Weekly wrap - Friday 25th September
Changes in responsible lending
Treasurer Josh Frydenberg's announcement in relation to making home loans easier for every day Australians was quite a surprise, and a nice one for that matter.
Quote: "As Australia continues to recover from the COVID-19 pandemic, it's more important than ever that there are no unnecessary barriers to the flow of credit to households and small businesses."
That is a fairly broad statement, but the goal is to speed up the credit approval process. As far as responsible lending is concerned, it's fair to say there are still a lot of credit criteria for the banks we have to go through.
Interestingly enough, the forensic approach to understanding was mentioned: "It's common for a person applying for a mortgage to be asked to explain individual discretionary spending and to provide verification of things like Netflix, Spotify subscriptions, UberEats, Menulog, and other details. All for the lender to be confident that it cannot be held liable in the event the borrower cannot repay the loan." It's not uncommon or unreasonable to think that, for a client, the way that they live today versus the way that they would live when taking out that home loan could be incredibly different. People adjust their spending or their lifestyle now to take into consideration a new commitment such as a new loan. It's good to see that there's some awareness around that, and also understanding that these extra documents and verification create delays.
The cost of living is the cost of living. Costs of private health and car insurance and council rates are what they are. There's no variance there. But discretionary spending such as Netflix and UberEats are the first things to go.
The assessment on clients' existing liabilities, their debts and their capacity to repay based upon their income and all those things are still relevant. There will still be definitely some level of liability. But it is exciting to see everyone seems to be in agreeance that it probably swung too far compared to what was meant, and now bringing that back to get more alignment.
It is still important to understand those costs, but the ownership is coming back onto the borrower to understand what they're actually spending and to be aware that they may need to make some adjustments to then afford a loan commitment. We have seen clients do that. It's a bit of common sense.
Cash back push
Six or seven banks currently offer between $2,000 and $4,000 cash back for a refinance, remortgage, or restructure. You can not only take up on the savings that are currently available, but also pick up $2,000 to $4,000 for doing a little bit of paperwork along the way, which is really exciting.
We’d like to share a client success story where this particular client also benefited from a cash back.
A new client came in with two investment loans for a combined total of $850,000 with an interest rate of 5.1%. Not only was that rate outrageous, but the product was outdated, interest only, not reducing debt, over a payment of about $834 per week.
We took that interest rate of 5.1%, back down onto a 2.49%. That's a saving in interest alone of 2.61%, which means $22,000 per year in savings for that client. Tap on $4,000 in cash back, and we're suddenly at $26,000 in the first 12 months of this client.
Then, we've been able to realign a strategy working with the financial planner. The principle and interest reductions now are still cheaper. We're only paying $774 per week and we're actually reducing the principal on the loan. It's the saving in interest now, those $22,000 a year, that is paying the loan off. Suddenly, we're almost $100,000 ahead on a loan in four years because of a switch in structure and some interest rate savings.
If you are an existing owner, there's never been a better time to have a conversation about restructuring or renegotiating. That can make the difference between feeling like you can't keep going with that commitment or you're not getting anywhere to suddenly actually getting ahead. It makes an unbelievable difference to go from thinking, "I have to sell the property because interest rates are high," to "Well, I can actually put that money back into my loan or back into my pocket each week or each fortnight."
Have a chat with us, we’re here to help.