APRA suggests banks relax key lending criteria

Here’s a bit of good news: you may be able to borrow more for your next home loan after the prudential regulator sent a letter to the banks asking them to relax a key lending criteria.

In a letter to lenders, the Australian Prudential Regulation Authority (APRA) has proposed removing its guidance that lenders should assess whether borrowers can afford their repayment obligations using a minimum interest rate of at least 7% (although most ADIs currently use 7.25%).

Instead, APRA has proposed that authorised deposit-taking institutions (ADIs) use an interest rate buffer of 2.5% over the loan’s actual interest rate when assessing a customer’s ability to manage repayments.

How you’ll be assessed

CoreLogic research analyst Cameron Kusher has done a pretty good job of breaking down how you’ll be assessed under these proposed changes:

“If someone is looking to borrow at an interest rate 3.9%, the borrower would previously have been assessed on their ability to repay the mortgage at an interest rate of 7.25%,” he said.

“Now they would be assessed on their ability to repay at a lower 6.4% (3.9% + 2.5% buffer).”

Kusher added that the proposed APRA changes seem sensible given the interest rate environment with the expectation that rates will fall from here and remain lower for longer.

“Furthermore, since 2014 it has become much more difficult to get a mortgage, that is partly because of this serviceability assessment,” he said.

Why the change?

APRA chair Wayne Byres said the operating environment for ADIs had evolved since 2014, prompting APRA to review the ongoing appropriateness of the current guidance.

“APRA introduced this guidance as part of a suite of measures designed to reinforce sound residential lending standards at a time of heightened risk,” said Mr Byres.

“Although many of those risk factors remain – high house prices, low interest rates, high household debt, and subdued income growth – two more recent developments have led us to review the appropriateness of the interest rate floor.”

Mr Byres said with interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7% floor and actual rates paid had become quite wide in some cases, and “possibly unnecessarily so”.

What does this mean for borrowers?

Mr Byres said the changes are likely to increase the maximum borrowing capacity for a given borrower.

However, he warned banks that the changes are not intended to signify any lessening in the importance that APRA places on the maintenance of sound lending standards.

“The proposed changes will provide ADIs with greater flexibility to set their own serviceability floors, while still maintaining a measure of prudence through the application of an appropriate buffer to reflect the inherent uncertainty in credit assessments,” Mr Byres said.

What next?

A four-week consultation will close on 18 June, ahead of APRA releasing a final version of the updated guidance.

CoreLogic’s Kusher said the changes will allow some borrowers who can’t quite access a mortgage currently to get one.

“Overall for the housing market, it will mean more people are able to get a mortgage. These proposed changes in conjunction with the uncertainty of the election now behind will potentially provide additional positives for the housing market,” Kusher said.

In the meantime, if you’d like to find out if these changes might help increase your borrowing capacity, then get in touch. We’d be more than happy to run through your situation with you.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

What the re-elected Coalition government has promised

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No doubt, like most, you’re suffering from a bit of election fatigue. But stick with us – here’s one last article that explains what you can expect from the 46th parliament of Australia.

With the Coalition securing enough seats to form a majority Morrison government, this week we thought we’d recap a number of key election promises and how they may impact your financials.

Now, we understand that politics can be somewhat of a … polarising issue, especially straight off the back of a hotly contested election campaign.

So we’ve done our best to take the politics completely out of this and just break it down into simple facts on what‘s been promised moving forward.

1. The big election issues that will remain unchanged

Perhaps the biggest talking point from this election is not what’s changing, but what’s staying the same.

Labor had entered the election campaign promising to halve the capital gains tax discount for investments entered into after 1 January 2020, and limit negative gearing to new housing.

However, the re-elected Coalition government opposed both these policies, so expect them to remain unchanged.

Labor had also planned to abolish the franking credit refund, which would have had an impact on shareholders and self-funded retirees. However, the Coalition campaigned strongly against Labor’s plan.

2. Tax relief

This is a bit of a tricky one.

The Coalition’s pledge to cut personal income tax was perhaps its biggest election promise.

