In brief, this means inquiring into a borrower’s financial situation and requirements, verifying the information supplied, and making an assessment as to whether or not the credit contract is suitable for the borrower. Ideally, the lender should also consider the ability of the borrower to maintain loan payments if there is an increase in interest rates. This is a common pathway into mortgage stress – the situation where loan repayments take up too large a fraction of household income.

The Inquisition

In the past, lenders often relied on loose assumptions of household expenditure when estimating a borrower’s financial commitments. That’s no longer the case, so if you’re looking for a new loan or to refinance an existing one, be prepared to provide the following information and documents:

• The amount and source of your income, and duration and type of employment. This will need to be documented via payslips or through bank statements and tax returns if you are self-employed.
• Your fixed expenses such as rent, other loans, credit cards, child support, insurance premiums and school fees.
• Your variable expenditure, including food, holidays and entertainment.
• Your age and number of dependants.
• Details of your assets with a focus on financial assets.
• Information on any foreseeable changes such as retirement.

You can also expect your prospective lender to delve into your credit history.

If you are using the loan to buy an investment property make sure you disclose this. You will likely face a higher interest rate, but don’t be tempted to deceive the lender. They are adept at detecting so-called ‘occupancy fraud’. You may also need to come up with a bigger deposit on an investment property purchase. This will decrease the sum you can borrow, limiting the price range in which you can buy.

Age needn’t be a barrier to taking out a home loan. However, anyone borrowing with a likelihood of retiring before the loan is paid off needs to have an exit strategy. This could be paying off the loan with superannuation, downshifting to a cheaper home, or even taking out a reverse mortgage.

Tighter adherence to responsible lending practices could likely lead to a reduction in the amount that people can borrow. However, this reduction in the amount of money flowing into the housing market should dampen down growth in house prices. Overall, more responsible lending may not have a major impact on housing affordability, but preferably see a reduction in the number of households experiencing mortgage stress.

Prepare ahead

Having answers to all the questions and the right documentation will come in handy when it’s time to apply for a loan. If a new loan or refinancing an existing one is on your radar, ask your financial adviser to help you prepare ahead of time.

The post What is responsible lending and why does it matter? appeared first on Newcastle Financial Planners & Financial Advisors.

While interest rates remain at historically low levels in many parts of the world, including Australia, thousands of mortgage holders have enjoyed lower repayments; but interest rate movements mean different things to different people.

Aside from mortgages, low interest rates have a much broader application—they also flow through into personal and investment loans, credit cards and various types of business financing. On the flip side, investors have seen returns on interest-bearing bank accounts and term deposits follow suit and understandably do not celebrate with every rate cut.

Across the economy generally, a low interest rate environment often goes hand-in-hand with slower economic growth, uncertain job prospects and lower asset prices.

So, depending on which category you fit into, here are a few implications worth considering in your approach to dealing with interest rates:

• Homeowners: With variable rates remaining low do you use this as an opportunity to build a buffer against rates when they eventually turn around? Or are there other more pressing items that your spare cash could be directed towards, such as credit cards or a car loan? Another issue to consider is your future housing preference. If you would like to renovate or upgrade your home, is now a good time to do this with prices generally stable and tradesmen more likely to return your phone calls? 
• Investors: Whether your preference is shares, property or another asset class, this may be a good time to consider starting a long-term growth strategy. Given that dividend yields and rents may have changed in the past couple of years, it's worth another look to determine if potential investments are likely to be positively or negatively geared.
• Business owners: Overdrafts, car leasing and other business loans may need a good review. In particular, any strategy to reduce your debt should be revisited. You could take advantage of lower interest offers with another lender, but make sure you balance the potential savings against any costs associated with moving your business to a new bank.
• Deposit holders: Dwindling returns on cash may make you feel like there would be little difference if you put it under the mattress. There's bound to be plenty of apparent alternatives to give your returns a boost but it's critical to read the fine print and understand what you're investing in. The adage of higher returns meaning higher risk holds true, so first make sure your ability to manage that risk is properly addressed.

Interest rates will not stay this low forever – and this will be good for some and not others. Now is a great time to think about how you can use the current situation to your advantage. 
Call (02) 4926 2300 or email us. 

To discuss current interest rates and you can take advantage of the current low rates, please call our team of accountants and financial planners at Leenane Templeton. 

The post Interest rates affect everyone differently appeared first on Newcastle Financial Planners & Financial Advisors.