Bar raised for borrowers: tougher home loan serviceability tests

, , , , , , , ,

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.

Are you too loyal for your own good? The banks think so

, ,

The average Australian homeowner is paying more than $37,000 in extra interest over the life of their home loan due to the loyalty tax, and it’s got three-quarters of borrowers feeling “ripped off” and “angry”.

What’s the loyalty tax?

It’s this sneaky lender trick where borrowers with older mortgages are typically charged a higher interest rate than borrowers with new loans, and it was confirmed in a study by the Reserve Bank of Australia (RBA) last year.

You see, the banks don’t think you’re paying attention, and as such, they only offer their lowest rates going to new customers in a bid to win them over.

For example, RBA June 2021 figures show the average difference in home loan interest rates between new and existing owner-occupier borrowers was 0.46%.

On an average loan size of about $400,000, that 0.46% difference on a 30-year loan means a borrower would pay an additional $37,462 in interest over the life of the loan.

That’s $1,249 per year, per household.

Athena Home Loans research estimates this costs Australian households a total of $9.1 billion per year.

Borrowers feeling ripped off and angry

It should come as no surprise then that 91% of borrowers want new and existing customers to receive the same rate, according to a survey of 1,000 homeowners undertaken by CoreData and commissioned by Athena.

The vast majority of those surveyed say they also feel “ripped off” (82%), “angry” (74%), and “outraged” (72%) at the opaque pricing practice.

“We know transparency is at the heart of trust. There is enormous opportunity for those lenders with clear pricing and a simple value proposition,” says CoreData Global CEO Andrew Inwood.

You don’t need to feel trapped

Now, the ACCC published a report in December 2020 with several recommendations to prevent this unfair practice, but nothing much has come of it since.

Meanwhile, more than half (56%) of those surveyed in the CoreData report say they feel trapped in their current deal, while one-in-three people (36%) asked their lender for a drop in their interest rate but were rejected.

But with competition among lenders quite fierce right now, it’s important to know the power is in your hands.

“Rates are at an all-time low at the moment, so it’s at a crucial time when Australians need the money in their pockets, not the banks,” explains Athena CEO and Co-Founder Nathan Walsh.

Adds the RBA: ​​“Well-informed borrowers have been able to negotiate a larger discount with their existing lender, without the need to refinance their loan.”

There’s no loyalty tax with us

We like to reward loyalty around here. We’ll always have your back.

So, if you haven’t refinanced recently, get in touch today and we’ll work with you to help save you thousands of dollars in interest repayments.

That might involve renegotiating with your current lender, or looking around for another lender who will give you a fairer rate.

Either way, we’ll make sure your lender isn’t taking advantage of your loyalty.

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.

Are they really OK? Here’s how to check in with them today

Do you know how the people in your world are really doing right now? Chances are you know someone who’s doing it tough, but silently pressing on. As always, we’re here to support you, and for R U OK? Day we’re sharing ways you can help others.

Life’s ups and downs happen to all of us. So chances are you know someone who is struggling right now.

They might not have seen their family for months, their business could be operating under the strains of COVID-19, or they might be having trouble meeting their mortgage repayments.

And here’s the thing: we’re not all blessed with the natural conversation instincts and EQ of someone like Andrew Denton.

So sometimes we put off tough conversations for fear of making the situation worse.

But rather than wait until someone’s visibly distressed or in crisis before offering them support, we wanted to mark R U OK? Day by sharing the charity’s tips for starting the conversation.

1. Pick your moment

Meaningful moments are more likely to take place when we’re spending quality time together.

While this can be difficult to do during a lockdown, below is an example of some everyday situations that may be a good time to ask someone if they’re ok:

– while exercising together
– when spending time together socially or during an activity
– during breaks from work or study
– when connecting or doing activities together online
– while sharing a meal
– while travelling together – even a short trip can be a good time to talk.

2. How to ask ‘R U OK?’

Start the conversation at a time and in a place where you’ll both be comfortable.

Be relaxed and friendly in your approach. And think about how you can ease into the conversation.

If they don’t want to talk, let them know you’ll be there for them when they’re ready, or ask if there’s someone else they’d be more comfortable chatting to.

Examples of how to check in with them include:

– I haven’t seen much of you lately, is everything going ok?
– So, how are you travelling these days?
– You’ve been a bit tired, how are things going?

3. Listen with an open mind

Once they start to open up to you, be prepared to listen. Don’t try to solve their problems right away and have an open mind.

Some other tips include:

– don’t rush them or interrupt. Let them speak in their own time
– encourage them to explain
– show you’ve listened by repeating back what you have heard and asking if you have understood them correctly.

4. How to encourage action

You don’t have to have the answers or be able to offer professional advice but you can help them consider the next steps they can take to manage their situation.

You can get the ball rolling by asking them:

– Where do you think we can go from here?
– What do you need from me? How can I help?
– Have you thought about going to see your GP?

5. Check-in again soon after

Be sure to follow up in a few days to see how they’re doing.

During the conversation, ask them to suggest a time that’s good for them, or simply ask: “Do you mind if I drop by again soon to see how you’re travelling?”

When you check in, ask how they are feeling and if anything has helped since the last time you spoke. If they have not taken any steps yet, be patient and ask if they would like to find some options together.

