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Borrowing Keeps Getting Tougher
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Borrowing Keeps Getting Tougher

Unless you’ve been on a deserted island chatting with Wilson for the last couple of months you will have heard all the noise about the Royal Commission into the Financial Services Industry.

There is a lot of information to digest, if you are interested, but one thing you can definitely “take to the bank” is that it is going to get increasingly harder to borrow in the short and medium term.

One area that is being scrutinised closely is the actual Cost of Living used in the loan application.

Until recently the lender’s calculators used what was known as a HEM (Household Expenditure Measure), which as an example allowed $32,400 for a family of four (not including rent or mortgage repayments).

Interestingly the same figure was being used whether your household income was $70k or $170k.

Now lenders are tightening up in this area and are insisting on a closer analysis of household expenditure, case by case, rather than a formula, much like the old days when you used to visit the bank manager “cap in hand”

ANZ Chief Executive Shayne Elliott says the inquiry would make the home loan approval process longer and more onerous.

The take-away from all this is that it’s best to review your loan portfolio as a matter of urgency, while you are at choice and before it is too late to do so.

If you don’t take positive action now you may find yourself stuck in your current loans.

The “Catch 22” is going to be that some borrowers who may wish to move to a lower rate or more suitable structure may not be able to do so because the new lender policy says “NO”.

We are here to assist you with a no obligation finance review which will take 30 minutes of your time and a response from us with our recommendations within 24 hours.  Please feel free to call.

Interest Only Mortgage Changes: “Forewarned is Forearmed”
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Interest Only Mortgage Changes: “Forewarned is Forearmed”

The phrase “Forewarned is Forearmed” is as relevant today as it was when first used in the late 16th century, especially when it comes to matters of borrowing money.

If you have an interest only mortgage, or you’re intending to obtain one, then consider yourself forewarned. I hope this two-minute read will leave you forearmed and that it motivates you to take action before it’s too late.

So here is the forewarning!

If you choose to re-finance your Interest Only loan and remain on Interest Only it will no longer be a “fait accompli” that your new loan will be automatically approved as Interest Only without a lender’s inquisition.

Not considering refinancing anytime soon? Remember that most Interest Only loans revert to P&I after 5 years unless refinanced. Suddenly you’ll find that your monthly repayment takes a big hike because you’ll now be paying principle as well as the interest.

To clarify my point here is an extract from an industry magazine explaining ANZ’s recent policy change.

As of 5 March 2018, ANZ will regard interest-only (IO) loan renewals as “credit critical events” which require full income verification as part of its measures to streamline the credit critical process.

The requirements are set to apply to loan applications that involve changing from principal and interest (P&I) to IO, or extending an IO term.

Further, if serviceability is not evident, the loan will remain or revert to P&I.

ANZ will update process guides and renewal checklists to include the changes.

Moreover, customers will be notified by ANZ six months prior to the expiry of the IO period, and they will be informed of refinancing options available to them.

The bank noted that it is making the changes to further enhance its lending practices.

“We are making this change as part of our continual enhancements to our lending practices,” the bank said.

“Converting to or extending an interest-only period is a material change to original loan conditions, which could increase the total repayments over the life of the loan.”

Last year, the Australian Prudential Regulation Authority (APRA) imposed restrictions requiring banks to limit interest-only lending to 30 per cent of new loans.

In simple terms this change from ANZ means, and the others will probably follow, that you may need to find more of your hard-earned dollars every month to meet a P&I commitment.

On a positive note, lenders are encouraging P&I loans at the behest of APRA, by offering lower interest rates but even this will not stop the repayment hike you’re facing.

Here is an example to explain based on a $500,000 loan for Owner-Occupied borrowers.

Principal and Interest over 30 years @ 3.69% p.a. $2,299.00 pcm

Interest Only for 5 years @ 4.29% p.a. $1,787.50 pcm

Most Interest Only loans revert to P&I after 5 years unless refinanced.

As you can see even though the rate for P&I is lower the repayment, rather than a payment of interest only is over $500 more per month.

