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The Experts

Adrian Sheahan
+ About Adrian Sheahan
Adrian leads the operations for Switzer Home Loans. He has over 20 years experience in the banking and finance industry and has primarily been involved in lending to the rural, commercial and residential sectors. Adrian has also owned and managed a retail business for five years and has s a Bachelor of Economics degree.

Tips for dealing with lenders over Christmas

Wednesday, December 13, 2017

By Adrian Sheahan

December is peak hour for banks and lenders and despite their best efforts every year, property buyers and sellers alike often miss their Christmas deadline and with solicitors taking time off over Christmas and New Year, that can delay the property settlement by weeks.  Banks and lenders put on extra staff to cope with the December rush but inevitably, settlement processes slow down because of the Christmas bottleneck.  

So what can you do to make sure that your application or property sale goes through smoothly?  The simple answer is, be prepared and make it easy for the lender who is dealing with your transaction.  That applies all year around though, not just Christmas, so here’s a few tips to help you get a good outcome from your lender.

Applying for new finance

Primarily lenders are concerned with your ability to repay the loan you are seeking and what security you can provide for the loan.  To meet their documentation requirements, have the following items ready:

Income and expenses

If you are employed on a PAYG basis, have your last two payslips and employers payment summaries. 

If you are self employed, have your last two years personal and business tax returns available.  If you don’t have them handy, get your accountant to email you a copy

Rent income.  Supply a copy of the rent statement from the property manager, the lease or the two most recent rent receipts.

On the expense side, lenders will quiz you on living expenses and existing loans so have a budget prepared and bring along the most recent statements for all of your loans and credit cards.

Loan security  

If you are purchasing a property, provide the contract of sale and a copy of the receipt for your deposit.  

If you are using an existing property as security, supply a copy of the most recent rates notice for that property.


Finally, have an idea of what you are trying to achieve and how you want the bank to assist.  A good lender will try and find a pathway to the outcomes you are seeking and if you have made it easy by supplying the information they need, the process can be quite smooth.

Selling your property

When you have sold a property a lender holds as security, they need to prepare a discharge of mortgage, organise settlement etc. 

They often employ solicitors to act for them and the whole process can take up to 4 weeks so if you don’t tell them immediately upon sale of your property, you run the risk that your tardiness may delay settlement.  You can ask for the matter to be attended to quickly, but at times like Christmas when they are flooded with requests, that is sometimes just not possible.

To minimise this risk, as soon as your property sells, provide the lender with a copy of the contract of sale, your solicitor’s details and sign the lenders discharge authority. 

Make sure you take care to provide full and accurate details.  If you have a personal manager or contact person with your lender, ask them to lodge it for you and keep an eye on its progress.  There is also no harm in your solicitor checking with the bank once the request is lodged to make sure all is in place.

Loan refinance

For the new lender, these matters are a priority but for the lender you are swapping from, property sales and purchases are more important so don’t expect them to fall over themselves to complete the refinance.   My main tip if you are considering a refinance is to speak with your existing lender first and see if they can satisfy your concerns. 

They may be able to provide what you are seeking, eliminating the need for the refinance in the first place.  If they can’t, you will have at least removed the step where they should try to retain your business.   Once you have decided to go down the refinance path, complete a discharge authority for your existing lender and lodge it with them as soon as possible. 

You can ask the new lender to do that for you but preferably, once you have made the decision and have the approval for the new loan, lodge the request so the old lender can attend to their process whilst you are completing the mortgage documentation for the new loan.  That can save you weeks.

No matter what you are doing, my number one tip for saving time in any dealing with lenders is to call them and establish what they require to action your request. 

Make a list of what they need and then satisfy that list to the letter. I recently had the pleasure of listening to a successful developer speak and his advice when dealing with governments, councils and banks was not to fight them, get what they want and work with them. 

The time savings are enormous.  If they request a letter from your accountant, get it for them, if they ask for two current pay slips, don’t provide one from two years ago. 

The easier it is for them, the sooner your settlement will happen. 

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3 things to consider if you have a home loan

Tuesday, October 31, 2017

By Adrian Sheahan
For most people, their home is the biggest asset they will own and the loan used to purchase the property, the biggest debt they will carry. They look after and maintain the property but too many don’t bother to monitor and manage their loan once they have the home. Everyone’s personal and financial circumstances evolve, even if they don’t switch properties, so regular reviews of their home or investment loan structure are a must to ensure the loan matches their circumstances. Borrowers should regularly ask themselves and their lender, does my loan structure and rate match my needs and circumstances? If change is needed, in most cases it should be neither costly nor difficult. On the other hand, not reviewing your loan regularly could prove both costly and give you plenty of headaches down the track.

Here are the three main loan features we constantly review.

