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Getting a CBA home loan just got even harder

By |2017-09-15T10:49:10+10:00June 25th, 2017|Finance News, Investors & Owner Occupied|

Australians will find it harder to take out new home loans with the Commonwealth Bank after the lender tightened repayment tests for borrowers.

When customers with an existing CBA home loan apply for a new home loan, the bank will assess their ability to continue to repay the existing home loan in the same way they assess their ability to pay a new home loan.

That is, the bank will apply an interest rate buffer of either 7.25% or the current product interest rate plus 2.25%, whichever is higher.

Customers with an existing home loan with another lender who apply for a Commonwealth Bank loan must demonstrate they can afford repayments on their existing loan plus 30%.

Westpac raises interest-only rates as mortgage stress heightens

By |2017-09-15T10:47:37+10:00June 25th, 2017|Finance News, Investors & Owner Occupied|

Westpac is the latest lender to put up interest rates, increasing pressure on interest-only borrowers.

The bank yesterday announced it would increase rates on interest-only variable home loans by 34 basis points to 5.83%, and on interest-only investor loans by 34 basis points to 6.30%.

In a move designed to lure customers into switching to a paying principal and interest, the bank reduced its variable rate by eight basis points to 5.24%.

“We understand the significance of interest rate changes to our home loan customers, so we try to balance the needs of both owner occupiers and investors in making these decisions,” said chief executive George Frazis.

The bank said there would be no switching for customers.

Record numbers of Australians are experiencing mortgage stress, according to research released by Digital Finance Analytics in May.

A quarter of home owners were feeling the pinch when it came to making home loan repayments, and more than more than 50,000 Australian households were at risk of defaulting on their mortgages in the year to May 2018.

Latest research to come from S&P Global Ratings blames interest rate rises for increased mortgage stress.

Their latest report shows a jump in the number of home owners now more than 30 days in arrears. Report shows an increase from 1.16% in March to 1.21% in April with Queensland recording the greatest growth in 30-day home arrears.



Make extra repayments
If you can, avoid interest-only loans. The more of the principal you pay, the more you’ll save on interest and the faster you’ll pay off your mortgage. Adding an extra $100 a month to your home loan amounts to an extra $1200 a year which, if you keep it up, could result in a mortgage paid off years in advance.

Reduce your loan term
You might believe that a long-term loan is helping you financially by allowing you to make smaller repayments every month. But while you’re saving more on repayments, you’re paying more in interest over the long term. Consider shortening the term of your loan, and try to commit more of your savings to the mortgage.

Save a bigger deposit
It’s a tough ask with property prices in the capitals, but a 20% or more deposit is ideal. The more money you borrow, the more you end up paying in interest over the life of your loan. Do some research on the government subsidies available in your state before you commit to buy.

Use an offset account
An offset account is a savings account linked to your home loan, which can be used to offset the balance of your mortgage. Interest earned by the offset account goes directly towards paying down your home loan interest, which means you won’t have to pay tax on your savings. It is a great way of streamlining the repayment process.

Fix your loan
If you’re worried that interest rates are going to skyrocket in the near future, consider fixing your loan. While you will have some security against interest rate rises, fixed loans may not allow you to make extra repayments, so you should evaluate whether it will be worth it. Instead, you could split your loan to be 50% fixed and 50% variable, which can help you have the best of both worlds.

Not in their interest: The home loan borrowers that have been left out to dry

By |2017-06-25T07:04:20+10:00June 25th, 2017|Finance News, Investors & Owner Occupied|

There is a hidden and worrying risk lurking for a particular set of mortgage borrowers, whose level of financial stress is about to get a whole lot worse.

It’s those home owners with interest-only loans that are now increasingly under the pump – with National Australia Bank the latest of the big four to announce big hikes in rates on these types of loans.

While banks, the media and the government regularly characterise those that have interest-only loans as wealthy property investors, the fact is that there are many owner-occupiers that have used this method to finance the family home.

Ironically, regulators have pushed the banks to reduce interest-only lending to improve the overall risk of consumers’ debt to the financial system. But for those investors with interest-only loans, the chances of being unable to service them creates a new and unintended risk.

These hikes have not attracted the ire of the government, which has put the banks on notice that any move to increase mortgage rates will be intensely scrutinised. Again, because it is not seen as hitting the political heartland of the average voter with a mortgage to finance their own home.

But these borrowers are particularly vulnerable because many of them took out their interest-only loans because they didn’t have enough cash flow to repay interest and principal.

The banks have been under regulatory pressure to herd these interest-only borrowers into interest and principal loans – offering little or no fees to change over to principals, and interest rates that are now around 0.6 per cent lower.

The catch though is that monthly repayments will be higher in most cases because the borrower also needs to repay principal.

Those that can afford to switch will do so, but there will be many that will need to remain on interest-only and have to wear the rate increase.

For owner-occupiers who have an interest and principal loan, interest rates have not fallen by much in this latest round of adjustments.

National Australia Bank and Westpac customers will see their rate fall by 0.08 per cent while ANZ customers will benefit to the tune of 0.05 per cent.

It is better than nothing, but won’t have a really meaningful impact to the weekly household budget.

For banks, the positive effect of the far bigger increases on interest-only loans will significantly outweigh the negative impact of the small fall in rates on interest and principal loans.

Indeed Westpac – which has a higher proportion of interest-only loans than the others – could boost its earnings by 3.5 per cent, according to research from Macquarie. This is calculated on the basis of all other things being equal.

But Macquarie takes the view that this earnings benefit will be eroded to some degree by some customers switching to interest and principal loans – the caveat being if they can afford it.

Martin North from industry consultant Digital Finance Analytics believes that some investor/borrowers that have interest-only loans would have less incentive to switch because the tax effectiveness of this type of borrowing could be negatively affected.

Young families, investors most at risk

The bottom line is that regardless of the kind of borrower, the overall effect of this latest round of interest rate resets will be to improve bank earnings, because in aggregate borrowers will pay more.

North said the two segments most at risk for mortgage stress are younger families that are more typically first home owners that pushed their finances to get into the property market over the past couple of years and at the other end of the spectrum a more affluent group that took advantage of the rising property market and low interest rates to buy one or more investment properties.

Both North and analysts at Macquarie warn that the flow-on effects from increased rate rises even on just interest -only loans, and the potential for some to switch to interest and principal, could be damaging for the wider economy.

“The increase to IO (interest-only) loans combined with the increased likelihood of customers switching to P&I (principal and interest), in our view, will ultimately lead to further reductions in disposable incomes and put even greater pressure on highly indebted households. We estimate that a 50 basis point increase in interest rates has a 4 to 10 per cent impact on disposable income of highly indebted households.

“While it would rationally make sense for many households (particularly for owner-occupiers) to switch to P&I, …. many of these households would not have capacity to do this,’ Macquarie said in a note to clients this week.

‘Deadly combination’

In analysing the reasons for an increased level of stressed households, North noted that “the main drivers are rising mortgage rates and living costs whilst real incomes continue to fall and underemployment is on the rise. This is a deadly combination and is touching households across the country, not just in the mortgage belts.’

Against this, the incentive for banks to massage rates higher is greater than ever, given they have been hit by the Federal Government’s bank levy and this week by an additional tax from the South Australian government that many fear could be adopted by other states down the track.

On the other side of the household ledger, the lack of any real growth in wages is only exacerbating the squeeze.

A report from Cit this week that analyses the industry segments in which jobs are growing provides insight into the problem.

“Not only does Australia have an underemployment problem that has been highlighted by the monthly labour force series, but the quarterly data shows that the economy is creating mostly jobs that are below average in terms of earnings,” it said.