19 Mar 2018
Your mortgage – Times have changed!
The last 2 years has seen the biggest continuous shake up of lending here in Australia. Yet for many the changes have gone unnoticed with families continuing to work hard to meet with rising utility costs and make the monthly or fortnightly mortgage repayment.
What has changed?
- Competition for loans for home loans have heated up over the last 2 years
Only last week the ACCC released a report revealing that for customers of the major banks who had not reviewed their home loan in the last 2 years they were on average, paying 0.32% more than what was (and is) being offered to new clients by the same lender today. They also pointed out that the longer a borrower had been with a bank the chances were that the deficit would be greater.
Furthermore, the major banks were criticised for failing to be “truly” competitive over recent years and they pointed to the availability of more competitive rates i.e. larger savings been available with mid-tier lenders.
- Loans for investment properties have been hard hit
With the property market described by many as “Hot” investment loans were the first to be hit.
This move was aimed specifically at slowing down the Investment loan market resulting in a number of interest rate increases. The major banks who hold the majority of loans in this market generally increased rates more than that of the mid-tier as a result of their needs to satisfy the regulators requirements.
Over the past 6 months interest rates have steadied with interest rates on existing investment loans remaining steady but yet again significantly improved interest rates for new investment loans.
- Loans generally should NOT be interest only any more
Previously borrowers were able to set their loans up as interest only for the initial years with no differential applying to that of a Principal and Interest Loan. In fact, for investment properties interest only loans were the favoured recommendation. These loans have also been specifically targeted in the last 12 months and now attract their own premium in interest rate versus principal and interest loans.
The key thing to note here is that the government regulator for lending, APRA, specifically directed that lenders had to get their market share of Interest Only loans down from over 40% to under 30% of all loans. The lenders moved to increase the interest rate on interest only loans to make the Principle and Interest loan more attractive.
The upshot is that, unless borrowers hold specific cash flow constraints and if borrowers can afford it they should switch to principle and interest repayments even for investment purposes. A worthwhile conversation with your PSK adviser.
- You can now borrow substantially less
The government regulator has also specifically targeted how lenders work out what borrowers can afford. In particular now instead of using a very low ‘base’ level of expenses for clients the minimum is now automatically scaled based on borrower’s incomes and they must provide a detailed personal budget with the lender using the higher of the 2 figures. Also, income from any investments is sensitised down more heavily while expense commitments are sensitised up. Overall this means clients who could easily get money a few years ago are surprised to discover they are now struggling to refinance what they currently have. Interestingly there are often many ways to help with this but they require borrowers to change lender, so current lenders may not volunteer this information even when they decline any additional loan that may have been applied for.
- Beware interest only periods expiring
The final warning is for clients with interest only loans. Often it was easy to roll a loan for an investment to another interest only period. Well now it is not! The government regulatory now insists lenders check that borrowers can afford the higher principle and interest repayments under the new tougher regime. As a result, clients are receiving notices that their interest only period is expiring, being refused any additional interest only periods, and suddenly finding themselves on very high principle and interest repayments. If you have any interest only loans be aware of when they are expiring and what the repayment is due to revert to.
Our recommendation is that as part of your regular financial planning review that you take the time to discuss and review your current lending arrangements. The cost savings could make a huge difference allowing you the opportunity to benefit from the savings or repay your mortgage earlier.