Repayment type

The Australian Securities and Investments Commission (ASIC) and the banking watchdog the Australian Prudential Regulation Authority (APRA) are now placing huge pressure on lenders to reduce the number of Interest only loans they provide. In response, lenders are using both the carrot and the stick approach to push applicants and existing borrowers alike towards principal and interest repayment loans. The carrot comes in the form of reduced rates for principal and interest structures and the stick is the loading of the rates for interest only borrowings, amongst other restrictions. The result is that interest only loans can carry a rate as much as 0.70% higher than the same loan on a principal and interest repayment structure. Many borrowers are unaware of the difference and that can be costing them thousands every year. If you have an interest only loan, particularly an interest only home loan, ask your lender what rate reduction you will receive if you switch to principal and interest repayments. It could be the greatest question you have ever asked.

Fixed or variable interest rate

The most common question we are asked about loan structure is ‘should I fix the rate on my loan’?  This is more complicated than just changing repayment type and must be considered carefully. When a loan is under a fixed rate contract, additional repayments may be limited, redraw and offsets restricted and should you pay the loan out before the fixed rate expires, the penalties could be significant. There is always the risk too that the rates may drop, leaving you paying more than you need to. Fixed Rate loans are best suited to borrowers who cannot afford to take the chance on repayments rising as a result of rate increases. I have written previously about the pros and cons of fixing rates but if you have the capacity to make additional repayments or think you may sell your property in the short term, a fixed rate loan may not be for you.

A popular alternative is to split your loan and have part fixed and part variable, giving you the flexibility of a variable rate loan but the security of a fixed rate on a significant portion of your debt. A rare example of being able to have your cake and eat it too!

Loan refinancing

The rate on your loan is of course critical. If you are paying more than the market rate for a standard loan, you are costing yourself hard earned cash for no good reason.  A lower interest rate will put more money in your pocket and gives you the option to reduce your home loan faster. There will be some costs to refinance your loan such as legal and registration fees, so care needs to be taken to ensure you are not offsetting any interest savings with the costs, but your finance expert will be able to detail these for you so you can make an informed choice.  The bigger then loan, the more important the rate is and even a small reduction in rate could save you plenty.

Changing loan structures or even refinancing is not a difficult process. There may be a little paperwork, but that is a small price to pay for a change that could relieve your financial pressure or save you thousands.  All you need to do is make a call to your lender, a finance expert or the team at Switzer Home Loans and they will get the ball rolling. The discussion you have may be best five minute chat you ever have.

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4 reasons why investment loans are now harder to get

Tuesday, October 03, 2017

By Adrian Sheahan

Investors are aware that their loans now attract higher interest rates than home loans and most are aware that the banks are also restricting the LVR or Loan to Valuation Ratios for Investment Loans. What is less obvious is that banks are also applying tighter assessment guidelines when assessing the applicant’s loan servicing capacity, or in simple terms, their ability to make the loan repayments when all of their income and expenses are considered.

This is leading to confusion and frustration for many applicants who know they can afford the loan sought based on the money going in and out of their bank account. So what are these changes and how do lenders now assess the capacity of Investors to repay the loan sought?

Rental income – When assessing an applicant’s rental income, lenders do not use the full gross rental income figure. That figure is instead discounted to allow for vacancies and the costs associated with the investment property. Commonly a discount of 20% is applied to the gross figure (some lenders apply an even greater percentage) meaning that when the bank looks at an applicant with $500 per week rental income, they will only use $400 in their servicing assessment, wiping $5,200 per annum from their assessable income. The more properties held and the more rental income the applicant relies on, the more impact this has on their cash flow forecast and the more difficult it is to pass the assessment.

Loan repayment calculations - All loans are now assessed using a ‘stress interest rate’ that is much higher than the actual interest rate applied to the loan. Typically, this is around 7.50% and is used to assess future loan repayments. This is also applied to any other loans the applicant may have. In some cases, these rates are almost double the actual rate being charged. This is done to allow for potential rate rises over the life of the loan. The outcome is that all of the assessed loan repayments for the applicant are significantly higher than the repayments the applicant is actually making, increasing the expense figure in the banks servicing calculations. So now the applicant is faced with the income figure used being reduced and the expense figure inflated. Again, the more properties and borrowings the applicant has, the more the impact on their ability to obtain a loan.

Interest only repayments – A little known but very significant shift in the assessment process has been in the way banks treat interest only repayments. Previously, interest only repayments were included in the assessment at the actual repayment figure. No consideration was given to repayment of the loan principal or the significant lift in repayment amount when the repayments reverted to principal and Interest repayments at the expiry of the interest only period – repayment shock. To cater for that outcome, not only is the ‘stress rate’ applied to the interest rate calculation but the repayments are based on the principal and interest amount that will be applied when the repayments come off the interest only period. This makes a huge difference to the expense calculations of the applicant.

