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The Experts

Adrian Sheahan
Expert
+ 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.

Prisoners on Mortgage Street

Monday, August 20, 2018

The banks have been rightly condemned via the Royal Commission for some poor lending practices and there has been an outcry for greater control by regulators on their activities. The media has happily broadcast the terrible behaviour of the banks but what is seldom reported is that measures have already been put in place to curb this behaviour.  A problem that’s becoming apparent though is that lending policies have been tightened to the extent that some loan applicants looking to refinance their existing loans and who are creditworthy are being declined.  The term ‘Mortgage Prisoner’ is used to describe these borrowers but who, specifically, does the label cover?

A ‘mortgage prisoner’ is a person with a home loan that cannot switch funders to a better home loan deal because under the new affordability calculations applied by lenders, the loan they are seeking is deemed unaffordable, even though they may have made their existing loan repayments without blemish over several years and even though their income and expenses may not have altered since they first obtained their current loan.

There are several factors that contribute to this outcome:

1. Living expense calculations.

Lenders have put this front and centre of their assessments after pressure from ASIC and the banking regulator APRA.  Not content to use benchmark living expenses for applicants, lenders are now scrutinising bank statements to get a full picture of applicant's spending habits. They will apply the higher of the benchmark figure or the applicant’s actual living costs to their affordability calculations.  Living expense benchmarks are also more sophisticated, with higher figures applied in certain postcodes and at higher income levels. When you consider that the minimum living expense benchmarks have been substantially increased, it’s easy to understand why lenders are calculating that borrowers have less disposable income to repay their loans than ever before.

2. Income assessments

To add to the conservative nature of lenders’ assessments, they’re also tightening up on what income they will allow in their income assessments.  One example is rental income, which is now discounted, so full gross rental income can’t be included in their calculations.  There is also less flexibility in how self-employed income is assessed. And credit teams are less generous than they previously were with items such as depreciation allowances, which is impacting assessed business performance.

3. Interest rate assessments

The other major change is how loan repayments are assessed.  Previously, a small or no buffer was added on to the interest rate to calculate projected loan repayments.  The buffer is used to mitigate potential rate increases. It is a sensible tool used to protect the applicant.  Previously though, a typical buffer would be 1.5% above the actual rate being charged.  Now the rate can be over 7%, which is nearly double the rate of some low rate variable rate home loans.  Buffer rates have also been extended to other debts, not just the loan being applied for.  So the more loans an applicant has, the more impact this feature has on their application.

The implementation of these policies has significantly impacted borrowers with investment portfolios, as not only is their rental income figure discounted for the assessment, the repayments on their loans are being assessed at inflated levels giving their affordability assessments a double hit.

How can you escape this?

If you find yourself a ‘mortgage prisoner’, there are three main avenues you could consider to ‘escape’ your current lender

1.  Switch from an interest only repayment structure to principal and interest repayments.  By doing so, you will qualify for a lower interest rate and the lender can calculate your repayments over the loan term, not the loan term minus your interest only period. Yes, your repayments will be higher, but the ultimate cost of the loan, the interest payable will be lower.

2. Renew your loan term to the maximum available, usually 30 years.  This will allow the lender to calculate your repayments over a longer period than your current loan, lowering the required monthly repayments and increasing your borrowing capacity.  Be very careful with this strategy though, because if you simply pay the minimum repayments, you will end up paying significantly more interest over the life of the loan. To combat that outcome, a good strategy is to maintain the same repayments as you are currently paying and you will significantly reduce your debt and the time it takes to repay the loan.

3. If all else fails and you have the capacity to do so, reduce your loan amount.  For example, if you have savings, use them to reduce the loan you are applying for, as a slightly smaller loan may get you to an affordable level under the lenders’ policies.

Seek expert help

Using all or a combination of these options may be the strategy you need. This is where a good advisor is invaluable as they will have access to suitable products, varied options and the experience to identify which one may suit your needs.

