Some borrowers will soon find it harder to get a mortgage after the banking regulator announced tougher serviceability tests for home loans. So who will they impact most?

The Australian Prudential Regulation Authority (APRA) will increase the minimum interest rate buffer it expects banks to use when assessing the serviceability of home loan applications from 2.5% to 3% from the end of October.

This means that banks will have to test whether new borrowers would still be able to afford their mortgage repayments if home loan interest rates rose to be 3% above their current rate.

APRA estimates the 50 basis points increase in the buffer will reduce maximum borrowing capacity for the typical borrower by around 5%.

“The buffer provides an important contingency for rises in interest rates over the life of the loan, as well as for any unforeseen changes in a borrower’s income or expenses,” APRA Chair Wayne Byres wrote in a letter to the banks.

Why is APRA increasing the buffer?

This move doesn’t come out of the blue. Federal treasurer Josh Frydenberg flagged tougher lending standards a week prior following a meeting with the Council of Financial Regulators.

And it’s due to a combination of factors.

Firstly, interest rates are at record-low levels, and secondly, the cost of the typical Australian home has increased more than 18% over the past year – the fastest annual pace of growth since the late 1980s.

That combination has made financial regulators a little worried that some homebuyers are starting to stretch themselves too thin and borrow more debt than they can safely afford.

Mr Byres adds that 22% of loans approved in the June quarter were more than six times the borrowers’ annual income. That’s up from 16% a year prior.

As such, APRA did consider limiting high debt-to-income borrowing but believed it would be more operationally complex to deploy consistently.

“And it may lead to higher interest rates for some borrowers as lenders effectively seek to ration credit to this cohort,” APRA adds, but it doesn’t rule out limiting high debt-to-income borrowing in the future.

Which borrowers are most likely to be impacted?

The increase in the interest rate buffer will apply to all new borrowers.

However, the impact is likely to be greater for investors than owner-occupiers, according to APRA.

“This is because, on average, investors tend to borrow at higher levels of leverage and may have other existing debts (to which the buffer would also be applied),” APRA adds.

“On the other hand, first home buyers tend to be under-represented as a share of borrowers borrowing a high multiple of their income as they tend to be more constrained by the size of their deposit.”

What could this mean for your home loan borrowing hopes?

If you’re worried about how this latest announcement from APRA could impact your upcoming application for a home loan, then get in touch today.

We can apply APRA’s new loan serviceability tests to your personal circumstances to help you determine your borrowing capacity and focus your house hunting.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or 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 interest rates at record low levels, we’ve seen a big increase in homeowners wanting to refinance this year. So this week we’ll look at some of ASIC’s top tips for refinancing, plus some of our own for good measure.

More and more mortgage holders are looking for a better deal on their home loan.

According to ABS data, the total number of home loan customers who switched providers last year increased by 27% – from 143,664 in 2019 to 182,016 in 2020.

And a further 200,000 Australian families are expected to switch lenders and save in 2021.

But there’s switching lenders the wrong way, and switching lenders the right way.

Fortunately, Laura Higgins, ASIC’s Senior Executive Leader Consumer Insights and Communication, recently shared some important tips with ABC radio, which we’ve compiled for you below.

1. See if your current lender can cut you a better deal

Here’s the thing about the big banks and home loans: customer loyalty is rarely rewarded.

In fact, the RBA found that for loans written four years ago, borrowers were charged an average of 40 basis points higher interest than new loans.

For a loan balance of $250,000, that could cost you an extra $1,000 in interest payments per year.

“Many times, new customers are offered a better deal than existing borrowers, so if you have a home loan that is a few years old you could potentially get a better deal that saves you thousands of dollars over time,” explains Ms Higgins.

“Even if you’re happy with your current lender, it’s worth checking you’re not paying for features or add-ons you’re not using.”

2. Don’t jump at the easy money: do the maths

There are a lot of incentives out there to entice you to switch mortgages quickly, such as cashback offers or very low-interest rates.

But Ms Higgins urges borrowers to closely compare these offers with the long term costs.

“For example, it’s worth doing the maths to ensure a cashback offer still puts you ahead over the long term when considered against other aspects of the loan, like interest rates and fees,” she explains.

“If you decide to switch lenders, you may end up with a longer-term loan.

It’s also important to consider whether lenders mortgage insurance or other costs, like discharge and loan arrangement fees, may be payable.

“These additional costs can outweigh the benefit of a lower interest rate,” she adds.