Living expenses - This has recently been a focus of the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) with the lenders again responding to pressure from these bodies. Prior to the spotlight being shone on this issue, lenders commonly applied a benchmark living expense figure to their calculations for simplicity but these have now evolved to more detailed calculations depending upon individual applicant circumstances such as location and income. The lender will also ask the applicant to provide an estimate of their living expenses. This figure is compared to the benchmark established by the lender and the higher of the two is used in the calculations. This has led to a marked increase in the expense figure of a large number of applicants. So again, this application of policy has led to a negative impact on the applicants borrowing capacity via an increase in the expense figure.

These are just a sample of the factors that have impacted the capacity of investors to obtain loans. Add to these the increased rigor of verification of the information provided by applicants, higher property values in Melbourne and Sydney, the scaling back of assessed gearing benefits and it is clear why it is more difficult for investors to borrow now than just a few short years ago (despite what some in the press claim). Although frustrating for many, in the main the changes provide additional protection for investors and they have certainly contributed to the slowing of investment borrowings. If you’re unsure of your borrowing capacity or how the changes affect you, use a trusted finance expert and get them to walk you through the assessment.

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Interest-only loans: Why all the fuss?

Wednesday, July 26, 2017

By Adrian Sheahan

If you are a potential property buyer or investor, you will be aware that the banks are putting the brakes on interest-only lending. So why (and how) are the banks doing this, and are interest-only loans still a viable option for property purchasers?

If you were to approach one of the four major banks for an interest-only loan, they would apply an interest rate of up to 0.66% higher than for the same loan with a principal and interest repayment structure. They have also tightened their lending criteria for interest-only loans, making the assessment process tougher for many applicants. These changes include tightening the method used to calculate the applicant’s capacity to repay the loan, and reducing the LVR levels acceptable under this product type. They can still provide loans for those borrowers who need them, but the reality is they are now more expensive, and the qualifying conditions are tighter.

Why the fuss?

The increase in the cost of the loans, and the tighter lending policies, are all designed to reduce demand for, and supply of, this type of facility. Why? Because the banking regulator, APRA, is concerned about ‘heightened risk in the housing market’ (and the impacts on both borrowers and lenders alike) should there be a significant interest rate rise and/or a downturn in the property market.

While they are concerned with protecting the integrity and strength of Australian banks, APRA are also trying to change the borrowing habits of Australians by making interest-only loans less prevalent and are doing so via the banks. Of all new residential loans, only 30% may be written on an interest-only basis under new guidelines implemented by APRA. Lenders are now also more closely scrutinised to ensure that interest-only loans are only provided to those deemed suitable.

The banks have no option but to slow their interest-only lending. By tightening policies, they reduce the number of applicants eligible for those loans. By increasing the rates, they reduce demand, steering applicants towards principal and interest repayment structures.

This stance is perhaps long overdue, because for some time, many lenders have been too liberal with the provision of this type of loan without due regard to the risks to both themselves and their borrowers.

These risks include;

  • If the loan is not reduced during the interest-only period and the property does not rise in value or indeed falls, the borrower’s equity may be reduced, or in extreme circumstances, the loan may even exceed the property value.  This is a concern if there is any correction in property values (particularly in Sydney and Melbourne, where prices have skyrocketed, along with loan sizes). Perth provides a stark example of this, with the decline in property values following the end of the mining boom leaving many property owners in the red.
  • When the repayments revert to principal and interest after the interest-only period, the repayments will increase significantly and may be unaffordable for the borrower. This is called "payment shock" and is a specific concern of APRA. The repayments increase for two reasons:

1. The revised payments will include a principal repayment component, in addition to the interest amount that was being paid prior to the change. 

2. The principal and interest repayments are calculated on the remaining term of the loan, not the original term. So, the borrower has the same amount of debt to repay as when they took the loan, but a shorter period to do so. 

Interest-only loans are still the right option for some borrowers, including;

  • Investors with strong income who rely upon a negative gearing strategy.
  • Borrowers with reduced income capacity in the short term (e.g. those taking periods of parental leave, or career breaks) who need to minimise their loan repayments during that time. 
  • Borrowers looking for tax-effective structures that allow them to focus their cash flow on loans where the costs are non-deductible, such as their owner-occupied property loan, rather than investment loans where the interest is tax deductible.  

These borrowers can still access interest-only loans, but the simple fact is the application process will be more rigorous and the rate will be higher than it was before.