If you can’t get your refinance application over the line, contact the team at Switzer Home Loans, or your finance advisor for the most suitable solution. You can escape this mortgage prison if you find the person with the key!

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Home loans for self employed – what lenders look for and why

Tuesday, July 31, 2018

Self-employed business structures come in many forms ranging from a simple sole trader to complex group structures involving several individuals, companies and trusts.  So how does that impact the way in which lenders treat them? 

Essentially, home loan providers assess self-employed applicants in the same way that they assess PAYG applicants.  The applicant must demonstrate they can repay the loan without suffering financial stress and they must be able to provide suitable security for the loan.  In practice though, assessment of self-employed applicants is more complex and that adds another layer of risk for the lender.  

Consequently, lenders need to have a higher level of expertise and they will seek more detailed information in comparison to a PAYG applicant.  Applicants therefore need to choose an experienced finance expert to ensure they are provided with the most suitable loan for their needs and be aware of the following issues.

1. Income Assessment

This is the toughest bridge for self-employed applicants to cross.  Lenders naturally prefer applicants with well-established businesses with a track record of stability and profitability.  They do not rely on cash flow forecasting, they rely solely on historical figures to measure the performance of the business.  In order to do that, as a minimum, they will request the two most recent individual tax returns from the applicants along with the two most recent returns for their business entities. 

The lender will then use these to analyse the income, profit and cash flow trends for the business.  After all, they are trying to establish that the applicant can repay the loan they have requested.  This makes obtaining a loan difficult for new business owners and those who have undergone a restructure.

Lenders review the structure of an applicant’s entities carefully and need to understand how the applicant’s income is distributed between them, how they are linked and the liabilities of each. 

How the applicant trades and the entity type (company, sole trader, trust etc) is critical to the assessment process.  For example, liabilities such as vehicle leases are treated differently for sole traders when compared to those who trade via a company structure.  So it is important for the lender to understand how the business operates. 

Self- employed applicants therefore need to clearly articulate the trading structure and income flows in the business (a family tree is useful if many entities are involved) and be prepared to provide more financial information to the lender.  If possible, I recommend that the applicant connect the credit assessor with their accountant to facilitate a timely and accurate exchange of information.

2. Loan Security.

Home loans and residential investment loans are secured by residential property.  This applies to both PAYG applicants and self-employed applicants.  Self- employed clients however are more likely to be requested to provide guarantees to add strength to the lenders security position.  

Guarantees will not always be required and their use depends upon the business structure but it is something that self-employed applicants need to be prepared for. When lending to a company, lenders are likely to tie the directors of the company to the loan via personal guarantees. 

The lenders rationale is if they are taking the risk of lending to the company, they expect the company directors to share the risk and take responsibility for the performance of the business.  Guarantees will also be used when a loan is requested in the name of company directors but the application relies upon income from their trading company.  In this case, the lender will use a guarantee from the company to tie the company income to the loan for their assessment.   By using guarantees, lenders minimise their risk by linking all the key entities in the business to the loan security.

3. Credit Reports.

The lender will consider the personal credit history of their applicants but they will also obtain a report on each of their business entities .  They will then explore the credit worthiness of those entities and review the number, type and amounts of credit enquiries listed on the report. 

The credit reports will also give lenders guidance on the structure of the business and will influence what additional information they seek.  That can lead to requests for additional information such as financial reports for all the entities in the group or accountants letters confirming the viability of each entity.

4. Loan purpose

Home Loan lenders do not provide funding for working capital use in business, funding for business expansion or finance to meet tax liabilities.   They will therefore look very carefully at the loan purpose and in particular, any request for a ‘cash out’ component in the application. 

That is, any funds not required for a purchase or loan refinance.  Acceptable cash out purposes include the purchase of a vehicle for private use, property renovations, etc. but it is likely that the applicant will need to provide some form of documentation to confirm the use.