This is not an insignificant amount just for one loan so for borrowers with multiple loans the impact will obviously be even greater.

With the Royal Commission underway there is a strong chance lending policies and guidelines will become even tougher.

So be forearmed.

I strongly suggest you plan well ahead so that you do not receive a nasty shock when you come to refinance your loans.

If you would like us to crunch some numbers for you please call me on 0409 02 99 22 or email greg.clough@onyx.net.au

‘Praemonitus, Praemunitus’

Cheers

Greg

67% of Australians aren’t aware of this!!
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67% of Australians aren’t aware of this!!

I have just read that 67% of Australians are not aware of this important legislation that will affect all borrowers in the future.

Scott Morrison claims it will help borrowers with a positive report get better interest rates. I have a feeling it may work the other way and borrowers with poor credit with be penalised with higher interest rates.

Furthermore, it is imperative that when you are providing information, like we you do with our Fact Find, that you include all of your debts so the information provided to the lender matches your credit report.

This includes all the little Zip Money type accounts and also those G.E. Store Cards even if they are currently interest-free.

Remember you can get a copy of your credit file for free at www.mycreditfile.com.au

Australia moves to comprehensive credit reporting (CCR)

After lagging behind other major developed economies such as the US and the UK for many years, the Federal Government legislated that Australia would finally move to a positive comprehensive credit reporting (CCR) system over the course of this year with final completion mid-way through 2019.

While this is welcome news for consumers and businesses who may want or need to get finance from time to time, the detail about CCR for many people can be hard to grasp.

What is positive comprehensive credit reporting (CCR)?

Quite simply, it means that lenders can use more detailed information on your financial background including your good credit history to work out the benefits and risks in lending money to you.

For example, unlike the current system that focuses on negative details such as payment defaults, court judgements and the number of credit application enquiries which “hurts” your credit profile and sees your credit score go down, positive CCR looks at how good you have been with credit overall.

Credit providers will, in future, be able to see:

  • When a credit account has been opened or closed (the start of an existing or past loan and when it was repaid);
  • The type of credit facility (mortgage, credit card, personal loan, car loan etc) and the available limit;
  • Your last 24 months repayment history.

Together, this information will help credit providers to assess how good a customer or potential customer has been in managing their finances, whether the risk of lending to someone fits their credit criteria and how much and for how long they will lend them money.

For borrowers, it may mean that they will get rewarded for having a good credit history, not be penalised for one or two missed payments if a small glitch happens in their life and allows them to shop around for a better deal that suits them without that being held against them.

And for those consumers who, at the moment, might not be able to get finance because their credit history doesn’t come up to scratch, positive CCR will allow them to improve their financial position over a period of time through better budgeting, repayment and spending decisions.

How will that information be shared and will it be safe and secure?

This data already exists but the vast majority of it is held by the large banks and lenders and is not shared among themselves or smaller financial institutions.

What the Federal Government has announced is that the previous voluntary system which was introduced in March 2014 will now be made mandatory, initially focusing on the big four banks who hold most of this data given their 80% share of the lending market.

The major banks will have to make available half of their credit data for sharing by 1 July this year and increase that to 100% of their information by 1 July 2019.

At present, that sharing figure is less than one per cent.

What does the Government say about positive CCR?

In his announcement the Treasurer said that CCR will give lenders access to more and richer data, encouraging competition between them including new providers to help consumers and small businesses looking for finance. It will also improve the capacity of credit providers to meet their responsible lending obligations as set by the regulators. Those regulations require us to ensure a customer is able to repay their loans based on their income and spending needs.

The Treasurer described the changes as a “game changer for both consumers and lenders, resulting not only in greater lending competition but also better access to finance for Australian households and small businesses”.

 

As always we’re here to help in any way we can so please feel free to call me for a chat at any time 0409 02 99 22 or email greg.clough@onyx.net.au.

Productivity Commission’s Errors a Tragedy for Home Loan Borrowers.
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Productivity Commission’s Errors a Tragedy for Home Loan Borrowers.