The primary objective of any good lender is to provide a loan structure that best matches the applicant’s needs and maximises their wealth. Interest-only loans are part of that product mix. So, if you are considering a loan with interest-only repayments, don’t let the higher price and the tougher guidelines scare you, as your circumstances may still be best suited by that type of facility. If in doubt, speak with a Switzer Home Loans specialist to identify the right structure and options for you. 

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Are you too old for a home loan?

Tuesday, March 07, 2017

By Adrian Sheahan 

Obtaining a loan is linked to the income that’s needed to meet the loan repayments. So if you are approaching, or have already made the step into retirement, could you still obtain a loan? The simple answer is yes, but of course this comes with some caveats.   

Older applicants seek loans for a number of reasons. They may want to expand their investment portfolio, they might be recovering from the financial effects of a divorce or failed business enterprise, or they may just wish to purchase a new home. These are all valid reasons for seeking a loan for residential property, and indeed, can be an integral part of retirement planning.

Whatever the reason, lenders must assess your request for finance by looking at your capacity to repay the debt. This is true for every application, regardless of the applicant’s age. They will also consider factors such as your credit history and the security offered, but first and foremost, they must consider how you can repay the loan. They do so to ensure the loan will not place you under financial stress, and of course, to ensure the loan is not a risk for them.

So if you are at - or approaching - retirement and your income is about to change, how can a lender justify granting you loan with a 25 or 30-year term? The answers lies in considering how the loan is to be repaid in the long term, and not in the assessment of your current income. Yes, the lender will look to your normal income to clear the debt, but if you plan to retire before the debt is cleared, they will then look at what income sources will remain past that date. These might include rental income, investment income or a generous superannuation income stream. A detailed plan from an accountant or financial planner is a helpful tool in these circumstances, but it needs to demonstrate that not only can the loan be paid from your post-retirement income, but that you can maintain a lifestyle without undue financial stress.

If that can’t be demonstrated, lenders will assess if you have an alternative exit strategy i.e. another way to clear the debt. This usually takes the form of the sale of an asset such as shares or an investment property, or if required, the part redemption of some of your superannuation assets.  

Critical in this assessment is asking the question: how long until you expect to retire? This will determine to what extent you can build the value of your assets and how much your loan will reduce by. For example, if you are a fit 55 and expecting to work until you are 70, you have significant time to not only reduce the loan balance, but also build up your superannuation balance, your share portfolio, and other assets. If, however, you have only two years until you plan or are obliged to retire, you will need to have an alternative exit strategy in place.

The most common asset put forward as an alternative exit option is superannuation. Be aware however that lenders are very cautious about this. Indeed, many lenders will not accept superannuation as a legitimate source of funds to clear debt unless the holdings are very large. Why? Because superannuation is, by definition, designed to meet your living needs in retirement, and not to pay off debt.

So, if you are retired or nearing retirement and looking for property finance, the assessment by your lender will be completely different compared to that of a younger applicant. While this may sound like common sense, many applicants don’t consider the pitfalls of new borrowings or the many options available to them. To address this, banks often request that applicants at or near retirement seek financial advice prior to entering into a loan contract because it is a critical decision, and financial mistakes heading into retirement can be devastating. As always, we recommend you use a professional such as a financial planner to assist you to build a strategy, and a trusted finance consultant to get the right loan advice, not just a loan.

Adrian Sheahan is the manager of lending operations at Switzer Home Loans. Contact him today for a free loan health check.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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Lenders Mortgage Insurance: What you need to know

Tuesday, December 06, 2016

By Adrian Sheahan

An interesting part of the debate on the difficulties facing first home buyers is the application of Lenders Mortgage Insurance (LMI) and its pros and cons. But before we delve into that discussion, it’s important to understand exactly what it is.

Lenders Mortgage Insurance 101

LMI is insurance a lender takes out against making a loss on a loan they provide. In simple terms, if a borrower defaults on their loan and the lender is forced to sell the property that secures the loan, in some circumstances, the sale proceeds will not cover the amount owed to the bank. When that occurs, the lenders mortgage insurer will cover the lenders shortfall. 

Most borrowers understand that, but what many do not know is that the mortgage insurer can, and will, pursue them for the amount of the shortfall.  LMI is therefore protection for the lender only – it does not offer any protection for the borrower at all. Furthermore, a common misconception is that it covers the loan payments if the borrower is unable to because of illness, losing their job, etc. It does not cover those risks, they are covered by separate policies such as income protection insurance that the borrower must arrange themselves.

When is LMI required?

Lenders usually require LMI when the loan amount is greater than 80% of the security value. This loan amount/security value ratio is called the “Loan to Valuation Ratio (LVR)” and it’s a critical figure when assessing if LMI is applicable, and if it is, what the cost will be. 

