By now you may have heard some of the hype surrounding Interest Only loans, and the banks changing policy in regard to these types of loans. Outside of the banking industry, it may seem like the banks changing their minds or trying to make things more difficult for home owners and investors. The truth of the matter is however, that the banks of other lending institutions - such as credit unions, building societies and friendly unions – have been instructed by APRA (the federal government body that oversees the finance industry) to lower their Interest Only loans to under 30% of their lending business. At present, the industry average is 38%, with some financial institutions higher than others.

In a letter sent on 31/3/2017 to Financial Institutions who fell under the jurisdiction of APRA , banks were told to act immediately to enact the new guidelines. The recent measures regarding Interest Only loans have been in response to this letter.

Recent Changes by the Big Four

NAB – Maximum LVR for Construction loans to be 90% (construction loans are interest only during the construction period)

EFFECTIVE 10th June 2017

CBA - Decrease discounts offered to customers for both new Owner Occupied and new Investment loans that are Interest Only

- Maximum LVR for Owner Occupied new Interest Only loans down from 95% to 80%

- Maximum LVR for Investment Interest Only loans down from 90% to 80%

EFFECTIVE 10th June 2017

ANZ - Maximum LVR 80% for both Owner Occupied and Investment Interest Only loans

EFFECTIVE 29th May 2017

Westpac - Maximum LVR 90% capped (with LMI) for Owner Occupied. Both new loans and existing loan top ups.

EFFECTIVE 15th May 2017

Some others have increased rates considerably, and slashed LVR for investors loans as low as 50%!

Why Does It Matter How Many Interest Only Loans The Banks Hold?

The Australian Banking and Finance industry has always been highly regulated, and is one of the reasons that we have such a stable banking and finance sector.

People may ask however “Why do APRA care is I want to pay Interest Only on my home or investment loan?”

This is a fair question, and it is certainly a blanket approach on behalf of APRA. The main concern however, is that a high percentage of Interest Only loans held by the bank, especially at a high LVR, may indicate that banks are adopting unsafe lending practices, which may result in customers being negatively impacted and placed in financial difficulty should interest rates rise, or when the interest only payments convert to a Principal and Interest payment at the end of the Interest Only loan. This is referred to as “Payment Shock”.

Another concern is that if housing prices fall, interest only borrowers may find themselves owing more than their property is worth, having only made interest payments, therefore not reducing the actual size of the loan.

This could mean that at the end of a 5 year Interest Only term, if the property falls in value by a conservative 3% per annum, at the end of the interest only term, you end up owing more than the property is worth.

Fluctuations in the market do happen. So the new measures being taken by APRA are there to protect consumers, and are not something to be worried about. The new guidelines to specify “new business” so in most instances will not affect loans already in place. Some banks will apply the new rules to those seeking increases to existing loans however.

As you know, it is our role to make sure that you have the most suitable loan for your situation. We are happy to discuss any concerns you may have in more detail. As always, please feel free to give me a call.

Some relevant stories you might like to read:

Until next time,

Gus

0449 200 111

So, there has been a lot of back and forth in our inbox over the last few days, with lots of people sending us information on the 2017 Budget as announced by the Treasurer Scott Morrison last Monday night.

BUT WHAT DOES IT ALL MEAN???

The big question on everyone’s lips is of course……

WILL THE BIG BANKS PASS ON THE COSTS OF THE NEW BANK LEVY?

First and foremost, it is important to recognise that the new tax is only applicable to the Big Banks. The banks are held accountable by different governing bodies. These include the ACCC (Australian Competition and Consumer Commission) and APRA (Australian Prudential Regulation Authority). Like most industries, the banks cannot just make up their own rules, and it is anticipated that both governing bodies will be keeping a close eye on the big banks to make sure any increases in rates and fees are justifiable.

Our advice, however, is to always be mindful of the fees and charges you are being charged by your bank. Banks do enjoy a great deal of consumer loyalty, and it is only the actions of customers that will make them work for your loyalty. Always consider what you are paying for and whether you can get better value elsewhere.

Remember, this levy is only applicable to the Majors. There are lots of different options if you feel that you are not getting a fair deal.