“A mortgage broker can also help you compare loans and decide whether to switch.”

Which is very true, if we do say so ourselves!

3. Consider switching to an offset account or redraw facility option

With interest rates so low, many borrowers are aiming to pay off their mortgage faster by making extra repayments.

“Interest rates may be low now, but probably won’t be this low forever. Making some extra repayments now can benefit customers in the long term,” says Ms Higgins.

But if you’re worried about tying up all your funds in your home loan, then you can consider switching to a mortgage redraw facility or offset account, which can allow you to make extra repayments but withdraw them if you need to.

“Either of these options might work for you depending on your goals,” Ms Higgins adds.

“Not all home loans can be linked to an offset account, and often those that can may have a fee charged or a slightly higher interest rate, so it’s worth making sure you’d be saving enough in there to warrant any extra costs.”

4. To fix the rate or not? Or both?

Last but not least, a refinancing tip that we think is worth considering in this climate of record-low interest rates (which probably won’t be around forever).

One of the most common ‘big decision’ questions we get asked when it comes to refinancing is: should I fix my home loan rate or not?

But did you know a third option exists?

Yep, you can fix the rate on some of your mortgage, but not all of it.

This allows you to lock in a low rate for a portion of your home loan, while also taking advantage of some of the flexibility that a variable rate can offer, such as the ability to make extensive additional payments.

If you’d like to know more about it – or any of the other refinancing tips in this article – then get in touch today.

We’d be more than happy to help you refinance your home loan, whether that be renegotiating with your current lender or exploring your options elsewhere.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or 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.

CONTRACTOR LOANS FOR CREATIVE PROFESSIONALS

 Not all jobs are steady 9-5!

If you’re a creative professional, it’s likely your days (and nights) are always busy but your earnings ebb and flow.

For actors, events-based professionals, musicians, production crew and artists, it can feel frustrating to be overlooked for loans because of the way your industry works.

However, with the right evidence of your income and the right support on your side, it is more than possible to secure a home loan as a creative professional.

Contact your creative professional and contractor loan specialist

HOME LOANS FOR CONTRACTORS

Now you have established your reputation as a creative professional, you can rely on a steady stream of commissions, gigs and contracts.

As a result, you can definitely be a candidate for a loan.

Get the help of an expert broker who understands which lenders to apply to and how to demonstrate that you are capable of repaying a loan.

CAN I BORROW MONEY FOR A HOME LOAN AS A CONTRACTOR, ARTIST OR MUSICIAN?

If you have a good credit history, a substantial annual income and evidence of being able to save money, you can definitely be considered for a home loan.

Here are some of the things you will need as part of your application:

  • evidence of your income for the last 2-5 years;
  • evidence of your personal debt (ideally it will be very minimal);

a good credit history, and

  • evidence you have been saving for a deposit (this could also include proving you have been steadily paying rent).

Take a look at this video for more information about figuring out how much you can borrow: coming soon

The most important thing you need when applying for a creative professional or contractor loan is someone who can walk you through the process and help you come up with a plan that will allow you to achieve your goals.

MEET YOUR CONTRACTOR LOANS SPECIALIST

Steve Morrison

With a ten year history as a mortgage broker, I have helped over one hundred creative professionals to get their home loan application over the line.

Whether you have a deposit saved and ready to go or you just want to know what your options are, I can help you understand what to do at every step.

My services include researching the lenders that offer the most competitive mortgages to Australians who don’t have the usual 9 to 5 job.

CONTRACTOR LOANS: HOW IT WORKS

If you’re a creative professional who does contract work and you are looking to buy a home, it makes sense to work with a mortgage broker who understands what’s possible for you.

  • Book a time to speak with me and we’ll go through your circumstances, your plans and your ideal outcome.
  • I’ll let you know how much you can borrow based on your savings, current interest rates and your borrowing options.
  • Then we will work together to prepare an application with a lender who can provide the most suitable options.

IMPORTANT INFORMATION ABOUT HOME LOANS FOR CONTRACTORS

Because contracting work doesn’t come with a regular salary like a PAYG employee, it is critical that when presenting your application, the person assessing your loan understands your unique circumstances and earning potential so they can confidently approve you.

For the past 10 years, that is what I have built significant expertise in; helping contractors like you to package up and present your application in the right way so the lender is comfortable to take you on as a client.

Get in touch to schedule your first appointment.

Contact your contractor loan specialist