Like all insurance policies, there is a premium or cost for the policy, and in most cases, this is passed on to the borrower. The cost of the premium depends upon both the amount of the loan and the LVR. The higher these are, the higher the premium will be. This is a reflection of the risk to the lender. The higher the LVR, the higher the possibility the lender will make a loss if they are forced to sell the property to recover their money. The higher the loan amount, the greater the potential loss.

Paying the premium

The premium is payable by the borrower at settlement of the loan. The borrower can pay that from their own funds, or it can be added to the loan amount. That is termed as “capitalising the cost” and can be done provided the policy for the lenders maximum LVR is not exceeded. Of course, if you choose this option, you are repaying the amount over time, and paying interest on the monies owed (which includes the LMI premium).

It sounds very one-sided in favour of the lender and it is, but it does have its advantages.  

Let’s consider two scenarios:

1. Purchasers can buy into the market sooner if they are having difficulty saving for a deposit

This is a significant positive and commonly applies to first home buyers. If the first home buyer is buying into a rising market, they will not need to save as much. Additionally, the capital gain generated in the time it would have taken to save the 20% deposit (plus costs) may, in fact, be more than the premium they pay. This has been evident in the property markets of Melbourne and Sydney over the past few years. 

Breaking it down

Let’s assume you want to purchase a unit in a market growing at 10% per annum, and the unit price is $500,000. To avoid LMI, you will need to meet the 20% deposit and the costs including Stamp Duty. Using round figures, you will need $100,000 to avoid paying LMI.

If it takes you two years to build your savings to $100,000, in that time, the property will increase in price to $605,000. So, you would then need $121,000 to avoid paying LMI, i.e., you are still not in a position to buy the property, and have wasted two years!

Alternatively, if, at the time, you put together enough funds to pay 10% plus the costs and taken a loan with Lenders Mortgage Insurance at a 90% LVR, the LMI cost would have been approximately $8,500. Given the gain in property value over the two years was $105,000, obtaining the loan initially and paying LMI would have left you well ahead.

Sounds great, but remember, not all property values rise in this way, and the booming markets of Sydney and Melbourne are not typical of the overall property market. So do your homework and use a professional to help you.

2. It enables you to preserve your cash/savings for other use

If you have significant cash reserves, but have them earmarked for other purposes, you may be able to borrow more than 80% of the property value and not have to use all of your hard-earned savings.  This can be advantageous from a tax point of view if purchasing an investment property, as the borrowings will carry some tax benefits, and the savings can be used for non-deductible spending.  As always, you should check this strategy with your accountant to ensure it suits your circumstances.

So, under certain circumstances, LMI is an excellent tool to help buyers achieve their property goals.  But there are many factors to consider and each individual has different circumstances. Like all lending decisions, there are implications for the borrower no matter which course they take, so use a finance expert to guide you, or speak with the team at Switzer Home Loans.

Adrian Sheahan is the manager of lending operations at Switzer Home Loans.Contact him today for a free loan health check.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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Investment properties: 4 things every lender looks for

Tuesday, October 25, 2016

By Adrian Sheahan

If you’re borrowing to purchase an investment property or add to your property portfolio, it’s critical you consider if the property you’re purchasing is acceptable to the lender. Almost all residential investment loans are secured by residential property, and lenders will decline an application if they deem the property unsuitable.

In cold hard terms, if things go pear shaped and you cannot make the repayments on your investment loan, the lender may sell the property to recoup their money. When that decision is made, the lender wants to know they can sell the property quickly, and that it will sell for enough to cover the outstanding loan and costs.

Lenders do not like risk, so they will look very closely at the property you are purchasing. The following list outlines their main points of focus.

Loan-to-valuation ratio (LVR)

LVR stands for loan-to-valuation ratio. This is the amount of the loan measured against the value of the property expressed as a percentage. For example, if a borrower purchases a property for $500,000 and obtains a loan of $400,000, the LVR is 80%. If they borrow $300,000, the LVR is 60%. This ratio is critical because it will determine how much that can be borrowed, and often, what interest rate the loan will attract. 

Obviously, the lower the ratio, the less risky the loan is for the lender. Lenders will not lend more than the property is worth and the highest LVR is usually 95%. The most common LVR number is usually 80%.  When the LVR is higher than 80%, the interest rate is usually higher and the loan will attract Lenders Mortgage Insurance, which is another cost passed on to the borrower. Furthermore, the lenders and mortgage insurers will scrutinise the application more thoroughly to ensure their risk is minimised. This makes the loan more expensive and more difficult to obtain approval for.


Location, Location, Location. We’ve all heard real estate agents use this phrase. The more desirable the location, the easier it is to sell the property and the more likely it is to retain or increase in value. In other words, the location of the property is a positive that reduces the risk to the lender.