Now, the good news is that last year the government passed a $530 tax cut for people earning up to $90,000 this financial year.

The bad news, however, is that it looks unlikely that the government will be able to pass legislation before the end-of-financial-year deadline to provide an extra $550 in tax relief.

That’s because it’s extremely unlikely that federal parliament will return before June 30, as the writs for the election won’t be returned until late June.

That said, the federal government is looking into other options for delivering the tax cuts, such as having the ATO retrospectively amend assessments once legislation has been passed.

3. First Home Loan Deposit Scheme

It was a policy announcement made late in the election race, but it will be welcomed by many young first home buyers eager to crack the property market.

Up to 10,000 first homebuyers will be given a leg-up into the property market under the First Home Loan Deposit Scheme.

The scheme, which will commence on 1 January 2020, will help eligible first home buyers purchase a house with a deposit as low as 5%, without having to pay Lenders Mortgage Insurance (LMI).

That means many first home buyers could save around $10,000 in LMI under the scheme.

4. Small business tax relief

For businesses with a turnover of less than $50 million, the government has promised to further reduce the 27.5% tax rate to 26% in 2020–21 and then to 25% the following financial year.

For unincorporated businesses with a turnover less than $5 million, they have introduced a tax discount of 8% (capped at $1,000), which will further increase to 16%.

The Coalition says this small business tax relief plan should benefit 3.4 million businesses employing over 7 million Australians.

Meanwhile, the government has also extended the Instant Asset Write-Off scheme until 30 June 2020.

The scheme allows small and medium businesses to claim immediate deductions of up to $30,000 for new or second-hand depreciable asset purchases, helping them with their cash flow.

Final word

As we’ve outlined above, there are a number of Morrison government policies that may trigger a re-assessment of your finances and tweaks to where money is allocated in your monthly budget.

Perhaps you’ll have a bit extra to pay off your monthly mortgage, small business loan, or to put away for a rainy day.

Whatever the case, if you need our help in any way, you know where to find us. We’d be more than happy to run through your query with you.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

How the new govt scheme could give you a head start on property

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Did you know that it takes four to seven years for the average household to save a 20% deposit for their first home and avoid paying lender’s mortgage insurance? However, a new scheme promises to drastically reduce that time by dropping the required deposit to just 5%.

As you may have seen, the Coalition government recently announced a plan to let first home buyers borrow up to 95% of the value of a property and still avoid paying lenders mortgage insurance (LMI).

Now, the First Home Loan Deposit Scheme “isn’t free money”, points out Prime Minister Scott Morrison, but it means fewer young Australians will need to ask the “bank of mum and dad” for cash upfront.

Labor has matched the proposal, meaning it should go ahead no matter who wins government this election, so today we’ll break the scheme down for you.

Why is this a big deal?

Ok, so as it stands, it is possible to get a home loan with just a 5% deposit.

But people with a deposit of less than 20% usually have to pay LMI, which can be a pretty big deterrent if you’re wanting to crack into the market.

Basically, LMI is the insurance that reimburses a lender if a property is repossessed and sold for less than its outstanding mortgage debt.

The insurance covers the backside of the lender, but the premium is paid by the borrower.

Under the new scheme, the government would guarantee the additional amount needed to reach the 20% threshold, which would save borrowers thousands of dollars in LMI.

How much could I save?

Ok, let’s say you want to purchase a $400,000 home to get your foot in the property market.

Currently, if you have saved up $62,000 for the deposit and fees, you’ll have around a 15% deposit. In that case, you’ll pay about $3,500 in LMI.

If you have pulled together a 10% deposit ($42,000 in savings), you’ll be up for $6,500 in LMI.

And if you’ve only put away a 5% deposit ($22,000 in savings), you’ll face $12,500 in LMI.

As you can see, that’s quite a lot of money you’ll be able to save in LMI under the new scheme.

The government’s policy in a nutshell

We’ve gone through the government’s policy and pulled out some of the more relevant tidbits. They are as follows:

– The scheme will commence on 1 January 2020.

