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Guest posted a topic in Pensions & Mortgages: Ask VistaThe Australian Prudential Regulation Authority (APRA) today announced that as of 1 January 2019 it will lift the supervisory cap it placed on interest only lending. So what does this even mean? First things first, who is APRA? APRA is one of the regulators in charge of monitoring financial institutions and basically keeping them in check. You may have noticed them in the spotlight in the Banking Royal Commission and copping a fair amount of criticism for basically coming across as being asleep at the wheel. Given the things that have come to light this is not really surprising. The general impression is they haven't been doing a very good job (i.e. a lot of wet lettuce leaf slapping - a.k.a. "enforceable undertakings"). But they have tried to put some things in place to try help. One of which was recognising we have way too much household debt (one of the highest in the world) and in particular zeroing in on the high proportion of interest only loans and associated questionable lending practices. If you're paying interest only, you're not reducing that debt, and it stays high. You might be reducing debts else where and taking advantage of tax breaks yes, but if things go south and you have to repay the debt, then you might be in a pickle. If lenders give you money you can't actually afford to repay then you might in a pickle. We want to avoid widespread financial pickles. To try reel this in, APRA announced a cap for interest only lending in March 2017 that all authorised deposit-taking institutions (ADI's) had to meet (read: people that lend us money who are regulated - full list here). The cap was 30% of all new lending, along with some extra 'don't be too risky' clauses. Did it work and what does it mean now it's being lifted? Low and behold how do you reduce the number of people applying for interest only loans/staying on them? You make it expensive. Fast forward to today, interest only rates are much higher than principal and interest rates. As result, people either haven't applied, don't meet the servicing criteria, have switched to principal and interest repayments, or have sold. For those that didn't, they've now paid ADI's a pretty penny. But this hasn't been the only thing changing in the industry - lending criteria is tighter than ever, lenders are scrambling in the wake of the Royal Commission, house prices are changing, interest rates are historically low etc. ADI's are now "... significantly below the 30 per cent threshold" so they've decided to lift this cap in the New Year and will review how things are tracking later in 2019. One may hope we would see some reprieve in the interest only rates and appetite for this type of lending to increase again, but don't hold your breath - everyone is waiting for the final release of the Royal Commission report in February. Why make changes now when you have a reason to wait? It's going to be an interesting start to the New Year.
Here are a few points I wanted to make today in the mortgage space. EOFY End of financial year is the busiest and most stressful time in the financial world so if you have purchased property and waiting to settle make sure you have discussed adequate time frames with your lender/broker/conveyancer as things may be slower than usual. If you planned to settle before 1 July and have settlement is not already booked in it is unlikely to happen - so check! If you hope to settle just after EOFY, keep in mind any credit assessors will have a backlog of files to look at that they have pushed back so again, check to see you have been given realistic time frames. Interest only periods This topic is relevant at any time of the year. Many people will be shortly coming up to the end of their approved interest only periods, particularly on investment loans (if you have interest only on owner occupied, that is very rare these days!). It will be harder to extend or be granted new interest only periods than when you first applied, so be prepared and don't leave it until the last minute! Once upon a time you could have asked for up to 15 years interest only on investment properties... Had 10 and finishing? Well, back in the day it would be a quick call to the bank and here you go, here's another 5 years to keep you going. Sign on the dotted line, done. Gone are those days. If you have an interest only period then you need to be able to demonstrate you can repay the full debt, principal and interest, in the remaining term after your proposed interest only period expires (e.g. if you have 5 years interest only, can you repay the higher minimum payments required to pay the debt back to the bank over the 25 years left?). The funny thing, is that this requirement is just plain responsible lending, so is actually nothing new to the industry! A prudent lender/broker/banker should always ensure you are able to pay your debts without financial difficulty, now or in the future. Lenders are being more thorough in actually verifying this information now (that should always have been doing) since financial services regulator APRA (the Australian Prudential Regulation Authority) started putting their foot down by tightening requirements to evidence serviceability and by setting a speed limit on investor lending growth in 2014. This was in light of high levels of household debt, low interest rates and concerns over an overheating property market, particularly in Sydney and Melbourne. Banks steadily increased their rates on interest only as an incentive for people to switch to principal and interest (amongst other things some may say), the Banking Royal Commission brought further concerns out into the open, and here we are today. (There is a lot more to this story, but I that is for another post!) APRA has recently dialed back on its investor cap policy but overall the responsibility of lenders, brokers and bankers alike remains now highlighted- make sure people can afford what they are doing. It does not matter what role you are in or who you work for, it comes down to the integrity of the individual to be a responsible lender and to do the right thing. If you want to understand more about the interest only story, RBA's Assistant Governor (Financial Markets) Christopher Kent spoke to the Housing Industry Association in April this year, and his speech covers off a lot of aspects nicely. What you need to do No matter what rules are in place, what checks are made or what you are told you can afford on paper, you need to be sure you can afford to repay your debt and you are comfortable with how much your repayments are. Check your options with your lender well before the end of your interest only period as the conversion to paying principal and interest can be a rude awakening! If you can't afford them, options include requesting a lower interest rate to reduce overall repayments, or refinancing or requesting a loan term extension so you have more time to repay at lower repayments per month. Reach out and ask for help to navigate your options. It is tax time, and we all know sometimes this is the only time we speak to an accountant! So when you meet with them for your tax return, also ask them if having interest only on investment property loans is still a suitable strategy for you. Interest rates are a lot higher and things in your personal circumstance may be a lot different to when you first set up your loan(s) so make sure the structures in place are still relevant to you now.
byrash posted a topic in Money & FinanceWas wondering what would the right bet in choosing the right interest or home loan option ? What among fixed or variable or Interest only would be a better option with the current market trend? Please suggest