Understand that it can take time for people to seek help. Stick with them. Your genuine support will mean a lot to them.

Feel free to reach out to us, too

We like to think of ourselves as more than just your broker who you turn to when you need a loan – but also a friend you can turn to in times of need.

So if you’re not feeling OK today, tomorrow, or next month, feel free to give us a call whenever you need. We’re always here to listen and help in any way we can.

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.

How to ease financial pressure through debt consolidation

, , ,

With many people around the country doing it tough right now, this week we’ll look at a way you can take some pressure off your monthly finances through debt consolidation.

Here’s a quick experiment.

Go pick up three balls and try to juggle them. Most people, besides those who ran away to join a circus, will likely drop at least one of them within a few tosses.

Now put two of the balls aside and throw the remaining ball up and down (with one or both hands).

Much easier to manage, right?

Well, it’s not too dissimilar to the concept of debt consolidation.

If you have more than one loan – be that a credit card, car loan and/or a personal loan – you can help reduce the stress of juggling multiple debts, payment dates and interest rates by rolling them into one easy-to-manage loan.

There are other benefits, too

One common debt consolidation method is to take out a new personal loan and use the funds to pay off your other existing debts.

Now, if the interest rate on the new personal loan is lower than the rate on your existing debts (for example, a credit card with a 17.99% interest rate) this can help you pay less interest each month – not to mention avoid the nasty late payment fees that come with those kinds of cards.

And by rolling all your debts into one, you can get a clearer timeline of when you can be debt-free.

Debt consolidation can also make it easier for you to manage your household budget, as you only need to factor in repayments for one debt per month instead of many.

Refinancing your home loan for debt consolidation

Another method people use for debt consolidation is rolling it into a refinanced home loan, because mortgages offer comparatively low-interest rates.

So if you’re really struggling with multiple debts right now – such as a car loan or a number of credit cards – consolidating your debts into your home loan will, in most cases, reduce your overall monthly repayments.

However, here’s a big word of warning.

While this option can reduce your monthly repayments now, debt consolidation through your mortgage can turn a short-term debt (like a personal loan) into a much longer-term debt.

As such, unless you aim to make a lot of extra repayments as soon as possible, you could end up paying significantly more interest than you would have otherwise.

One way to address this issue is to create a loan split for the debt consolidation, giving you the ability to pay off all the short term debts within a few years, rather than, for example, over a 25-year home loan period.

So if you’re in need of breathing space now, debt consolidation is an option to consider – especially with mortgage rates so low at present due to the RBA’s official cash rate being at record low levels.

Get in touch today

If you’d like to explore your debt consolidation or refinancing options, then get in touch with us today and we can help you look at ways to take some financial pressure off your shoulders.

It’s also worth noting that lenders are providing mortgage holders impacted by COVID with a range of hardship support measures, including loan deferrals on a month-by-month basis.

Whatever your circumstances, we’re here to support you however we can through these times.

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.

Buy Now Pay Later users put on notice by credit agency

, ,

Do you use a Buy Now Pay Later (BNPL) service like Afterpay or Zip? If so, be warned that one leading credit reporting agency has made a big change that means your BNPL data will go onto your credit report.

BNPL transactions have risen rapidly over the past few years – so much so that they caught financial regulators and credit reporting agencies a little flat-footed.

But Equifax, one of the three main credit reporting agencies in Australia, looks to have caught up.

In a recent email to brokers and lenders, Equifax states that BNPL accounts and transactions will be included in credit reports from 24 July 2021.

“Expect to see two new BNPL account types available for accounts, enquiries and defaults,” the Equifax email reads.

So what does this mean for your credit score?

Don’t stress, time is on your side!

That’s because it’s still early days and Equifax wants to measure how much BNPL data could affect overall credit scores.

“The new BNPL Comprehensive Credit Reporting (CCR) account types will be quarantined from scores in the short term to prevent any unintended and inappropriate impact on scores. As data builds up over time, we will reassess,” Equifax explains in a FAQ here.

But, Equifax adds, BNPL accounts and transactions will be included in CCR scores as soon as they believe it is sensible to do so.

“We are moving cautiously as we have never seen these types of accounts before, so it is not possible to evaluate and reflect the relationship between [BNPL accounts and transactions] and risk accurately,” they add.

“Equifax will monitor the risk of these accounts as the data accumulates over time.”

But that doesn’t mean lenders won’t be paying attention

It’s worth reiterating that lenders will now still be able to see BNPL transactions and accounts in your Equifax credit report, and according to a parliamentary joint committee this week, they’re already paying very close attention.

Liberal MP and committee chair Andrew Wallace put the following to Zip Co co-founder and chief operating officer Peter Gray: “I have heard that if banks see repayments to buy now, pay later providers, the banks take a very dim view of that person’s credit assessment.”

Mr Gray responded by saying banks would “absolutely” see BNPL providers in a negative light, before later stating: “I can confirm to the committee that the number one reason for [people] closing their [Zip] account is because their bank has told them they need to, to proceed with the mortgage.”

Get in touch today

If you’re worried about what a BNPL account – or multiple accounts – could mean for an upcoming finance application, get in touch with us today.

We’ll be able to run through it with you and give you some pointers on what you can do to get things sorted before applying for finance.

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.