– Eligible first home buyers can’t have earned more than $125,000 in the previous financial year, or $200,000 for couples (and both need to be first home buyers).

– The First Home Loan Deposit Scheme will be limited to 10,000 first home buyer loans each year.

– The lender will still have to undertake the full normal credit check process (meeting all their legal obligations) to ensure that you’re in a position to afford your repayments.

– If the borrower refinances, or the loan comes to an end, the Commonwealth support will terminate.

– Eligible first home buyers will be able to use the scheme in conjunction with the First Home Super Saver Scheme as well as relevant State or Territory first home buyer grants and duty concessions.

Other factors to consider

Keep in mind that having a 5% deposit, rather than a 20% deposit, means that the monthly repayments on your home loan will be larger.

You’ll also likely pay tens of thousands more dollars in interest over the life of a 20-30 year home loan.

That said, this scheme will enable many young Australians to start growing their property portfolio years earlier than they otherwise could have.

And for most people, it will also mean they can save a few years paying rent.

For example, if you’re paying $400 a week in rent while saving for a deposit, that’s $62,000 over three years that could have gone towards the mortgage on your first property instead.

Basically, it’s a decision each prospective first home buyer will need to make according to their own personal circumstances.

Final word

If you’d like help cracking into the property market, or know a family member who would, please get in touch.

As we’ve alluded to, lenders will still be required to go through all the checks and balances to ensure a first home buyer has genuinely saved up their deposit and can afford their mortgage.

We’d love to provide you with some helpful tips and techniques to ensure that when lenders look through your accounts in 2020, you’ll be well and truly prepared.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

Will the RBA cut the cash rate this month?

We don’t like to dust off the old crystal ball and speculate very often, but there’s been so much noise about whether the RBA will cut the official cash rate this Tuesday that we feel compelled to address it.

30 meetings in a row.

That’s how long the RBA has kept the record low official cash rate at 1.5%. All the way back to August 2016.

So with an uninterrupted streak like that, why are we putting this article out now?

Well, it’s fair to say that speculation has hit overdrive that the RBA will make a cut when it meets on Tuesday. But it’s certainly far from a given.

So today, let’s look at some of the main reasons for a cut to the official cash rate, some of the main reasons against, as well as what a rate cut might mean for your home loan.

For: Inflation (or lack thereof)

Australian Bureau of Statistics data showed inflation was totally static in the March quarter, with the consumer price index at 0.0 per cent, bringing the annualised rate down to 1.3 per cent.

The unexpected reading has financial markets and pundits predicting an increased likelihood that the RBA will cut the cash rate this Tuesday.

Basically, the thinking is that by cutting the cash rate, the RBA could give the economy a good ol’ hit with the defibrillators.

ANZ Bank chief executive Shayne Elliott backed the case for cutting official interest rates to a new record low, saying it would boost economic activity and give “breathing space” to people struggling to make their home loan repayments.

“Maybe it will just give a bit of juice into the economy, and get a bit more employment, and put a bit of money back into people’s pockets,” Elliott says.

That said, some people doubt that an official rate cut would be passed on to mortgage holders, as we’ll touch upon later.

For: Falling house prices

Nationally, we’re amidst the worst annual housing price fall since the GFC.

Over the year, median prices nationally fell by 7.2% in average weighted terms.

The declines in the combined capital cities over this period was even larger at 8.4%.

CoreLogic’s research director Tim Lawless says a rate cut could help give the property market a bit of a boost.

“The prospect for lower interest rates is another factor that could support an improvement in housing market activity later this year,” says Lawless, who also adds that “the worst of the housing market conditions are now behind us.”

Against: The federal election

Perhaps the biggest reason why we may not see the RBA announce a rate cut this month is because we’re in the middle of a federal election campaign.

“Changing monetary policy during an election risks the central bank being caught up in a political fight,” says the AFR’s senior economics writers in an analysis piece.

“The RBA last raised interest rates during an election in 2007 and John Howard and Peter Costello never forgave then-governor Glenn Stevens. Howard had campaigned on keeping rates low.”