For that reason, a property in a blue chip suburb in Sydney or Melbourne is considered more favourably than one in a small regional town where the market is less active. As many investors are also finding to their detriment, locations reliant upon a single industry such as mining are also considered risky. If the industry goes into decline or fails, the property will also decline in value. Therefore, lenders may have a lower LVR in certain towns or locations or may not lend in those locations at all. Another example is high-density apartments in our capital cities. As more apartments are completed, supply is rising and prices are coming under pressure. As a result, lenders will commonly only consider applications for those properties with an LVR of 70% or less. Given these projects are commonly located close together, the postcodes in which they are located will have a lower maximum LVR. So do your homework. Look at the supply of properties, the economic features and the long-term market activity of the location. Even if you don’t, the lender will.

Property type

Lenders are wary of what they classify as ‘specialist’ property types. These include properties such as studio apartments under 50m2, mixed zoning properties, titles with multiple dwellings, Off The Plan properties, student accommodation, etc. Why? These types of properties are seen to have a smaller market and consequently, lower demand. That means they may take longer to sell, or may need to be sold at a heavily discounted price to attract a buyer. That raises the risk for a lender, so again, they may limit the LVR, or consider the property unacceptable and decline to fund the purchase. If in doubt, ask your lender before you go to the auction or enter into the contract - it may save you tens of thousands of dollars.

Adverse features

The final item to consider is if the property is negatively impacted by any external features. Lenders will decline applications for properties if they think an external feature may extend the selling period, or lower the value of the property. This may include close proximity to high-voltage power lines, land slip areas, flood zones, bushfire zones, old mine areas, etc. Again, it comes down to doing your research.

Property can deliver investors with terrific yield, but if the lender looks unfavourably on the property after assessing these four key areas, they may decline your application. So do your research and if in doubt, ask your financial adviser or the team at Switzer Home Loans.

Adrian Sheahan is the manager of lending operations at Switzer Home Loans.Contact him today for a free loan health check.

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Introductory rate loans: What happens when the honeymoon is over?

Tuesday, September 06, 2016

By Adrian Sheahan

Honeymoon loans are just one of many products offered by lenders. But like all honeymoons, the good times can come to an end, so it’s important to do your homework to avoid getting caught out!

What is a honeymoon loan?

Honeymoon loans are also called introductory rate loans, because they offer a period at the beginning of the contract when the interest rate is lower than the standard variable rate.

This period of time can be as short as six months and stretch as far as three years from the start of the loan.

Lenders use the introductory rate as a marketing tool to attract new business and gain market share, but the loans do not come without risk and potentially come with additional costs to the borrowers in the long run. So, before considering this type of loan, it is critical that a borrower understands the product, the long term costs and the risks.

There are two types of introductory rate loans:

1. Discounted Variable Rate. The interest rate is set at a fixed percentage below the standard variable rate for the honeymoon period before reverting to the standard variable rate at the expiry of the introductory term. It will move in line with changes in the variable rate, but the discount will remain in place and the difference between the two rates will be unchanged until the introductory period is over.

2. Discounted Fixed Rate. The interest rate is fixed for a period of time at the beginning of the loan, and like all fixed rate loans, won’t move with changes in the variable rate. The lenders offer a lower rate than the variable rate and at the moment, the fixed rate period is for one, two, or three years.

I don’t know any borrower who would not like a lower rate on their home loan, so why aren’t they more common? The simple answer is that while these loans are appealing at first glance, there are several negative considerations. If borrowers ignore these considerations in the rush to secure a low rate, they may be left with the exact opposite of what they want, that is, a costly and unsuitable loan. Here are just a few of those potential pitfalls.

The pitfalls

1. Cash flow hit. Discounted fixed rate loans are now the most common form of introductory rate loans being offered. Lenders offer a fixed rate below the prevailing variable rate so they can advertise a low headline rate. The problem is that when the fixed rate expires, the loan usually reverts to the lender’s Standard Variable rate and this can expose the borrower to a real hit to their cash flow if rates have risen. Borrowers that are vulnerable to upward movements in interest rates and their loan repayments are therefore at significant risk of not being able to afford their loan repayments.

2. Reduced flexibility. Under the discounted fixed rate offer, borrowers can lose options such as redraw and offset accounts. So they may have a lower rate, but the loan may have no flexibility.

3. Limited additional repayments. During the honeymoon period, particularly for discounted fixed rate offers, the lender may limit additional repayments to the loan, eliminating one of the two main benefits of the product (i.e. the ability to take advantage of the low rate to reduce the loan to a manageable level before the introductory period is over).

4. Higher fees. These loans may carry higher fees offsetting the gains of the lower rate so the borrower does not realise the savings they were banking on.