So if you’re self-employed and contemplating a home or investment loan prepare for a little extra paperwork and a more rigorous assessment process.  A little preparation and understanding of what to expect will eliminate much of the stress but to achieve the best outcome involve your accountant and seek out a lender such as Switzer Home Loans who is has plenty of experience dealing with self- employed applicants. 

 

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5 reasons to review your home loan

Tuesday, June 19, 2018

This is a much covered topic, but given the slowing property market in many areas, the number of new loans will decline. So lenders will sharpen their pencils to retain their existing business and increase their share of the refinance market.

So, as we are constantly urging, take the time to give your loans a health check.  If you don’t have the resources or expertise to do so, contact your finance professional or the team at Switzer Home Loans and ask them to do it for you. It could the best phone call you ever make.

Here are 5 good reasons why:

1. To Save Money

This is a no brainer.  If you are being charged 1.00% more on your loan than you should be, for every $100,000 of debt you have, you are paying $1,000 per year too much.  On a $500,000 loan, that’s $5,000 per annum coming out of your pocket for no advantage.  Of course, that is a simple example but the message is clear, if you are not checking your loan, you may be costing yourself thousands every year for no good reason.

A word of warning though, if you do want to switch loans for a better rate, check what it will cost you in discharge costs for the existing loan and establishment fees for the new loan.  Also check if there are ongoing fees on the new loan.  These fees and charges can have a big impact on the viability of switching loans so make sure the interest savings you are gaining are not offset by the costs of switching. 

2. Make sure the loan can be managed to suit your needs

Sharp interest rates are only one part of a good home loan.  Having a suitable structure is just as important.  Is the repayment type (Interest only v Principal and Interest) suitable, are the fees and charges excessive and is the interest rate structure right for you?  Other factors that make a difference are simple things like making fortnightly repayments instead of monthly repayments, having access to an offset facility and separating your loan into two or more splits, or portions to reflect the purpose of the funds you obtained with the loan.  For example, if you borrowed against your home for investment purposes, it is much easier to manage the investment accounting and tax if the investment loan is separated from your home loan debt.  A decent mortgage professional can identify a suitable structure for you very quickly, so a short conversation may make your loan easy to manage. 

3. Do you have the most suitable repayment structure? 

Most borrowers are aware that Interest Only repayments are more expensive than Principal and Interest, and that the banking watchdog, APRA has forced a big change in the accessibility and cost of Interest Only loans.

Lenders now encourage borrowers to make Principal and Interest repayments by offering rate discounts for that repayment structure but they will still provide Interest Only loans where it is deemed suitable for the borrower. Suitable purposes include investment borrowings, if the client is having a short term reduced income (eg maternity leave) or they are planning to sell an asset and pay the loan off in the short term.  If the repayment structure is unsuitable, your strategy objectives won’t be met, your loan will be more costly in the long term and as many of those coming off Interest Only repayments at the moment will attest, a poorly structured loan can place you under great financial stress. 

4. Consider Fixed Rate options 

Interest rates are low now but it has not always been the case and they will rise again at some stage, so if rate rises will place you under financial stress, a fixed rate loan may give you the insurance you need for your cash flow.  

Fixed rate loans are less flexible in terms of repayments and usually exclude useful features such as offset accounts. Penalties may also apply if you make lump sum payments or pay the loan out during a fixed rate term.  Care therefore needs to be taken to ensure a fixed rate loan is suitable, but a popular strategy to counter that is to split your loan and have a fixed rate portion and a variable rate portion.  That way you can have the best of both worlds.  Security and an element of flexibility. 

5. It’s easier than you think 

The first step is to call your existing lender and ask them to review your circumstances to ensure you are getting the best from your loan.  Do your homework first and find out what rates are available in the market and compare them to what you are being offered. If your rate is not competitive, ask your lender to provide you with some relief.  If they can’t, or won’t, it may be time to look around. Refinancing does not take too much time or effort, it just takes a little organisation and paperwork, but not as much as you would think.    