As we all know, Howard lost that election to Kevin Rudd, and the only other time there was an official cash rate change during a federal election was in 2013 – when Rudd lost to Tony Abbott.

So the track record for rate changes during election campaigns is not good for incumbents.

Against: Would lenders pass on the cuts?

So what would a cut mean for your home loan?

According to an analysis commissioned by the AFR, lenders would keep rates the same, or pass on only half the rate cut. That’s what they did after the last cash rate cut in July 2016, and it’s another reason the RBA might not end up making the cut this month.

If they did, however, and half the cut was passed on, the typical monthly repayment on a $1 million standard variable loan would reduce by just $65, the analysis finds. On the average $400,000 loan, the reduction would be just $26 a month.

Final word

So those are the main reasons for and against a cut to the official cash rate.

What’s a little more clear cut, however, is that most economists are predicting that if it doesn’t happen this month, it will most likely happen in the months to follow – and perhaps twice before the year’s end.

If you’d like to know more about what these potential upcoming cash rate cuts could mean for you and your family, please get in touch – we’d love to run you through it.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

With home loan interest rates dropping, is it time to pull the cord?

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Fixing your home loan while rates are dropping is a bit like pulling the ripcord on a parachute. If you do it early you’ll get a steady ride but may miss out on a bit of action. But if you leave it too late things might get a little messy.

To fix the rate or not?

That seems to be the question on a lot of people’s lips at the moment.

We’re just a few months into 2019 and already 44 lenders have dropped rates on more than 500 fixed-rate home loan products.

These discounts aren’t just being offered by smaller lenders trying to attract new customers, either.

Commonwealth Bank, Westpac and NAB have all announced significant fixed rate cuts, while ANZ recently offered a discount to the headline rate on its flagship variable rate product.

To fix or not to fix?

When there are so many lenders scrambling over each other to cut rates, a question we often hear from clients goes something along the lines of: “Is now a good time to lock in a rate?”

While we’d love to be able to give you a definitive answer on this, the fact of the matter is that it depends on your individual circumstances, preferences and home loan.

Let’s quickly run you through a few important considerations below.

What will the RBA do?

The first factor to consider is that these cuts are being made out-of-step with the RBA.

That’s because the RBA hasn’t changed the cash rate since it was moved to 1.50% in August 2016.

However, speculation of a near-future cut to the cash rate has ramped up, with the RBA’s April meeting minutes revealing there was an explicit discussion of what it would take to make a cut.

Some economists, including AMP’s Shane Oliver and NAB’s Ivan Colhoun, predict the RBA will cut the official cash rate twice to 1% before the year’s end.

Furthermore, the RBA will likely come under more pressure to cut interest rates at their next meeting after inflation fell further below its target band, the ABC reported this week.

With all that said, nothing is certain. It wasn’t too long ago that most pundits were predicting that the RBA was going to move the cash rate upwards rather than downwards.

The pros and cons

Locking in a fixed home loan means that it doesn’t matter whether or not the official rate goes up or down, you won’t be affected.

It can give you a sense of clarity and certainty, and as such, can help you budget and plan ahead for up to the next five years.

You might prefer a fixed home loan rate if you:

– are comfortable with the interest rate offers being currently spruiked by lenders and won’t suffer from FOMO (fear of missing out) if rates drop further

– prefer to accurately plan your finances in the short and mid-term

– are concerned that you would be unable to make your repayments if rates were to rise.

However, you might prefer not to lock in a rate if you:

– are confident interest rates will continue to fall over time

– don’t mind having some unpredictability in your financial planning

– prefer to go with market rates.

Give us a call

If you’re still unsure on what’s the best option for you, or you’d like us to run you through some of the home loan rates currently on the market, then give us a call.

As we touched upon earlier, lenders have dropped rates on more than 500 fixed rate home loan products so far this year, so the market is constantly shifting.

We’d be happy to look at your current home loan and run you through how it compares to some of the other products on the market.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.