Shane Oliver Head of Investment Strategy and Chief Economist at AMP shares his thoughts on what could happen to interest rates in 2018.
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 firstname.lastname@example.org
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 email@example.com.
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.
Great article from Peter Switzer
It looks like it’s capitalism to the rescue and its ability to induce ‘outside the square’ thinking just might reduce the hate session young people have for baby boomers over their dominance of real estate assets.
Over the weekend, smart economics writer, Jessica Irvine, who graces the Fairfax Sunday papers, reminded us how annoying it is that baby boomers hold so much of the property that Gen X’ers and Gen Y’ers covet. Some critics even resent that baby boomers live so long and have the temerity to live in their homes — big homes — too long as well!
It’s an intergenerational hate session over the thing that used to force tribes to war over past centuries — land! And the arguments against baby boomers (and even older Australians) have been powered along by the Grattan Institute, which seems to spend a lot of its life telling baby boomers that they’ve had it too good and have been ripping off younger Australians.
How did they do that? Firstly, living too long — damn modern medicine!
Secondly, after being told by Paul Keating in the 1980s that they wouldn’t get the pension, they’d always been promised, if they had too much money and bugger all super, they looked to investment properties to build our wealth quickly.
Thirdly, much higher tax rates encouraged people to use the taxman and tax refunds to bankroll their life as a landlord. This was encouraged by the rise of the media money-men and women, who started to get air time and column inches in media outlets, like yours truly.
These money mentors started explaining the mumbo jumbo of wealth-building that once was only known by a group who used to be called “the wealthy”!
So that’s why baby boomers went into property but two big things have made it such that reasonable people like Jessica admit that the current housing situation makes her blood boil, a bit.
Firstly, governments have slugged huge charges on developers and have put ridiculous restrictions on them, as state governments effectively got out of public housing. Dumb governments have created a housing supply problem, which has pushed prices up for the existing stock. And it has happened while Australia has one of the fastest population growth rates of the Western world. Governments screwing up? No!
Secondly, cool younger people like Jessica don’t want to live in the boondocks too far away from great cafes, entertainment and cool lifestyles, especially when many dumb governments have done precious little to create great, affordable public transport systems.
So that’s the problem and here’s the ‘outside the square’ part-solution and I call it the Manhattanization of our cities.
New York’s Manhattan is a huge paddock of apartment blocks with most New Yorkers being renters. Anyone who watched Seinfeld would know that and there’s enormous competition for apartments when older people die, as a Seinfeld episode showed us.
The Age newspaper today tells us about groups such as Mirvac that are planning to build apartment blocks purely to rent out.
“They’ll be nothing like we’ve seen before, either, with building managers looking after apartments, staff to look after leases and run ‘community’ events, and onsite cafes, shops and work spaces,” Sue Williams tells us.
“There will also be long-term rolling leases with the potential for tenants to transfer to other allied blocks in different areas if their jobs or circumstances change.”
Adam Hirst the GM of Capital Allocation at Mirvac explained why this new style of building is coming.
“It’s a lifestyle choice of millennials, young families and downsizers, and the choice of a growing number of people,” he said.
“There are currently 2.5 million rental homes in Australia and we see that growing in the next few years with purpose-built apartment buildings for the rental market”.
“It’s well-established overseas but, in Australia, it’s a new form of housing and there’s a lot of excitement around it.”
This will become a new asset class that the retirees — those damn baby boomers again! Could invest in but, better still, it should entice our super funds to use their money to bankroll affordable housing, which will return a reliable flow of income.
Ironically, this move could slow down house prices rises in hot inner city locations but could raise prices in sea-change and tree-change areas as weekly, inner-city renters escape to the country on their weekends, like lots of New Yorkers and Europeans do, who have grown used to believing that owning a property in their home cities might be just too hard.
Given the incurable stupidity of the politicians who populate governments, who never seem to come up with solutions to our social problems, thank God capitalism throws up lateral thinkers, who love profit and who can do the fixing our so-called leaders always fail at.
‘Yes, we repriced the back book’, ANZ defends rate hikes!
Please tell us something we don’t know!
The big four banks are fronting the House of Representatives Standing Committee on Economics to amongst other things try and justify the gouging of their customers by increasing rates on the back-book.
To read a short article written by James Mitchell for The Adviser magazine click here.
Unfortunately I don’t think ANZ chief executive Shane Elliott answers the question adequately, he merely spins his way around the issue.
Industry luminary Steve Weston also weighs in on the matter….
The four major bank CEOs will be before Parliament, and I suspect they will be asked the same questions,” Mr Weston said “If they are found to have misled consumers about their reasons for lifting their back books as is being suggested, they may then be asked what else they have been disingenuous about. This could be a pivotal moment for banking in Australia.”
