you? That's because your money doesn't actually physically stay at the bank. It gets loaned out. The only difference is - when you loan someone money yourself, you don't still see that money in your account. But when a bank does it, your bank balance doesn't change.
That's because the bank only keeps a fraction of the total money deposited with them (around 1-10%), and the rest they loan out. They can do this because usually, most people don't need most of their money. If you have $20,000, you'll very rarely withdraw all of it, and spread across all the customers of one bank, that almost never happens. (When it does, that's a bad sign and also causes bad things - that's a run on the banks).
So say the bank holds $2,000,000 from its customers. It knows people will only draw out say, $200,000 at a time (10%). So they keep that $200,000 on hand, and loans out the other $1.8m to borrowers. The customers still see a total of $2m in their accounts, but now the borrowers also see $1.8m (being the loans) in their accounts. Total cash in the system has just increased from $2m to $2m + $1.8m = $3.8m.
But the borrowers don't need all $1.8m of the loans in cash - and nor do the sellers they pay the $1.8m to. Those sellers bank the $1.8m and their bank knows they'll only withdraw $180,000 at a time too (10%). Their bank then can lend out $1.62m. Remember how there was $3.8m money in the system? Now there's $3.8m + $1.62m = $5.42m. And the process repeats, until ultimately you have 1/(0.1) times more money in the system than what you started with. That's the multiplier effect.
Google the italicized terms for further reading, but this was how I was taught this in Econ.
PS: the smoke and mirrors trick is that bank customers don't see a lower balance after their money is lent out to others by the bank. Even though the bank only holds 10% of the moneys deposited with them, customers still see 100% of their bank balance.
@HighAndDry: so you're saying bank don't pay another bank money ?
are we even talking about the same thing here ?
so buyer get $1m homeloan from CBA to buy a house from seller with ANZ loan to be discharged.
upon settlement buyer CBA agent and seller ANZ agent just show up for fun ? ANZ don't take $1m from CBA ? CBA doesn't pay $1m to ANZ ?
@dcep: Oh they do. CBA pays ANZ $1m. So the seller sees $1m in their account. But ANZ doesn't just hold onto that money (otherwise where does the interest come from?) - ANZ lends out 90-99% of that $1m, but the seller still sees $1m balance in their account.
@HighAndDry: The maths doesn't sounds right.
Back to the original saying of "Bank creates new money out of thin air when issuing homeloan".
How does CBA creates new money out of thin air by issuing $1m homeloan to Buyer, but yet CBA has to pay the $1m upfront to ANZ ?
$1m - $1m = $0
@dcep: Okay, say you have $1m in your bank account. It's earning interest right?
If you lent that money to a friend, they'd see $1m in their account, but YOU would see $0 in your account.
BUT! If the bank lends your $1m to a homebuyer, that money goes to the buyer, goes to ANZ, etc, but you will still see the $1m in your account. Even though it's actually been lent out.
It doesn't literally create money out of thin air, but it does effectively create money, because the seller to the homebuyer has $1m in their account now (from the loan to the buyer), and you still have the $1m in your account.
@dcep: Yes. At the end of each day the banks have to settle with each other. In your example CBA has to give ANZ $1M.
They could get money from their vault and send an Armaguard van with it and that would be perfectly acceptable. But that's a hassle is much easier to transfer electronically.
Banks do this using their reserve accounts held with the RBA who act as the "banker to the banks". So they say to the RBA "Please move $1M from our reserve account to ANZs reserve account".
But banks can reduce the amount of money that needs to be transferred even more by a process called "netting". Basically they wait till the end of the day and compare each others unsettled transactions. Imagine in your scenario that on the same day the CBA customer has to pay the ANZ vendor $1M there is an ANZ customer who bought a property from a CBA customer. Well ANZ now have to settle $1M with the CBA. They look at both $1M transactions, realise they cancel each other out and thus no money has to be transferred between each other.
This is just 2 transactions but imagine every day millions of transactions being netted off against each other. At the end of the day the actual amount of money that needs to be transferred between banks at the reserve bank is actually very little.
Incidentally this is also why if you transfer money to someone the money doesn’t become available to the receiver until the next day. Because the interbank settlement process takes place overnight.
@meumax: Yes, in short, banks make the money out of nothing, using a system of fractional reserve banking.