I nearly choked on my brekky this morning when I read this article, “Why you can’t get a good deal on your home loan” on news.com.au.

The article has a crack at mortgage brokers using the Australian Government Productivity Commission (AGPC) report into the finance industry released today.  It’s a tragedy for home loan borrowers that AGPC has got critical issues so wrong.

Mortgage Brokers are Licensed

This line really got my hackles up – “Unlike in wealth management, mortgage brokers are not obliged by law to act in the best interests of the customer,”

This is just plain wrong. Mortgage Brokers are licensed by the Government through ASIC and one of the requirements of our license is that brokers “must complete an assessment as to whether a loan is ‘not unsuitable’ for a consumer”. The compliance is very strict.

Furthermore, I would happily line up the performance of mortgage brokers against the wealth management industry.  For 16 years we have provided quality advice to our clients always putting them first.

Banks Taking Advantage of Loyal Customers

I do agree with the statement that banks offer a better deal for new customers rather than established. I’ve been commenting on that for over a year now.  However, the report somehow puts the blame for this on mortgage brokers not doing their job.

The reality is that the clear majority of customers who switch banks do so through a mortgage broker arranging a home loan for them with another lender.

Instead of deriding brokers the AGPC should be encouraging more consumers to talk to a broker.

Why Criticise Choice? 

The report claims there are 4000 different home loans and that somehow this is a bad thing.  Home loan choice combined with professional mortgage broker advice is absolutely the best option for borrowers.

Don’t Forget the Non-Bank Sector 

The article also does not mention the “non-bank lending” sector. We have always been a strong advocate for non-banks. They play a key role in innovation and providing solutions for niche markets that would normally be unable to obtain finance.  Mortgage brokers are the main way borrowers find out about non-bank lenders because they don’t have the marketing spending power of the major banks nor a branch network.

Word of Mouth Speaks Volumes 

Like most brokers, we rely heavily on “word of mouth” referrals so it is in our best interests to deliver the very best outcome for our valued clients and if we don’t they are less likely to refer.  Furthermore creating a win, win environment is what makes the world go around. The commission system used to remunerate brokers only rewards us when we get the job done for the client and for making sure they are happy over the long term.

It’s a Tragedy

I’m surprised and disappointed that Australian Government Productivity Commission, an institution we rely on for knowledgeable advice, could get this so wrong.  If the Government acts on these views, its only going to lead to tragic consequences for home owners and investors. It will also in fact decrease competition as borrower’s access to alternate lenders will be become more difficult.

The Mortgage & Finance Association of Australia (MFAA) is disappointed by the report saying “The Report’s authors have failed to understand the reasons why consumers engage brokers to act on their behalf“.

 I’d Love to Hear from You

As always if you would like to chat about how we might be able to assist you or if you would like to discuss the content of this article I’m always up for a chat, so please feel free to call me direct on 0409 02 99 22.

 

UNDERINSURANCE BECOMING MORE COMMON IN AUSSIE HOUSEHOLDS
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UNDERINSURANCE BECOMING MORE COMMON IN AUSSIE HOUSEHOLDS

Stats show 29% of homeowners and 67% of renters don’t have home and contents insurance, and as many as 40% of households with insurance are still underinsured. Make sure you’re covered.

What is underinsurance? Are you underinsured?

Underinsurance is when someone does not have adequate insurance to cover the cost of loss or damage to the things they own, or is not insured at all for those belongings.

As far as material goods go, your home or property is likely to be your most valuable asset. Insuring it for less than what it would cost you to rebuild makes about as much sense as insuring a Porsche at a Hyundai price. You might get away with it, but at some stage the gap in cover is going to come back to haunt you.

How many people do not have home and contents insurance?

The David Murray Financial System Inquiry’s Final Report showed that 29% of homeowners and 67% of renters in Australia do not have any form of contents insurance.

How many people have home and contents insurance but are still underinsured?