It’s becoming an Australian past time  to complain about our banks, and the media are having a field day with the Royal Commission. But perhaps we should be taking some responsibility for our own positions.  The best way to keep your lender accountable and to make sure you are being looked after is to regularly review our own individual arrangements with them. 

If these reasons get you thinking, grab the phone and speak with a mortgage professional and use their experience to give you the right loan structure and pricing for your needs.  Five minutes could save you a small fortune.

 

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The Royal Commission – A loan writer’s perspective

Tuesday, May 15, 2018

We’ve all heard the admissions of misconduct from major institutions at the Royal Commission, with their statements a sad reflection on the conduct and governance of the banks.  Whilst these revelations have given the media their headlines, the reality is that the vast majority of lenders act with their customer's best interests at the forefront of their thinking. 

Furthermore, it has been interesting to note there has been little or no discussion of the fact that over recent years, regulators have been taking steps to protect the interests of borrowers and address poor lending practices.  As a lender dealing with loan applications on a daily basis, I have seen a quantum shift in policies and compliance as both regulators and lenders move to minimise risk to themselves and their clients as the nation’s home loan debt grows. 

These changes have led to some long overdue reforms and there is no doubt that further changes will be recommended by the commissioner Ken Hayne. But in the interim, borrowers can have confidence in current lending practices and the protections already in place.

Broadly speaking, lending policy and compliance have seen the most change and it’s worth looking at each in isolation and how they impact borrowers.

Lending policies are set by the respective lenders but heavily influenced by regulators who use a number of methods to makes sure that Banks that meet their expectations.  The recent imposition of caps on Interest Only lending being a clear example.  In simple terms lending policies now more than ever ensure the loan provided is both suitable and affordable for the applicants with the following items illustrating that point.

Loan repayment affordability calculations

Lenders now assess loan repayments at an interest rate of around 7.5% to minimise the risk imposed by potential rate rises.   With most new home loans attracting an interest rate of under 4.00%, rates would have to almost double to reach the level that repayment affordability is being assessed at.  Any existing loans are generally also assessed at that level of interest rate for the same reason.  By introducing these measures, lenders are mitigating the risk posed to clients by rising rates.

Living Expense calculations

This was the topic of much discussion at the Royal Commission but it has already been a point of action for the regulators and lenders for a number of years.  The focus has led to lenders applying increasingly tougher assessments on living expense declarations and the application of minimum benchmarks in their assessments with the benchmarks being more sophisticated and significantly higher than in the past.  The outcome of course has been to lower the borrowing capacity of many applicants shielding them from potential financial stress. 

Compliance is driven by legislation and policed by ASIC.  There has been a huge leap in the documentation required by lenders who have reacted by establishing or expanding departments to deal with this specific area.  The purpose of the increased compliance requirements is to ensure that borrowers are clear on the details of the facility being provided, that the lender is doing their due diligence on the information provided and all fees and costs are being disclosed.  It is also designed to minimise the potential for fraud.  Again, this can be demonstrated by using two simple examples.

Statements

Bank statements are a document increasingly sought by lenders to confirm everything from income and living expenses on savings statements to limits, rates, terms and repayment types on loan statements.  By verifying the information from formal documents such as statements, fraud can be minimised and the assessment completed using figures that reflect the applicant’s true position. 

Documentation regarding assessment and decision rationale

Lenders are now required to fully document the loan process from start to finish and provide their applicants with a number of compliance documents during that process.  Not only must they be able to justify their recommendations based on the information obtained and make reasonable enquiries into the accuracy of the information but they also must document that.  Above all, they must be able to demonstrate that the loan recommended will not place the borrower under financial stress and in legislative language that the loan ‘is not unsuitable’ for the applicant.  Good lenders have always done that but the legislative requirements in this area now mean that all lenders are required to provide rational explanation for their recommendations and document it.