As you would know, if you read my blog posts, I’ve been pretty vocal and angry with the these opportunistic actions taken by the banks and other lenders who have followed suit.
At least now it is getting some mainstream media.
In the words of Robert F. Kennedy “Don’t get mad, get even!”
How you may well ask?
Well quite simply lenders are providing better rates for new business than that provided to current customers.
So it follows that you get rewarded for making the change rather than being blindly loyal.
If you would like me to do a quick review to see how you can save then please call me on 0409 02 99 22 or email at firstname.lastname@example.org.
You may also like to download my ebook Seven Tips to Healthy Finances.
I look forward to chatting with you soon to start the process of putting your hard-earned dollars back into your pocket.
The major bank CEO has explained how it was a first mover on mortgage repricing and why it made a decision to hike rates knowing full well that its customers could move to another lender.
ANZ chief executive Shayne Elliott appeared in Canberra on Wednesday (11 October) where he answered questions before the House of Representatives Standing Committee on Economics, commonly known as the major bank review.
Committee chair David Coleman MP asked the ANZ boss why the group increased rates for existing loans earlier in the year when APRA’s 30 per cent interest-only cap was for new lending only.
“We run a business,” Mr. Elliott said. “We need to make sure that it is prudent and that we identify risk and price for it appropriately while still providing a good, decent service to our customers.
“We started changing our approach in terms of lending standards, policy and pricing well before APRA put in place its speed limit. In fact, our first changes around interest-only started in April 2016. We made policy changes, we have reduced the amount of time people can have interest-only, and we have reduced the maximum LVR. That was well before [APRA’s speed limit] because we assessed that the risk in that book was changing and that we needed to be mindful of that.”
Mr. Elliott said the first pricing changes the bank made were on 24 March, a week before APRA’s interest-only speed limit came into place.
“Subsequent to the speed limit we came out and reduced rates, we were the first. We reduced rates for people paying principal and interest and we increased others. We did that not knowing what our competitors would do and not knowing what the customer behaviour would be. But we wanted to reward customers who repaid principal, because it is the right thing to do, and we wanted to give them the right signals to move.
“Yes, we repriced the back book but, we also gave price cuts to the back book as well.”
ANZ CFO Graham Hodges added that the bank also introduced its lowest ever fixed-rate at 3.88 per cent for P&I borrowers.
Mr. Coleman argued that it is “disingenuous” for a bank to tell its customers, who are not impacted by APRA’s regulatory action, that the bank has determined that it is good for them to move to P&I.
“First of all, we gave people a four-month notice period,” Mr. Elliott said. “Whether that’s to move with us or a competitor. Also, when people come to us and asked for an interest-only loan, we assess them on the basis that they can afford to pay P&I from day one. We do assess people’s ability to be able to pay the principal.”
Mr. Elliott said the bank modelled the impact of its pricing changes. Asked about the profitability of interest-only loans and the impact of repricing, the chief executive explained that the answer depends on customer behaviour.
“It depends what customers do,” he said, adding that there was an assumption in Mr. Coleman’s question that all customers stay with ANZ and don’t move.
“About 10 per cent of our customers with a home loan choose to leave us and go somewhere else each year. There are a lot of factors.
“We absolutely ran an analysis and looked at the fact that by reducing P&I loans by 5 basis points it would come at a cost. That’s about two thirds of our customers who received the benefit of a rate cut.
“We were first. We did that not knowing what the competition would do and at a risk that a lot of those customers would vote with their feet and go somewhere else, or vote choose the fixed-rate, which is a much lower margin product.”
Interest-only loans currently account for approximately 34 per cent of ANZ’s total mortgage portfolio.
Westpac also faced tough questions from David Coleman in Canberra yesterday. Chief executive Brian Hartzer told the committee that interest-only loans accounted for 50 per cent of the Westpac mortgage book.
[ARTICLE: SOURCED FROM THE ADVISER]
It’s not too late to claim depreciation
With the 2016-2017 financial year now over, property investors may assume they have missed their opportunity to organise a tax depreciation schedule and make a depreciation claim.
Research suggests around 80 per cent of property investors simply don’t claim because they are unaware of depreciation, they don’t know the rules or they don’t realise they’re eligible.
Legislation enforced by the Australian Taxation Office (ATO) allows investors to claim depreciation deductions on any income producing property for the wear and tear that occurs over time to the building’s structure (capital works deductions) and the plant and equipment assets contained.
Both new and older properties attract depreciation. Although the ATO restricts owners of older residential properties on claiming capital works for buildings in which construction commenced prior to the 15th of September 1987, depreciation of plant and equipment can be claimed for most buildings*. Property owners could also be entitled to claim deductions for any recent renovations or updates made.