Underinsured home insurance is surprisingly common, it would seem. The Insurance Council of Australia estimates that more than 40% of households fail to correctly assess the value of their home and contents, so there’s a real chance you could be under-insured.

Underinsured home insurance hurts homeowners at claim time

Cheap insurance may not be so cheap when you make a claim. Apart from not receiving enough home insurance money to cover the cost of your loss, there’s an added risk that can be far greater. If you have significantly under-insured your home or contents, your insurer may have the right to pay only part of any loss because you’ve insured for only part of what it’s worth.

 

Case Study:

Let’s say you insure your home for $150,000, but it’s really worth $250,000. A bushfire sweeps through the area and does $80,000 damage to your home. Your insurer may have the right to reduce the payout in proportion to the level of under-insurance.

In this case, there might be a payment of only $48,000. Sadly, that is nowhere near enough to repair or replace a $250,000 home.
When it comes to contents insurance, or even personal effects insurance, doing a household inventory of everything you own in your home is one of the most important steps you can take to protect your items. An inventory can help you keep track of everything, from your electronics and appliances to your jewellery and DVD collections. This can be invaluable when deciding how much contents insurance coverage you need and also at time of claim. We have also identified 10 ways you can cut the cost of your home and contents insurance.

Prevent underinsurance: Get your complimentary review today.

1300 1400 15

 

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2016-2017 FEDERAL GROWTH – A STEADY ROAD MAP FOR GROWTH
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2016-2017 FEDERAL GROWTH – A STEADY ROAD MAP FOR GROWTH

A Steady Roadmap for Growth

Budget-2016

Overview

As is custom, there were a number of official announcements and an abundance of rumours and unofficial ‘leaks’ in the lead up to the release of the 2016-17 federal budget. As widely anticipated, there was very little in terms of budget measures specifically aimed at housing. However, the significance of the tax reform contained within this budget was arguably underestimated, particularly if you consider the changes projected for the out-years. In the near term, small businesses are the main beneficiaries of the announced reforms.

The key areas addressed in the budget:

  • the Government has held firm on their commitment not to make any changes to capital gains tax or negative gearing provisions. Furthermore, comments within the Treasurer’s budget speech suggest the coalition have solidified this position ahead of the upcoming election;
  • the plan to lower the company tax rate to 25 per cent through a staged implementation over the next decade, with a number of changes for small businesses to take effect in this budget period;
  • a modest change to the personal income threshold for the second highest marginal income tax rate which was increased from $80,000 to $87,000 (slightly higher than expected) in order to ameliorate concern about bracket creep;
  • Commitment to the Smart Cities Plan;
  • A Youth Employment Package
  • significant reforms to the superannuation system;
  • the ATO has been provided with additional resources to bolster enforcement activity, primarily aimed at addressing multi-national tax avoidance.

In the sections below we discuss the overall economic and fiscal outlook presented in the 2016/17 Budget along with some of the key forecasts. This is followed by additional explanatory detail regarding the key announcements most relevant to the residential building industry.

Economic Backdrop & Fiscal Position

The Budget presents a “steady as she goes” outlook for economic growth over its forecast horizon. The key economic assumptions on which the Budget was developed are summarised in the table below.

Key Treasury Forecasts underlying Budget 2016-17:

federal budget graph

In terms of the economic assumptions underlying the Budget projections, the Treasury foresees the rate of economic growth returning to 3.0 in 2017/18 and remaining at this level over the forecast horizon. The acceleration of economic growth will help drive a reduction in the unemployment rate to 5.5 per cent by the end of the forecast horizon, a little lower than the 5.75 average rate expected for 2015-16. Against this backdrop, inflation is expected to pick up a little but remain in the relatively comfortable 2 per cent to 3 per cent range. Stronger GDP growth, and the decline in the cash value of the budget deficit over time means that the relative size of the deficit is expected to fall from 2.4 per cent of GDP in 2015/16 to 1.4 per cent of GDP in 2017/18.

