The Royal Commission

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry that concluded in early 2019 discovered a number of lax lending practices by some of Australia’s biggest lenders. Of particular concern was that some banks failed to verify the living expenses of home loan applicants. In many cases this lead to people receiving loans that they were unable to repay. The Royal Commission also revealed that one of the bank regulators, ASIC, did little to punish misconduct, so there was little incentive for banks to comply with their legal obligations.

In response to the Royal Commission ASIC promised greater scrutiny of lending practices and lenders began to ask for a lot more information when assessing home loan applications. They now require detailed proof of both income and expenditure at a level that many people may find intrusive.

Bigger deposits

The decline in home prices in Australia’s major cities mean that buyers don’t need to borrow as much for a given property, which should make it easier to get a loan. However, falling prices create a greater risk for the banks, and one way to reduce this risk is to require a higher deposit, extending the time it takes to save that deposit.

Stringent stress testing

Even before the Royal Commission the prudential bank regulator, APRA, introduced a requirement that banks check on their borrowers’ ability to service their loans if there is a significant increase in interest rates. While it might be possible to borrow at an interest rate of less than 4% per annum (pa), the banks need to check that the loan is still affordable at an interest rate of more than 7% pa, thus reducing the amount that can be borrowed.

Being prepared

The main response to this more difficult lending environment is simple, but that doesn’t make it pleasant. Unless you are able to increase your income, you’ll need to save more. Inevitably, that means spending less:

• Apps such as TrackMySPEND from MoneySmart can help you track your spending and make it easier to work to a budget.
• Keep detailed records of saving and spending. You will be asked for them come loan application time.
• Start early. You are more likely to be successful in your home loan quest if you can show a consistent history of saving and responsible spending spanning years rather than months.
• Shop around. By all means start with your regular bank, but also check out what the non-bank lenders and mortgage brokers can offer.

Need to speak with a financial advisor? Call the Leenane Templeton Wealth Management team to chat about your current financial situation and needs. Contact Us Today.

The post Why it just got harder to get a home loan appeared first on Newcastle Financial Planners & Financial Advisors.

Being a parent working towards owning your home carries with it many dilemmas. One such quandary is funding education for your children.
 

While the best option will depend on your family’s specific circumstances, two important strategies to consider are:
 

1. Direct spare cash into the home loan and use redraws to fund education costs.
 

Benefits of this strategy:
• Reduces the total amount of interest paid on the home loan.
• After-tax investment return is equal to your home loan interest rate – risk free!
• Invest amounts that are income and capital gains tax-free.
• Easy access to your cash if required sooner than anticipated with the flexibility of an offset or redraw facility available with some home loan products.
 

Problems with this strategy:
• Offset account or redraw facilities are not available with every home loan.
• Financial institution may charge a fee to redraw payments in advance.
• Could achieve lower returns than alternative investments.
 

2. Investing in a managed fund dedicated to funding educational costs.
 

Benefits of this strategy:
• Can choose a mix of assets to suit timeframe and desired investment return.
• Many funds allow regular investing which takes advantage of dollar cost averaging.
 

Problems with this strategy:
• Income and capital gains tax are generally payable on managed fund investments.
• Investments made within a managed fund are subject to market fluctuations. In times when investment markets perform poorly, returns on the fund may be low or even negative, but this is often more than offset with high returns during the good years.
• Most funds charge entry, exit and/or administration fees.
 

Other important factors to consider:
 

Investment timeframe before children start school: Managed funds are usually a long-term investment (from five to seven years plus). If your timeframe is less, investing in a managed fund is not usually recommended due to the risk that you may receive less when you withdraw the funds than you originally invested.
 

Time before retirement: Not many people want to pay a home loan with their retirement income. Generally speaking, the further you are from retirement the more sense it makes to use the home loan to fund education costs.
 

Interest rates: How much interest are you paying on your home loan? If your rate is higher than the managed fund return, it usually makes more sense to focus on paying down your home loan and invest separately in a managed fund.
 

Investing wisely: High penalty tax rates exist for income earned by minors. This makes investing in the name of a child under 18 undesirable.
 

Our team of professionals and award winning financial planners are at hand to help with any questions you may have regarding this article.
Call on (02) 4926 2300 or email us.
 

Disclaimer.
 

Funding education can be confusing, so if you’re not sure what would work best for your family, talk to us.

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