So whilst the Royal Commission has exposed some disgraceful conduct that cannot be excused, steps have already been undertaken to minimise those occurrences and lending policies and requirements are constantly under review to ensure better borrower outcomes are ensured.   So if you are seeking a home loan, take time to block out the hysteria surrounding the Royal Commission and take comfort in the fact that you are being afforded more protection than ever in relation to your lenders recommendations.

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7 tips to pay your loan off sooner

Tuesday, April 10, 2018

Debt is a great tool for growing your wealth when used correctly but reducing your Home Loan quickly should be the objective of most borrowers.  A lower debt reduces your risk if interest rates rise or your income drops and of course the additional equity in your home will increase your borrowing capacity for the next purchase or if you wish to use it for investment purposes.  To get that Home Loan debt falling, here are seven tips that can make a difference. 

  1. The first tip is pretty simple.  Just make more than the minimum repayment.  Most lenders now assess your capacity to repay your loan at a rate of around 7.5%.  They do that to ensure you will not be placed under stress if rates rise, but this indicates you could be paying significantly more than what the loan repayments actually are.  For the sake of example, let’s consider the impact on a $500,000 Home Loan at 3.75% over 30 years. Making repayments at the banks ‘stress rate’ of 7.50% will cut the $500,000 Home Loan from 30 years to just over 15 years and save over $170,000 in interest payments.  That’s $170,000 in your pocket.
  2. The second tip is a commonly used one and it has a negligible impact on your day to day cash flow. Halve you monthly repayment and make fortnightly repayments instead of monthly.  By doing so you will make 26 payments of half the monthly amount, or 13 full monthly payments; 1 more than if you had stuck with the minimum 12 monthly repayments. It also suits the pay cycle of most borrowers so it makes sense from a cash flow point of view too. Going back to our example, that change will save you 4 years on the loan term and over $50,000 in interest payments.
  3. Tip number 3.  Have a loan with Principal and Interest repayments and not Interest Only.  The Banks are making this decision easy now by charging a premium for Interest Only loans but too many people use Interest Only loans inappropriately and their debt never reduces.  That is fine in some specific circumstances but for most, it just means their debt takes longer to repay and they pay significantly more in Interest repayments.
  4. If you have surplus cash at any time, put it into your Home Loan.  Most Home Loans have a redraw facility that will let you draw on those extra repayments if needed so you are not locking it away.  Going back to our $500,000 loan example, if you make a $10,000 extra repayment after year 1 on the loan, that deposit will save you almost $20,000 in interest and cut a year from the loan term.
  5. Tip 5 is an easy one.  Loan repayments are made in arrears so the first repayment is due 1 month after you settle the new loan.  If you make a full repayment on day 1, it will save you almost $5,000 over the life of the loan in interest and reduce the loan term by 3 months.  You will always be ahead in your repayments and that can be handy if you need extra cash or some repayment relief at any time.
  6. Tip 6 should be an annual event.  Review your Home Loan and make sure it is suitable for your needs and that your rate is competitive.  If in doubt, ask your lender to do it for you.  Your objective is to keep your loan costs to a minimum by getting a competitive rate and the right loan structure is in place.  New loan products are continually being developed and everyone’s circumstances change from time to time so a quick check is just common sense. 
  7. The final tip is to refinance if your current loan is poorly structured or too expensive and your current lender will not assist.  You don’t have to have the cheapest loan in the market but the rate needs to be competitive or you are simply throwing money away. Using our example again, a reduction in rate from 4.25% to 3.75% would see your repayments drop by $138 per month if you refinanced at year 5 of a 30 year loan.  Be careful though; there are two important things to remember when refinancing

o   Make sure switching does not cost you more in fees than you are saving in interest

o   Keep making the same payments that you were making on the old loan otherwise it will still take you just as long to repay the new loan.