- Old grandma deposits $1,000
- Bank lends out $9,000 (using 1/10 or 10% reserve requirement) - with interest
- Someone who gets this $1,000 of this $9,000 lent out goes and deposits it all (at the original or another bank)
- Bank lends out $9,000 on that - and charges interest on this money it just 'made up'
etc etc you get the picture.
So from an original $1,000 many many times (much more than the 10x reserve requirements) can be 'created', lent out and charged interest on.
Pump more money into the system -> asset (house) prices go through the roof.
Biggest scam ever, we are being robbed through inflation (the decrease in the value of the dollars we all hold in our wallets that happens when new money is created).
It's theft - a transfer of wealth from the young (interest, inflation and asset price increases) to the asset owners (e.g. home owners) and bank owners (i.e. shareholders).
The multiplier effect explanation is obsolete. Banks can simply borrow more reserves from either another bank, or the central bank itself.
Banks could always do that, but they still have some form of capital reserve requirement. That they can borrow just means the multiplier could be even higher than in the classical fractional reserve system. I'm trying to keep it simple enough to be explained on OzB - cut us some slack haha.
@HighAndDry: Reserves are not capital. Reserves are an asset for the bank, whereas capital is equity (liability side). The capital need not be a constraint, either. Check out my response to serpserpserp.
You'd be surprised how many bank CEOs get concepts like this muddled. It's very depressing.@pos: I think there's a bit of confusion here. Capital reserves are equity, but they are equity because they're supposed to be (again, in very simple terms), balanced against how much 'risky' assets the bank holds (and so yes, they're on the opposite side of the ledger).
So if a Bank holds $100t in assets, their capital reserve requirements might be 5%, so $5t in equity either as shareholder capital or just cash reserves, in excess of liabilities - so they can lend out $95t of those assets.
Again - I absolutely concede this is a simplified conceptualisation, but Assets = Liabilities + Equity doesn't mean Equity is the same as liabilities - it's rather that equity is excess of assets above liabilities.
In your reply to serpserpserp:
For example, a bank could issue a loan to a customer who then uses the money to buy newly issued shares from the bank itself.
That helps the bank's capital reserves because the money literally has gone directly back to the bank. In effect, their new "asset" of the loan of, say, $100, is 100% covered by added "capital" of $100 increase in shareholder's equity in accounting terms. In physical, cash terms, the loan is fine because the depositer whose $100 it was that the bank loaned out, can call on that $100 and the money will physically still be at the bank.
@HighAndDry: Thanks for taking the time to write a detailed reply. To keep it short (but please don't take this as blunt):
1. There is no such thing as 'capital reserve requirements'. There are capital funding requirements and reserve requirements.
2. Reserves are not capital. Nor are they necessarily funded by capital. Reserves are deposits owned by a bank at the central bank - this makes it an asset for the commercial bank. This asset may be funded by either a deposit (1) or a share issue (2) (or equivalent equity source). Indeed, if you check an annual report you will find that reserves != equity.(1) e.g., I transfer money from my ANZ account to your WBC account. ANZ will transfer ownership of an RBA reserve of the same amount and put it in the name of WBC. WBC's liabilities increase by the deposit, and assets by the reserve (i.e., no change in capital).
(2) e.g., I buy a newly issued WBC share with an ANZ deposit. ANZ transfers WBC the reserves per the example above. WBC's equity increases by the share issue and assets by the reserve.
— Edit —
Fixed formatting of examples.
Do you all just sign people up onto banks that pay highest commissions?
Do you fob people off if they only want to borrow $150k?He is a bank lender and not a broker. Therefore he lends for his bank only.
When I was a lender a $150k loan is a decent loan. It's the people that want to borrow $30k that are annoying. But when you are trying to reach your targets you probably wouldn't turn down anything.
As a broker, I will work with someone for a $150k loan… most will.
will you lend me a bank?
If I have plenty of savings, no debt, and an investment property will applying for credit cards to get frequent flyer points and cancelling (2-3 per year) actually have an effect on how much you’d lend me?
My current plan is to walk into a bank to get a loan and if anyone asks about my credit card history just “I’ve never paid interest and got myself a bunch of free flights using your banks money, who’s the real credit risk here?” Good idea or bad idea?
They won't care about canceled credit cards. Or your humble bragging.
So more generally the frequent advice given out on this forum about too many credit card applications affecting your credit score (and thus the ability to get loans/good rates) is wrong?
If you have no debt you're proving servicibility of those accounts. Banks only care about open cards that are a liability after giving you a loan.
