Updated on 31st July 2019: Since this interview, the Reserve Bank cut the official cash rate by 25 basis points in June and again in July to a record low 1.00 per cent. Don’t count on your bank automatically passing on the full advantage to you. Call your bank manager or your mortgage broker to see if you can get a better deal (scroll to the last question in the below interview for more tips!)
Between falling house prices, tighter lending conditions and a federal election, you could say the housing sector has been facing a perfect storm. We caught up with mortgage broker Anthony McDonald, Director of Port Finance, to find out what it all means for the lending market and borrowers.
How has the lending market reacted to the retrun of the coalition Government?
The market has reactived positively to the continuity of a returned Coalition Government with business as usual, except for the introduction of the $500 million First Home Loan Deposit Scheme. From January 2020, first home buyers will be able to purchase a property with a deposit as low as 5% with the Government effectively going guarantor on the other 15%. So, we expect to see strong demand for these mortgages which are likely to come from smaller lenders.
We’ve heard a lot about tighter lending restrictions and people have been surprised to learn their borrowing capacity has changed without their financial situation changing much. Can you explain?
Qualifying for finance is certainly harder than it used to be. I used to congratulate people for buying a property, now I congratulate them for getting a mortgage! The regulators were already asking the banks to look more closely at the living expenses of borrowers in recent years and this has only grown in the wake of the Royal Commission.
It’s not uncommon for prospective borrowers to have to provide 1-3 months living expenses and show the bank what they spend on a daily basis. If the determination is that your income is stretched by perceived high living costs, your application may be knocked back or you may be able to borrow much less than you thought, despite having a good income or a high equity-to-debt ratio in your current loan.
This may begin to change given the lower interest-rate environment. On 21st May the Australian Prudential Regulation Authority (APRA) flagged removing the 7% minimum assessment rate it has required borrowers to meet, as interest rates headed lower. If the banks set their own minimum assessment rate it should increase borrowing capacity for owner occupiers.
So, what should people do if they’re looking to secure finance to buy property?
My advice would be to manage discretionary living expenses, have a documented budget and allow plenty of time. Loan applications are being heavily scrutinised, so the days of lending discretion and quick pre-approvals are gone. If you want to be in a position to bid at auction, aim to secure finance at least three weeks in advance. People used to turn to a mortgage broker to get the best interest rate, but increasingly a timely approval is just as sought-after.
How can people get a better deal on thier home loan?
With a variety of data pointing to a softening economy, rates are probably softening too. Three-year fixed rates are being discounted below the current variable rate. That means the banks are pricing-in rates either not going up or falling further over that period. [Editor’s note: the Reserve Bank has since cut the official cash rate by 50 basis points to a record low 1.00 per cent as at 02/07/19 giving mortgage holders even more negotiating power]
Reviewing your current position with your broker can tell you what’s out there in the market and they can often push your current lending institution to give you a better deal. Depending on your circumanstances it's possible to save thousands of dollars per year just by asking your bank for a rate discount.
The market is very competitive, and lenders are offering plenty of deals, from $4,000 cash-back-deals and frequent flyer points to interest rate savings of up to 1.5% depending on your current rate and circumstances. As well as opportunities for new borrowers, we are also working closely with clients looking to release equity from existing property. For more information speak with your FMD adviser.
Make the most of your home loan and investments
General advice disclaimer: This article has been prepared by FMD Financial and is intended to be a general overview of the subject matter. The information in this article is not intended to be comprehensive and should not be relied upon as such. In preparing this article we have not taken into account the individual objectives or circumstances of any person. Legal, financial and other professional advice should be sought prior to applying the information contained on this article to particular circumstances. FMD Financial, its officers and employees will not be liable for any loss or damage sustained by any person acting in reliance on the information contained on this article. FMD Group Pty Ltd ABN 99 103 115 591 trading as FMD Financial is a Corporate Authorised Representative of FMD Advisory Services Pty Ltd AFSL 232977. The FMD advisers are Authorised Representatives of FMD Advisory Services Pty Ltd AFSL 232977.