Actioning only one of these strategies could cut years from your home loan and save you thousands; just imagine what applying several of them will do.  

If you would like to see how changing your rate or repayment structure would affect your loan, visit our website www.switzerhomeloans.com.au and experiment with the calculators on our advice page.  If you would like advice call your finance expert or contact the team at Switzer Home Loans on 1300 664 339.

 

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New Year financial resolution No 1: Review my home loan

Tuesday, February 06, 2018

The holiday season is now behind us and most of our New Year resolutions have been consigned to the rubbish bin already. 

These resolutions usually revolve around our personal habits: I’m going to lose weight, drink less, stop smoking etc. But how many of us have a look at our finances and in particular, our Home Loans?  Not many!!  So here’s my recommendation for the New Year.  Resolve to undertake a review of your Home Loan and do it every year. 

And here’s the best part, if you use a professional, they will do most of the work for you.  It’s quick and maybe one of the easiest resolutions you will ever have to fulfil.  Here is a quick look at why and how to review your home loan.

Why?

Everyone’s circumstances change from time to time and the lending landscape also changes so it’s inevitable that your home loan at some stage will become too expensive and/or structured in a way that is unsuitable for you. 

 

  • Rates and costs.  You should review your home loan rate at least every two years (every year is better) as products evolve and lenders alter their rate structures from time to time and you could be eligible for better interest rates either with your current lender or failing that, by refinancing to a new lender.   I don’t recommend that you go chasing small improvements in rate every year but if you can save 0.50% on your interest rate, that can add up to tens of thousands over the life of your loan.  The other thing to check is your fee structure.  The annual fee of $395 that many loans attract adds up to over $11,000 for a 30 year loan term.  The Home loan market is a competitive place so you need to make sure you are getting value for that fee.  If not, take action.
  • Interest Rate type.  If things are tight with your cash flow, it may be time to fix the rate on your loan to make sure you are not left in trouble if rates rise.   See what the market is offering and compare that to your loan and the repayments you currently make.  A fixed rate will not suit everyone but it may save you a lot of stress if rates move upwards.
  • Repayment Type.   Are you suited best by Principal and Interest repayments or Interest Only repayments?   There are many factors that influence the answer to that question but what is certain is that lenders are providing discounts for those who are on Principal and Interest repayments, especially if the loan is a Home Loan.   The difference in rate can be over 0.50% so if your loan has Interest Only repayments and you don’t need that structure, a switch will save you heaps.
  • Loan features.  Older loans do not have many of the current loan features such as offset accounts, redraw and the capacity to manage the loan via the internet.   Again, you could save significant amounts of your hard earned money by using these features so ask the question of your lender and find out if your loan features can help you.

The loan interest rate is not the only factor when assessing if your loan is the right one for you but it is a great indicator, so a simple check is well worthwhile. 

How?

OK, so it’s worth having a review of your loan, especially if it hasn’t been done for some time.  But how do you do it and how difficult is it?  Basically you have two ways of going about it.

  1. Make a lot of phone calls to various lenders and find out what they can offer you (including your current lender)  or,
  2. Call a finance professional like a loan broker or the team at Switzer Home Loans and get some expert advice.  At Switzer we do this every day and can usually let you know if your loan is right for you with a 10 minute phone conversation.

A 10 minute phone call has to be the easiest New Year resolution you will ever have so if it isn’t on your current list of resolutions, do it and start this year.

https://www.switzerhomeloans.com.au/

Call us on: 1300 664 339

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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.

Objectives  

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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MORE ARTICLES

Are you too old for a home loan?

Lenders Mortgage Insurance: What you need to know

Investment properties: 4 things every lender looks for

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

The perks and pitfalls of interest only loans

Should you fix your loan?

What your lender really thinks about negative gearing

7 reasons to refinance and save thousands

4 tips to finding the right home loan

4 tips to finding the right home loan

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