Of note are the estimates of the contribution that dwelling investment will make to economic growth in the years ahead. HIA’s projections are for dwelling investment to fall by 5.4 per cent next financial year and by 6.7 per cent in 2017/18. The HIA’s forecasts are based on the assumption that new home commencements will decline from about 214,300 in 2014/15 to 160,100 in 2017/18, while renovations activity is projected to recover modestly over the same period. Realising the outcomes expected by Treasury will require a continuation of the current record levels of new housing activity and strong growth in the renovation market.

While the changes to superannuation and the lowering of the Official Cash Rate will encourage more investment in other avenues like rental investment, it is unlikely that this will be sufficient to deliver the continued growth in residential investment that Treasury is anticipating.

In terms of the projections contained in yesterday’s budget, the size of expected future deficits has increased since the forecasts in December 2015’s Mid-Year Economic & Financial Outlook. In 2015/16, the underlying cash balance is expected to reach $39.9 billion followed by $37.1 billion in 2016/17. Thereafter, the deficit is projected to decline significantly, falling to just $6.0 billion by 2019/20, the latest year for which Treasury forecasts have been prepared.

federal budget forecasts

Key Budget Measures

‘Ten Year enterprise Tax Plan’:

  • The tax rate applicable to small businesses has been lowered by 1 per cent to 27.5 per cent, which follows on from the 1.5 per cent cut in the previous year.
  • The definition of small business has been expanded from those with revenue of less than $2 million to those with revenue of less than $10 million.
  • Extension of the provision enabling small businesses to immediately depreciate assets valued up to $20,000 to the end of June 2017, and making this provision accessible to businesses with revenue up to $10 million.
  • A ‘Ten Year enterprise Tax Plan’ aims to incrementally lower the company tax rate to achieve a 25 per cent rate for all companies by 2026/27. Over time, the size of companies eligible for the 27.5 per cent tax rate will be lifted each year until all companies are taxed at this rate in 2023/24. The rate for all companies will then be incrementally lowered over the ensuing four years to reach 25 per cent by 2026/27.
  • The government will extend the unincorporated small business tax discount. From 2016-17, the discount will be available to businesses with annual turnover of less than $5 million, up from the current threshold of $2 million, and will be increased to 8 per cent. The maximum discount available will remain at $1,000. Over the next decade, the discount will be further expanded in phases, to a final discount of 16 per cent.

The Youth Employment Package

  • This program, Youth Jobs PaTH (Prepare, Trial, Hire), has three components: the first provides pre-employment skills training for young job seekers; the second provides a $1,000 inducement to businesses to provide a 4-12 week internship for program participants along with an income supplement for the participant; and the third is $6,500 ‘Youth Bonus’ wage subsidy payment for employers who take on a young worker who has been in employment services for longer than six months.

Reforms to superannuation

  • The purpose of the superannuation system is to be enshrined in legislation in line with a recommendation of the Murray Review. This will define the purpose as: providing an income in retirement to substitute or supplement the Age Pension. This provides legislative basis the government of the day to target the superannuation tax concessions at those who would otherwise be likely to be remain dependent on the Age Pension, this is likely to come at the expense of tax concessions currently available to those likely to be self-funded in retirement.
  • Those with combined incomes and superannuation contributions greater than $250,000 will pay 30 per cent tax on their concessional contributions, up from 15 per cent. This represents a lowering of the previous income threshold of $300,000.
  • The superannuation concessional contributions (ie pre-tax contributions or contributions where a deduction is claimed) cap has been lowered to $25,000 per annum, down from $30,000 for those under 50 and $35,000 for those over 50.
  • This has been partially balanced by enabling unused concessional contribution caps to be carried forward on a rolling basis for up to five years for those with account balances of $500,000 or less.
  • The government have introduced a $500,000 lifetime cap for non-concessional contributions (ie contributions made from savings for which no deduction is claimed).
  • The Government will introduce the Low Income Superannuation Tax Offset to replace the Low Income Superannuation Contribution when it expires on 30 June 2017.
  • From 1 July 2017, the Government will lift current restrictions and allow individuals under the age of 75 to claim tax deductions for personal superannuation contributions to eligible superannuation funds.
  • The current spouse tax offset has been broadened. The income threshold for the receiving spouse (whether married or de facto) will be lifted from $10,800 to $37,000