5. Other penalties. The cost of discharging the loan, or switching during the introductory period, can incur fees. So if the loan is paid out for any reason, there is the potential for the borrower to be hit with substantial penalties.

Despite the above negatives, there are circumstances when the loan can match the needs of a borrower and would be a suitable option.

The lower rate during the honeymoon period may provide two main advantages.

1. Reduced initial costs. It softens the cash flow shock for new borrowers who may be purchasing their first home, starting a family, or early in their careers with lower incomes. The lower rates and repayments give these borrowers the chance to establish themselves, get their home set up and cement their income streams before the loan repayments increase.

2. Accelerated debt reduction. Secondly, the lower repayments during the honeymoon period provides the borrower with the opportunity to make extra repayments while the rate is low (subject to the conditions of the loan) so they can accelerate the reduction of their debt in the early years of the loan to reduce their risk.

Like all honeymoons, the borrower will have to return to normal life at some point and the reality hit may have long term impacts. So if you are considering this type of product, make sure you do your homework first and ensure the specific product suits your personal circumstances. If in doubt, consult your finance expert or the team at Switzer Home Loans and let them do the leg work on your behalf.

Adrian Sheahan is the manager of lending operations at Switzer Home Loans. Contact him today for a free loan health check.

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The perks and pitfalls of interest only loans

Wednesday, July 27, 2016

By Adrian Sheahan

Are interest only loans a good option? It's a common question, and the short answer is that interest only loans often provide unintended downside risk, and should only be recommended under specific circumstances.

This stance is backed by the banking regulator, APRA, with lenders now required to detail why they have provided a borrower with an interest only repayment structure, and why it’s suitable for their situation and needs.

So when are interest only loans suitable? First, let’s consider the potential benefits of a loan where the repayments during the initial period of the loan (usually up to five years) are interest only, before converting to Principal and Interest for the remaining term.

The benefits

  • As there is no requirement to reduce the loan principal, the repayments during the interest only period are less than those under a Principal and Interest repayment structure, providing improved cash flow for the borrower.  
  • It can be used by investors who rely upon growth in the property value (capital gain) to create wealth, while minimising repayments and maximising tax deductions against the asset in the short term. This is an important tool in a negative gearing strategy.
  • Interest Only loans allow borrowers with reduced income in the short term (e.g. during periods of parental leave or a career break) to minimise their loan repayments. This can release the financial pressure on the borrower until they return to work, or re-establish their income stream.
  • It can allow investors to use more of their income to repay loans where the loan costs are non-deductible, such as their owner-occupied property loan. However this is a strategy that needs to be discussed with a financial adviser or accountant to confirm it suits the applicant’s situation.
  • If the borrower’s property is on the market, or they have a large sum of money due to them in the short term, interest only repayments may be suitable to relieve cash flow pressures pending receipt of the money or sale of the property.

Interest only loans are not without risk however – so what are the pitfalls of interest only repayments?

The pitfalls

  • The obvious negative outcome is that the loan balance is not reduced. Therefore, if the property value does not rise, or worse, it decreases in value, the borrower’s equity in the property may be reduced, or in extreme circumstances, the loan may even exceed the property value. For investors, that leaves their strategy in tatters and for the home owner, it leaves them owning less (or none) of what’s potentially the biggest purchase of their life.
  • When the interest only period expires and the repayments change to principal and interest, the loan repayments will increase significantly, leaving the borrower at risk of being unable to afford the loan and of being forced to sell the property to pay out the debt. The repayments increase for two reasons;
  1. The new repayments will include a principal repayment component over and above the interest amount being paid prior to the change.
  2. The principal and interest repayments are calculated on the remaining term of the loan, not the original term. So, the borrower has the same amount of debt to repay as when they took the loan, but a shorter period to do so.  

To illustrate these points, consider the following scenario.

Mr and Mrs Applicant sign up for a loan of $500,000 over 25 years with an interest rate of 5.00%. They opt for a five-year interest only period, before converting to principal and interest repayments for the remaining loan term.

During the interest only period, repayments will be approximately $2,085 per month. When the initial five-year interest only period expires, the repayments on a principal and interest basis will jump to $3,299. That’s an increase of $1,214 per month for the remaining 20 years, and a lot of money in anyone’s language.

The overall cost of the loan will also be significantly higher under this scenario.

If the loan was repaid over 25 years on a monthly principal and interest basis, the total cost would be $876,885. By electing repayments on a five-year interest only basis before reverting to principal and interest repayments, the total cost is $916,946, a difference of over $40,000!  

Interest only loans often have a higher interest rate. In response to APRA’s concerns, many lenders now charge a premium on the interest rate for interest only borrowings, lifting the rates by as much as 0.25% on interest only facilities.

