Royal Commission and What it Means for Borrowers
If they haven’t already, most lenders are preparing a major overhaul of the way they assess, and check information provided on loan applications. This includes a “deep-dive analyses” of applicants’ income and with the introduction of sophisticated bank statement retrieval records and open banking, the lenders now have much more information around an applicant’s credit to and income to base their decision on.
As Finance Specialists we are being briefed about what is required to be asked at initial interviews, including the financial documentation required and third-party verification that needs to be made in order to complete a full assessment.
From November, lenders will be using new “comprehensive credit reporting” checks by having third-party agencies check on applicants’ credit card, home, personal, or car loan debt.
It will enable the bank to cross-reference details in an application to discover whether other debts have not been listed on loan applications, undisclosed credit limits or amounts owing that are misrepresented.
Some of the toughest scrutiny will be borne by older applicant that are getting close to retirement age and also investors with rental properties.
In addition, mortgage brokers will be required to provide “enhanced verification” about applicants’ income and rental expenses. This will include more details about changes to financial circumstances, including impending retirement.
Something that has been in place for a while now but will remain in the forefront of every lenders mind is how we verify living expenses and any other commitments for a client. More and more lenders are now relying on information captured via bank statement transactions to make these verifications.
As a Finance Specialist, we are required to look out for any signs of financial hardship, including late payments, overdrawn accounts, gambling and pay day lender transactions. Any evidence of any of these can put the applicant into a higher risk category of lending that in some cases will result in a decline.
It is now more important than ever to understand how things will affect your credit rating and what is showing on your credit file. Your banking conduct is now just as important as your credit file, so keeping an eye on your account to ensure that you do not overdraw on your savings accounts and forget to pay the credit card bill could help you get a better loan deal next time you require funding for your next big-ticket purchase.
The good news is that if you get these few things right then it’s all smooth sailing for you. If you would like to get a better understanding of your position right now, feel free to call Warren on 0419 781428 or Tony on 0439 978554.
Alternatively, you can contact us here and we’ll contact you at a time that is convenient for you.
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We financed ‘Queensland House Removers‘ into their new property last year.
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The MBPN online event for February was held on Thursday 15th February. Warren Pavey from Crediflex Caboolture was our sponsor speaker.
Posted by Streten Masons Lawyers on Sunday, 18 February 2018
If it’s your first home, or if it’s time to renovate, refinance or invest, we’re here to help make it happen.
My lender is charging me a higher home loan rate than I see advertised elsewhere. Can I change lenders?
This is exactly the reason why most people change lenders. There may be a penalty clause in your current home loan, meaning you may need to pay a discharge fee, but it could still be in your financial interests to change. When shopping around it is always important to look for the comparison rate of a product. A comparison rate is essentially the true rate, taking into account the fees and charges you will pay on the loan. So even though you see a lower rate it doesn’t mean the repayments are less. AFG brokers are able to take the hassle out of this for you.
I have just come off a ‘honeymoon’ interest rate to a much higher rate. Can I move lenders or am I locked into my mortgage?
You can walk away from most mortgages, although penalty fees sometimes apply. To review your options, why not contact an AFG broker?
If I move my mortgage to a new lender, is there anything stopping that lender from increasing their rates in a few months time?
It depends what kind of product you have. If you’re concerned about rising rates, perhaps you should consider a fixed rate home loan, where repayments are fixed for a period from 1 to 5 years.
Why do some lenders charge more than others for lending the same amount of money?
Banks and other lenders pay different amounts for the money they on-lend to you, they have different overhead structures and different profit expectations. All these factors affect how much they charge to lend people money.
What documentation do I need to refinance?
The last 3 – 6 months of mortgage statements is sufficient to begin this process. An AFG broker can advise on other documentation.
A guide to home loans
Variable rate loans often provide additional flexibility and are the most popular type of home loan in Australia. As the name suggests the interest rate is variable and therefore fluctuates with the Reserve Bank of Australia’s movement and the cost of the financial institution sourcing funds to lend. Variable rates are generally broken into two categories by financial institutions: basic and standard.
As the name suggests the basic variable rate only covers the basic home loan features. On these loans you won’t have access to features such as a redraw facility; however this also means the interest rate is generally slightly lower than other loans.
The standard variable rate is traditionally slightly higher than the basic variable, however along with this you receive extra features such as a redraw facility, repayment frequency flexibility, portability and the option to pay in advance.
Variable loans generally require closer monitoring, especially if you overcapitalise and interest rates rise. It is important to make sure that you budget and plan for the future should interest rates rise, to ensure that you are able to meet the required repayments.