I've had loads of credit cards and never had an issue getting a loan.
So I'd say yes, they are wrong.
It does affect your credit score. But people who say this don't understand how much it affects it (not many people have access to that info and wouldn't be talking about it on a public forum).
If you are a borderline case for a loan, yeah they'll look at your score and go "this guy despite what he tells us he is going to do actually actively seeks more credit from banks constantly so there is a risk he'll do the same after this loan and trip up."
While your situation you probably have excellent serviceability prospects so they won't care about the credit card apps. But again depends on the size of the loan, if you are going to borrow to your credit serviceability limit, yeah they might care about it then!
@serpserpserp: I don't think this is true. My latest refinance of my mortgage they made me decrease my credit limit and cancel another card I had.
After the lending was approved I applied for a new amex with 10k limit and got it.
Which could easily make me default on my mortgage if I maxed it out.
not many people have access to that info and wouldn't be talking about it on a public forum
Exactly why I was asking this of the OP as he should know, too bad he's gone missing…
And no offense to crashloaded but it doesn't sound like he has access to the info either and is rather relying on his personal experiences as a customer, so I don't place that much weight on his answers…
@stirlo: OP won't know he is just a mortgage lender in a branch/call centre.
The people who derive the credit score agencies would know exactly how much an application might affect your score, still I doubt it'd be broad brushed and there are probably some particulars to it.
@serpserpserp: The question is not "how will your credit score be affected by multiple credit card applications" everyone knows that happens and depends on circumstances.
The question is "as a Mortgage Lender with a Big 4 bank how much discretion do you have to offer a good rate to someone who may have a lower credit score as a result of credit card applications?" and "Are there any hard rules eg: score below X = no loan or score below X rate must be above Y%? Knowing those limits would probably help out Ozbargainers who chase points a lot…
@stirlo: big 4 lenders don't use the dumb credit scores that the credit reporting companies have made up. they get the raw data and apply their own assessment
@[Deactivated]: Good to know, and hopefully they're smart enough to judge accurately the credit risk of someone who applies for and cancels many cards but always pays on time. If so for many sensible ozbargainers the credit hit from applying for cards for points wouldn't mean much at all.
@stirlo: Again, from my post above it really comes down to your serviceability prospects on the day you apply for the loan. If you are maxing out what you can borrow, all the other little factors you might think are insignificant all of a sudden become important to a bank. However if you are only borrow 80% of the max then happy days (most likely).
Humble? Smug maybe?
Sarcasm ;)
If @stirlo is young and has a high income, I find the lack of debt inefficient rather than something to brag about.
@drfuzzy: Nah just going to take out a million dollar mortgage in the next year so realistically I'm far worse off than the boomers who own their 1/4acre block already. Until then no need to take on short term debt that would limit my future borrowing capacity.
When was your last prostate exam and were any concerned raised by your doctor afterwards?
Who do you lend banks to?
Can I borrow 3mil ? please
I'm with Chewy
Care to share the factors that are weighing on investor and owner occupier lending recently?
Whats the options for an overseas student to get a property in Sydney now? If possible borrow but also let me know if cash only is the only way. And how. Thanks.
I think most banks will not give you home loan unless you have permanent residency/citizen.
There are a few options but you will pay a higher interest rate.
Student if the worry here, hope you have heaps of cash.
What's it like working in retail sales?
Thanks for doing the AMA. A few questions:
- Have you historically had sales targets? Were they product based? If so, have these changed post royal commission? And how does that change overall remuneration? (i.e. is a larger portion of your salary now guaranteed?)
- Are you involved in assessing how much you can lend to a borrower? What can we do to maximise the amount we can borrow? Close credit cards? (Make sure we're not always opening and closing lines of credit?)
- What are your thoughts on mortgage brokers? Obviously banks prefer we go directly to you but are there any benefits for not going through a broker?
I was a lender many moons ago and Im sure things have changed at least a little….
But from my older experience:
Lenders sales targets / bonuses were loan value based. Although there were "gatekeepers" in that they need to sell x amount of home insurance products to qualify for any bonuses.
Generally if a loan met all the standard criteria (i.e. x amount of payslips and person has been working for x) then the system could auto approve the loan and I just had to gather all of the verifications etc and get all the docs signed. The system could also outright decline (usually based on terrible servicing or perhaps black marks on credit files) or "refer" which meant that a submission would need to be made to the credit team of the bank for manual approval.