Opinions below:

Let’s also remember that the big banks have consistently been announcing increasing annual NPAT (Net Profit After Tax), and in 2015 and 2016, profits reached figures of between $6,000,000,000 and $10,000,000,000. Half yearly reporting has indicated that this year will be no different. The following table puts the annual levy per bank into perspective:

PROPOSED ANNUAL 5,000,000,000 10,000,000,000

NET PROFIT AFTER TAX

PROPOSED ANNUAL 300,000,000 300,000,000

BANK LEVY

PROPOSED PERCENTAGE 6% 3%

OF ANNUAL NPAT

PROPOSED PERCENTAGE 94% 97%

OF PROFIT RETAINED BY BANKS

PROPOSED NET PROFIT AFTER 4,700,000,000 9,700,000,000

TAX POST LEVY

Apart from the proposed bank levy, naturally everybody wants to know whats in it for them. We have summarised the main points below with links to more information if you are interested.

SMALL BUSINESS ASSET WRITE OFF CONTINUES

THE GOOD:

Extension of the $20,000 instant asset tax write-off for another year, with revenue ceiling up from $2,000,000 to $10,000,000Commitment to drive company tax cuts for ALL Australian businesses$300M commitment to State Governments to reduce small business compliance costs

THE BAD:

Costs to business for employing foreign workersPossible flow on costs associated with targeting “black economy” through courier and cleaning industries

Read more in the following links:

FOR ALL AUSTRALIANS……..

FIRST HOME BUYERS

BENEFIT

THE GOOD:

Increase in spending for childcare over 4 yearsNo annual cap on Child Care Subsidy for parents earning up to $185,710Funding for all Australian children to gain access to 15 hours per week of preschool programsAdditional $18.6 billion allocated to schools over the next 10 yearsTax benefits for Retired Downsizers and First Home OwnersLevy on foreign investors retaining vacant propertiesNew funds to support training opportunitiesIncreased Health funding in several areas, from Public Hospitals to childhood cancer research and Mental health servicesNew infrastructure funding – including $5.3 billion for Badgerys Creek airport, and $3.6 billion for Western Sydney infrastructure to support population growth

THE BAD:

University fees to rise by 1.8 % next year, and 7.5 per cent by 2022Increased Medicare levy – from 2% to 2.5%Changes to Depreciation deductions for investors

THE “MAKE-UP YOUR OWN MIND….”

Drug testing for welfare recipients (small trial)Increased tobacco levy on rolling tobaccoNew levy on big banks to raise $6.2 billion over 4 years

Read more in the following links:

First Home Owners Grant – Is there a real benefit?

With property prices in Sydney seeming to be on an ever-increasing trajectory, it is becoming more and more difficult for those buying their first home to fit into the parameters set by the NSW government. Property prices in Sydney have hit a median of $1,100,000. This creates another challenge for First Home Buyers (FHBs) with a cap of $750,000 to receive the grant. Buyers are finding very little available – especially to suit a growing family – under this cap.

There is also a cap of $550,000 to receive a full stamp duty concession!

The second major hurdle for FHBs is the Mortgage Insurance premium. Mortgage Insurance is insurance taken out by your financial institution to cover them for any defaults during the term of your loan with them. This premium does not cover the borrower at all.

The premium payable is a calculation based on the purchase price, and the level of deposit held (or Loan to Value Ratio - LVR). However, with housing prices now so high, the mortgage insurance premium is now swallowing up almost all of the deposit accumulated by First Home Buyers. This along with banks tightening their policy to manage risk and to comply with AAPR requirements, makes it ever more difficult for a FHB to borrow.

A choice available is for borrowers to add the premium onto their loan, or capitalise it.

Currently most banks with an appetite for FHB lending have reduced the amount they will lend to 95% LVR, including the capitalisation of the mortgage insurance premium. LVR has been on a decline since the days of 100% lending. Essentially, this means that FHBs will have to save up to 12% on a $749,000 property in order to fit most bank policy.

As a result, we are currently seeing more and more young people looking to their parents for assistance to get into the market. This can be achieved by leveraging a parent’s family home, with a limited guarantee, or a family pledge.

We have also assisted several young people to get into the market - with no deposit - by initially buying a property with their parents on title and foregoing the First Home Buyers Grant completely!

As you can see, lending to FHBs with a minimal deposit has become a very complicated space.

We are always available to work through the details with you, so if you or someone you know is a First Home Buyer looking to get into the market, give us a call today to discuss your scenario in detail.

There is a full stamp duty concession for land to $350,000 & pro-rata $351,000 - $450,000.

The $10,000 grant is available for purchases under $750,000 for a new dwelling.

http://www.osr.nsw.gov.au/grants/fhnh

http://www.osr.nsw.gov.au/grants/fhog

Today the Reserve Bank met and left the cash rate on hold at 1.75%. The instability and uncertainty post the federal election may have had had some direct correlation on this decision.

Currently Interest Rates are below 4%, so now is a great time to review your home loan and ensure you are not paying too much.