Tax Integrity Package’ – additional resources for the ATO

  • The government have provided additional resources to the Australian Tax Office to establish the Tax Avoidance Taskforce. The key focus will be pursuing tax avoidance by multinationals and high wealth individuals.
  • The government will introduce a new ‘Diverted Profits Tax’ targeting multi-nationals shifting profits earned in Australia to lower taxing jurisdictions.

Source: HIA Economics Research Note – May 2016
https://hia.com.au/

RATE CUT PREDICTIONS 2016
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RATE CUT PREDICTIONS 2016

Rate Cut Predictions 2016

The Commonwealth Bank of Australia predicts another two official Reserve Bank of Australia interest rate cuts will occur in 2016.

It would take the cash rate to 1.25 percent.

CBA’s chief economist Michael Blythe said he felt obliged to add another cut to our cash rate profile in November following the one already pencilled for August.

The CBA is alone among the big four in tipping a 1.25 percent cash rate by November.

NAB expects the Reserve Bank to hold at 1.75 percent for the rest of 2016.

Westpac and ANZ Bank economists expect one more cut in August.

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THE LATEST RBA RATE DROP IS A BOON FOR INVESTORS
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THE LATEST RBA RATE DROP IS A BOON FOR INVESTORS

The latest RBA rate drop is a boon for investors

The latest RBA rate drop is a boon for investors and it’s also great for those with an existing mortgage and anyone wishing to enter the property market.  There’s also predictions of a further rate cut sometime around August. It’s what’s been dubbed the “global race to the bottom” and certainly we’re seeing countries such as Japan with zero interest rates. The cuts are being driven by inflation and slow growth. Other factors such as the end of the mining boom are also playing a part in the RBA’s decision.

Still, the fact is that we are living in an unprecedented time with the interest rates reaching historic lows of 1.75% and some experts recently predicting two more cuts this year. Click here for more information on the predictions in 2016. 

The RBA minutes suggest we will be in a low interest rate environment for the foreseeable future.

To look at where we are in historical terms, we’ve been seeing continual drops and interest rate cuts over the past six years. The last time interest rates were hiked was back in 2010. Since then, it’s been a steady series of cuts each quarter.

Those old enough may remember the days of the late 80s and early 90s when interest rates were at crippling levels of 17%. It’s hard to imagine Australia ever returning to those days, but right now the property investment market is under a patch of sunlight.

As mentioned at the start, this is good news for virtually all Australians. For those with an existing mortgage, this suddenly means you have extra capital to play with and use for investment. Even a small cut on one’s home loan rate can save thousands of dollars. This in turn can go back into play as investment capital. For investors with a portfolio, you can access these record low rates to expand and add properties. And for those desperate to enter the world of property investment these historic low rates allow a platform to do so.

It’s also an opportunity to review existing loans to get a better deal and take advantage of the new rates. The last few months have seen a significant drop in home and housing approvals, and this rate cut will bolster the figures.

The beauty of Australia with its vast land and varied property markets is that there is no end to finding an affordable property in a growth area. Whether it’s South East Queensland, Brisbane, outer Sydney or Melbourne, or growing regional centres like Port Macquarie, there are countless markets to enter.

For the investor this means you can acquire a property with a loan that’s already cheaper than it was a year ago and have the benefits of positive cash flow on top of capital growth.

All the discussion about negative gearing is becoming less relevant as more and more properties will be positively geared and positive cash-flow.

There’s no doubt that this is a rare and golden opportunity.  Those that don’t take advantage of such low rates and affordable housing will definitely have cause to regret it years later. We know that Australian property will always be attractive to both domestic and international investors. This exceptional period is a unique window of opportunity that would be foolish for canny investors not to open and enter.

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