By Carol from Vista Financial
The 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.
By Carol from Vista Financial
Merry Christmas says the RBA. No changes to the cash rate.
Here's some interesting bits of today's announcement, which will be the last until 2019:
"The global economic expansion is continuing and unemployment rates in most advanced economies are low. There are, however, some signs of a slowdown in global trade, partly stemming from ongoing trade tensions...
Financial conditions in the advanced economies remain expansionary but have tightened somewhat. Equity prices have declined and credit spreads have moved a little higher. There has also been a broad-based appreciation of the US dollar this year. In Australia, money-market interest rates have declined, after increasing earlier in the year. Standard variable mortgage rates are a little higher than a few months ago and the rates charged to new borrowers for housing are generally lower than for outstanding loans...
One continuing source of uncertainty is the outlook for household consumption. Growth in household income remains low, debt levels are high and some asset prices have declined. The drought has led to difficult conditions in parts of the farm sector...
Conditions in the Sydney and Melbourne housing markets have continued to ease and nationwide measures of rent inflation remain low. Credit conditions for some borrowers are tighter than they have been for some time, with some lenders having a reduced appetite to lend. The demand for credit by investors in the housing market has slowed noticeably as the dynamics of the housing market have changed. Growth in credit extended to owner-occupiers has eased to an annualised pace of 5–6 per cent. Mortgage rates remain low, with competition strongest for borrowers of high credit quality."
You may read the full release here.
By Carol from Vista Financial
On hold again, as most predicted.
"Growth in China has slowed a little, with the authorities easing policy while continuing to pay close attention to the risks in the financial sector. Globally, inflation remains low, although it has increased due to both higher oil prices and some lift in wages growth. A further pick-up in inflation is expected given the tight labour markets and, in the United States, the sizeable fiscal stimulus. One ongoing uncertainty regarding the global outlook stems from the direction of international trade policy in the United States.
...In Australia, money-market interest rates have declined recently, after increasing earlier in the year. Standard variable mortgage rates are a little higher than a few months ago and the rates charged to new borrowers for housing are generally lower than for outstanding loans.
...Conditions in the Sydney and Melbourne housing markets have continued to ease and nationwide measures of rent inflation remain low. Growth in credit extended to owner-occupiers has eased but remains robust, while demand by investors has slowed noticeably as the dynamics of the housing market have changed."
Read the full release here.
By Carol from Vista Financial
What is it?
Lenders Mortgage Insurance or LMI is an insurance policy that protects the bank from financial loss if you can’t pay your loan back.
LMI cover protects the lender, and you pay the premium. That’s right, you are paying to protect the bank from yourself!
When/why is LMI applicable?
Normally LMI is required if you request to borrow more than 80% of the property value, as this is deemed riskier to the lender.
Why? You’ve put less money in, your repayments will be higher, and they have more to lose. So, they hedge their bets by insuring themselves.
If you default on the loan (i.e. don’t/can’t pay), they will chase you for the funds. If that doesn’t work and as a last resort, they will re-possess and sell the house to pay the debt.
If the sale of the property isn’t enough to pay the outstanding debt, the lender makes a claim with the insurer to recover the difference.
(Important to note – even if the lender gets all the money back from the sale or insurer, this is doesn’t absolve you from your debt – there is sadly no get-out-of-jail-free card.)
How much is it?
LMI can be very expensive. The cost is determined by a number of factors including the loan to value ratio (i.e. how much you are borrowing compared to the purchase price), the size of the loan you want (costs increase exponentially), if you are a first home buyer or not, and the insurer. The two main insurers in Australia are QBE and Genworth, but some lenders also self-insure.
You can get a rough idea on the cost of LMI here, but take it with a grain of salt as it does vary between lenders.
How do you pay for it?
You can pay it upfront or most lenders will allow you to add this to the home loan amount (i.e. capitalise it). Most people opt to add it to the loan.
Why on Earth would you choose to pay LMI?
Saving a 20% deposit is very hard, and can be almost impossible for some. LMI enables you to purchase without having to have 20% deposit, so is actually quite a popular option.
How to avoid LMI?
Save like crazy to have a 20% deposit.
If not, there may be other options, including gifted funds from the Bank of Mum and Dad or using a guarantor.
For a lucky few LMI waivers sometimes exist with some lenders – normally restricted to those in the medical profession or specific white-collar professions. Normally strict criteria apply.
Important fact to remember
LMI protects the lender, it does not protect you!
As a borrower, this type of insurance does not offer you any protection whatsoever.
LMI is often confused with mortgage protection insurance - a type of insurance that protects you if you lose your job/fall ill and can’t meet a repayment. This is a completely different insurance, so note the difference.
If you still have any questions regarding LMI, get in touch so I can help.