Fixed rate loans generally have all of the features of a standard variable product; however the interest rate is fixed generally from one to five years. Fixed rate products are great products to help maintain the household budget because the repayments will not change during the fixed period.
However, a fixed rate loan means you could end up paying more if interest rates fall. It is possible to exit the loan agreement if you feel it is right to do so, although lenders will generally charge penalty fees to compensate for any loss in profits they may suffer.
Introductory and Honeymoon
Introductory or Honeymoon loans are generally popular for first home buyers, however this doesn’t mean that these are the only people who can access these products. Honeymoon loans give individuals a discounted interest rate for the first six to twelve months depending on the product. After this period expires, the loan generally reverts to the lenders standard variable product.
Although it may be tempting to take out a Honeymoon loan because of it’s reduced interest rate, it is important to watch out for restrictions or exclusions on other aspects of the loan. Many lenders will limit the availability of features (such as redraw facilities, repayments etc.) to offset the lower interest rate. In some cases this can mean less flexibility over the life of the loan.
Interest only loans are particularly popular for investors. The repayments of interest only loans will be lower than an ordinary loan because you only pay the interest charges each month – you aren’t required to pay off the principal.
Some interest only loans are available for owneroccupier clients; however these can be risky because your level of debt will not fall for the life of the loan. Interest only loans should be a short term option (about 5 years at the most). Also, in times when house prices may fall this may mean you have negative equity – you have borrowed more than your house is worth.
Low Doc and No Doc
Low and No Doc loans are increasingly popular in Australia, especially for self employed or contractors. As the name suggests you require less documentation to take out the loan (this is essentially proof of income and other debts etc).
Although it is generally much easier to be found eligible for these loans, it is not always the best way to go. As a result of providing less documentation the bank will generally charge a higher interest rate or additional fees because there is a higher perceived risk with applicants. If possible, in most cases you will be better off with a full doc loan (full documentation – providing the required proof of income etc) because they are a cheaper product in the long run. Although it may be less work to apply for a low or no doc option, the extra work can be worthwhile applying for a full doc loan.
So how do I know which loan to choose?
That is one of the most frequently asked questions and something that needs to be carefully considered before jumping in and signing loan documents. Really, it comes down to what you think is right for you. Speaking to a broker is a really great way to find out what loan is most appropriate for you.
A broker won’t force you to take out a product; they recommend a loan that will suit you based on the information you have given them and take care of all of the paperwork and application requirements. If you specifically would like a certain type of loan a broker is able to compare a wide range of them.
Reviewing your finances?
Some money-saving suggestions
Many people refinance their homes or investment properties to reduce their monthly home loan repayments. What other aspects of your finances can you review to help save money?
1. Review the frequency of your home loan repayments
If you are paid weekly or fortnightly, see if you can change the frequency of your home loan repayments to fit in (this may not be possible on all products). Because the interest on your home loan is calculated daily, making a payment two weeks earlier each month saves you money in the long term, and in the short term helps make ongoing budgeting easier.
2. Consolidate debt
If you’re paying high rates of interest for debt on credit and store cards — each of which will probably have an annual charge — think of consolidating debt in one place. You may very well be able to access a lower overall interest rate, reducing your monthly outgoings. You will avoid paying duplicate fees. Plus, a single monthly debt repayment is easier to manage than having to pay multiple credit card bills.
Cars are often the biggest family expense after home loan repayments. But as family needs change over time, and the price of petrol rises, we can find we have more expensive cars than we need. Could you downsize your car/s, not only reducing monthly repayments, but also potentially saving in maintenance, insurance and fuel costs? Have you thought about buying a scooter for short, local trips? Are you getting the best deal for the money you spend on your car insurance and repairs?
There are three ways you may be able to save money on your insurance premiums. First, shop around when your renewals fall due rather than simply continue with your existing provider.
Also, you may be able to reduce monthly premiums raising the excess payable, or improving the security on your home.
Finally, some insurers provide discounted rates for bundling together policies such as home, contents, car, health or life insurance. Perhaps you could make an overall saving this way?
Organising your insurance through an AFG broker could save you money. For example if you take out Home insurance you could be eligible for a 10% discount for the first year and a bonus 90 free day’s cover. Why not get a complimentary quote? What have you got to lose?
5. Clear out the shed!
Perhaps you have items of value gathering dust in your shed or garage? Whether you hold an old-fashioned garage-sale or go onto e-bay, perhaps now is a good time to get money for the belongings you’re never going to use.