A specialist Quantity Surveyor can prepare a tax depreciation schedule at any time of year. This schedule will begin from the property’s settlement date and outline depreciation deductions over the entire depreciable life of that property (forty years).
If an investor has not previously claimed or maximised the depreciation deductions available from their investment property they can go back and amend two previous tax returns.
*Under proposed changes outlined in draft legislation (section 2 of Treasury Laws Amendment Bill 2017), investors who exchange contracts on a second hand residential property after 7:30pm on 9th May 2017 will no longer be able to claim depreciation on plant and equipment assets. Investors who purchased prior to this date and those who purchase a brand new property will still be able to claim depreciation as they were previously. Investors should note that these changes are not yet law, as the legislation still needs to be passed through the senate for confirmation. BMT Tax Depreciation remain in discussion with government around the new changes and will keep our clients informed on the outcome. To learn more visit www.bmtqs.com.au/budget-2017.
Investors who would like more information can contact one of the expert staff at BMT Tax Depreciation on 1300 728 726.
[SOURCE: BMT Tax Depreciation]
Bradley Beer (B. Con. Mgt, AAIQS, MRICS, AVAA) is the Chief Executive Officer of BMT Tax Depreciation.
Please contact 1300 728 726 or visit www.bmtqs.com.au for an Australia wide service.
In the words of Mahatma Gandhi, “Action expresses priorities”.
Now is the time to take action on having a Finance Health Check while you still have some say in the outcome. Make it a priority!
Mainstream lenders continue to tighten policy with the latest change being the revision of Loan to Income ratios.
In recent times, we have seen other tightening of lending policy with the following changes being implemented.
- Cost of living allowances closely analysed and tightened.
- Interest only borrowers paying a premium on rate for the privilege.
- Investors paying a higher rate than owner-occupiers.
- Loan to Value ratios reduced in some cases.
- Serviceability calculators tightened.
What does all this mean to you?
Well if you haven’t checked your own loans recently you could be paying too much.
Lenders offer discounts to new clients while leaving their current clients out in the cold.
I know we are all busy but my advice to you, is to put some time aside for yourself and work with us on a Finance Health Check. Before it becomes out of your control.
With APRA continuing to insist that lenders put the handbrake on policy, borrowing will become tougher in the foreseeable future, meaning you could be stuck in an interest rate that is higher than you deserve to be paying.
APRA is also now regulating non-bank lenders so their lending criteria will start to tighten also.
Do yourself a huge favour and take action today! Spend time on your own affairs.
The process may only be an hour or two of your time. Please call me today for a chat and we’ll get the process underway.
Our system to maximise your claim!
Closed circuit television systems, garden watering systems, intercom systems and solar powered generating system assets are all assets which are often missed by property investors when claiming depreciation.
These and other missed assets such as door closers, freestanding bathroom accessories, garbage bins, shower curtains and smoke alarms are part of a list we have compiled to help investors avoid missed depreciation deductions.
Although many of these items have a low depreciable value, as shown in the following table, the depreciation deductions which can be claimed for these items can add up to thousands of dollars for an investor.
So here’s our system to help investors ensure no item is missed and to maximise their depreciation deductions:
- Take note of the assets included in the above table
- If you have a depreciation schedule and you own any of these assets, confirm with your Accountant that they are included in your schedule and your depreciation claim. If items have been missed, the Australian Taxation Office will allow you to go back and amend the previous two years of missed deductions
- If you don’t have a depreciation schedule you should talk to a specialist Quantity Surveyor as soon as possible
- Ensure your specialist Quantity Surveyor can outline the deductions available for assets which are eligible* to be written off immediately or added to the low-value pool
*Under proposed changes outlined in draft legislation (section 2 of Treasury Laws Amendment Bill 2017), investors who exchange contracts on a second hand residential property after 7:30pm on 9th May 2017 will no longer be able to claim depreciation on plant and equipment assets. Investors who purchased prior to this date and those who purchase a brand new property will still be able to claim depreciation as they were previously. BMT Tax Depreciation will be making an official submission outlining our concerns along with suggestions of alternative methods to better resolve the Government’s integrity issue. To learn more visit www.bmtqs.com.au/budget-2017.
A specialist Quantity Surveyor will use their expert knowledge of tax legislation to ensure the maximum deductions are claimed for each individual asset.
[SOURCE: BMT Tax Depreciation]
Bradley Beer (B. Con. Mgt, AAIQS, MRICS, AVAA) is the Chief Executive Officer of BMT Tax Depreciation.
Please contact 1300 728 726 or visit www.bmtqs.com.au for an Australia wide service.