So, while there are very real circumstances and strategies when interest only borrowings are the most suitable loan structure, the above example demonstrates the risks associated with interest only loans and why APRA are concerned about their use - particularly when the loan is for the borrowers principle place of residence.   

For Switzer Home Loans (and for any good lender), the primary objective is to provide the loan product that best matches the borrowers needs and maximises their wealth. Interest only loans do not always meet this criteria, so if you are considering a loan with interest only repayments, speak with us, your financial adviser, or a loan specialist to identify the right structure for you.  

Adrian Sheahan is the manager of lending operations at Switzer Home Loans. Contact him today for a free loan health check.


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Should you fix your loan?

Tuesday, June 14, 2016

By Adrian Sheahan

Should I fix my loan interest rate now?

As a credit advisor, this is probably the most common question I’m asked.

Of course, giving the answer is not as simple as asking the question, and like most problems, the answer will reveal itself after consideration of your individual situation.

You should first consider why you are looking to fix the rate on your loan.

For many borrowers, the decision to fix the rate is all about picking the change in the interest rate cycle. By punting on picking the perfect moment when the fixed rates are at their lowest and variable rates are about to rise, you are hoping to lock in a low rate while the variable rises, thus saving yourself interest costs.

So, what you are actually asking me is, “if I fix my rate now, will it be cheaper than if I stay on a variable rate?”

It’s a fair question and the objective is great, but it’s a tough ask to outsmart the banks when their business relies on getting these things correct. It’s also not the best reason to fix the rate on your loan. The reason you should fix your interest rate is to eliminate the risk of loan repayments increasing as a result of interest rate rises. So the question you should be asking me is; “can I afford to take the risk of interest rates rising and my loan repayments increasing?”

It’s an important distinction because fixing the rate on your loan has wider implications than just locking in your rate and loan repayment amounts for a set period of time.

The pros and cons illustrate just what those implications are;


  • Certainty of monthly repayments for the term of the fixed-rate period
  • Insurance against rate rises, which will increase your loan repayments
  • The peace of mind that the above two outcomes provide


  • Additional repayments and lump sum reductions may attract penalties
  • If a loan is paid out during a fixed-rate term, large penalties may be incurred
  • If interest rates fall, you will not receive the benefits of lower interest rates
  • Redraw and Offset accounts are commonly excluded from fixed rate offers

So if you fix the rate just to save interest, you may lose the benefit of your offset account, lose the ability to redraw your advance payments, and you may face hefty penalties if you sell your property and pay the loan out before the fixed rate period expires.

Therefore, even if you have picked the rate cycle perfectly, the interest savings could all be washed away by penalties and your loss of flexibility. Furthermore, if you get it wrong, you will achieve exactly the opposite of what you have set out to do because you will pay more interest than if you had stayed on a variable rate.

On the other hand, let’s assume you and your partner purchased a home three years ago with a substantial loan to finance the purchase. You have decided that now is the time to start a family and your partner is taking extended leave care for the new arrival. The extended leave means that your partner’s income is substantially reduced and the surplus cash you have previously enjoyed, is no longer available. You now face the very real risk that increases in rates and monthly repayments will have a significant impact on the core items of the family budget. Can you afford this, or will it place you under significant financial stress? If the answer is yes, fixing the rate on your home loan may be the tool to eliminate that risk until you’re in a position to reduce your debt or your income rises again.

So when asked “should I fix my rate now”, I will ask the following types of questions;

  • Are you likely to make additional repayments or pay the loan out in the short term?
  • Are you looking to sell your property in the short term?
  • Is there likely to be any change in your income, or that of the household?
  • Are you a risk-averse person who is happy to pay a slightly higher rate to guarantee certainty over the loan repayment?
  • Do you use an offset account or a redraw facility?

Although the response to these questions will provide direction, my primary consideration is always, “can you afford the increased loan repayments if rates rise?’

If you are still not sure which path suits you, there is a third option that, under the right circumstances, can provide you with the best of both worlds. Most lenders will allow you to split your loan into separate portions with one having a fixed rate and the other a variable. By having a split loan, if rates rise, you have ensured some level of certainty and protection. But if they fall, you receive some of the benefit from lower loan repayments. By having a variable rate portion, you also maintain a level of flexibility because you can still make additional loan reductions, use redraw etc., on that portion without penalty. Again, this will not suit all borrowers, but it allows you to have your cake and eat it too.

Still not sure if you should fix or not? For some, the lure of potential interest savings will always be the motivation for their decision, but for those who need a little guidance, the best advice I can give is don’t take a punt, but speak with your finance professional or give one of the team at Switzer Home Loans a call on 1300 664 339.

Adrian Sheahan is the manager of lending operations at Switzer Home Loans. Contact him today for a free loan health check.

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