To maximise the amount you can borrow.. You could:
- Earn more money
- Payout / close existing debts or credit cards.
- Have less kids.
- Also these days they ask you to estimate your expenses. Keep them low as the bank will have a minimum amount that they assign to a family with x parents and y kids and if you keep your estimates low you should be using the base rate/
- Brokers are alright. They are generally helpful for anyone whos loan is a bit more complicated (i.e. self employed) as bank lenders can sometimes put those applications in the too hard basket. Also from my experience credit departments used to go a bit easier on broker loans because banks wanted to encourage the brokers to come to their bank.
Anyway thats my two cents!
Good response here. I would add most banks are focussed these days on "whole of wallet" i.e. meeting all of a customer's requirements. The point on living expenses if more true than ever as statements are being reviewed to confirm veracity of claims around living costs! If you'd like to maximise borrowing capacity reduce your living expenses for the 3 months prior to applying.
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OP has left us High and Dry
he might have swapsey'd us for another forum.
They may have been having a lend of us.
he is busy lending money to strangers
Applications for questions are subject to prevailing credit criteria. Fees and charges may apply.
Hi All, AMA!! Doesn't mean I'm gonna answer though! :-)
He took his meds and now he's just an ordinary person
I feel robbed.
do you like chicken nuggets?
Make sure you include chicken nuggets on your living expenses.
Pineapple on pizza, delicious or disgusting?
Well this is a great ama
Do you drive an $80k car?
Lender says worth $80, bought for $60, worth $40.
no wonder OP doesnt bother to comeback, looking at most of the questions are just trolling. oh well,…
Savings or paying off smaller loans? What is more appealing in handing over a large sum of money to me, a 20yo, in 5 years.
Meet the repayments on the smaller loans and otherwise it's savings. You'll always need equity to contribute and could readily payoff loans if you have it anyway.
Do you ever get back to anyone?
At least it confirms that the OP really does work for a bank.
You will have a different lender in 4 weeks time.
Can you advise what is the quickest way to pay your mortgage? Is there a loophole or strategy that you can do other than paying extra?
Pay more than the minimum amount to reduce the loan term?
Put down a bigger deposit or buy a cheaper house.
Using the proceeds of the sale of your house.
No offence to you personally, but whenever I have dealt with bank lenders I usually end up educating them instead of the other way around. I work in finance but not banking/lending so I shouldn't be the one to know more. Do banks provide inadequate training in your opinion or is there another reason for this?
Hilarious this AMA made it to the front page yet the OP hasn't replied to anyone hahahah.
If i was very wealthy and walked into the bank for a large loan, however dressed like a centerlink bogan, would you still give me the same level of customer service as someone in a suit and tie.
dressed like a centerlink bogan
I think the judging based on appearances is subconscious given they've got nothing else to judge you on when you first walk in. Until such a time you open your mouth and speak.
I went to a solicitor's office (who I hadn't met in person before) in thongs, shorts and tshirt to hand over ID and bank cheques for a property purchase and they were taken aback for a second. The look on their face said it all. Then they asked whether I brought everything they asked for. Given the time of day they assumed that I would've come from the office in a suit (had a laugh and they actually told me this!).
(By the way, I'm by no means wealthy!)
My mate did the same to buy a new 5 series (shorts and tshirt). The sales consultants didn't even go to him to offer assistance. Went to another dealer and got great customer service and bought the car, still in shorts and tshirt.
Hi OP. I'm a Nigerian Prince.
I want to send all my money to Australia.
Please message me if you're willing to assist me.
WORST AMA EVER !!!
What bonus did you get from bank for Xmas ?
When will someone offer me a 6 figure salary so I can purchase a median priced house on minimum repayments on a maximum 30 year term?
Happy to swallow a few extra thick condoms if thats what it takes to get my foot in the door.
Apply for a bank lender position.
Has anything actually changed after the Royal Commission in regards to lending practice?
I have my doubt that it will fix anythingBecause the whole economy depends on lending
we have a hostage situation with banks against the government
A lot. Your expenses are scrutinized a lot more than before and getting credit is a lot harder while property price is on the brink.
Read it as : I am a blender, ask me anything.
Supposed to be AMA.. not AFK.
He's on banking hours, 10am to 12:30pm.
Front page material right here
Where is OP?? Almost 2 days and still not one question answered?
Well they won't be answering any questions today, not with Monday being a public holiday.
Do you enjoy shattering the dreams of young families?