As the clock struck midnight on the eve of Halloween 2021, a chill ran down the spine of Australian homebuyers.

It was no ordinary fright, but rather the realisation that the game had changed, and their dream of homeownership was slipping further out of reach.

Before October 31^st, banks had used a 2.5% serviceability buffer to assess home loan applications. But then, like a ghost in the night, the Australian Prudential Regulation Authority (APRA) appeared and announced that the buffer was being raised to a minimum of 3.0%.

Suddenly, borrowers were left scrambling to understand how this change would impact their ability to borrow or finance.

What exactly is a serviceability buffer and how does it impact borrowing power?

Picture this: you’ve been saving for years, carefully budgeting and dreaming of owning your dream home. You find the perfect property, and you’re ready to take out a mortgage to make your dream a reality. But just as you’re about to sign on the dotted line, you’re hit with the news: the serviceability buffers have increased, and you no longer qualify for the loan you need.

In the simplest of terms, a serviceability buffer is the difference between the interest rate on the loan and the borrower’s ability to service that loan, based on their income and expenses. It is a percentage that lenders add to their assessment rate to ensure that borrowers can still afford their loan repayments, even if interest rates increase.

These minimum financial requirements are designed to protect borrowers and lenders alike, ensuring that borrowers can afford their loan repayments and reducing the risk of loan defaults.

However, the impact of these buffers on borrowing capacity cannot be ignored.

As home loan serviceability buffers have increased, many potential homebuyers are finding themselves priced out of the property market. The higher buffers have effectively reduced how much money customers can borrow, making it harder to secure a mortgage.

APRA Maintains 3% Serviceability Buffer Amid Economic Uncertainty

As the world continues to grapple with economic uncertainty, the APRA has announced its decision to maintain the 3% serviceability buffer for home loans. Despite increasing pressure to ease lending standards, APRA has remained steadfast in its commitment to promoting stability at a systemic level.

In an information paper released on the 27^th of February 2023, the regulatory body confirmed its view that the existing policy settings remain appropriate based on the current risk outlook. With the potential for further interest rate rises, high inflation, and risks in the labour market, APRA Chair John Lonsdale emphasised the importance of maintaining a prudent approach to lending standards. As such, the serviceability buffer remains a critical tool in the regulator’s toolkit, providing a buffer in bank capital for stress if needed.

Refinancing and Mortgage Prisoners

The impact of this could be significant, particularly for those who are already struggling to get on the property ladder. It also affects those who may have previously been able to refinance their mortgage or access equity in their home.

Imagine being locked into a mortgage with no way out. You’re paying more in interest than you should be, and your repayments are putting a strain on your finances. You know that if you could just refinance to a better deal, you’d be able to breathe easier. But the serviceability buffers have other plans for you.

This is the reality for many homeowners in Australia who are now classified as “mortgage prisoners.” These borrowers are trapped in their existing mortgages, unable to refinance due to the increased serviceability requirements.

This is particularly true for those who took out fixed-interest rate loans several years ago, when rates were much lower. As these loans expire, many borrowers are looking to refinance. However, with the increased serviceability buffers, many of these borrowers no longer qualify for a new loan, effectively trapping them in their existing mortgage.

The impact of being a mortgage prisoner is significant. These borrowers are paying more in interest than they should be, and many are struggling to keep up with their repayments. With interest rates expected to continue rising, the situation is likely to get worse before it gets better.

What happens next?

Overall, while the decision to maintain the interest rate buffer will likely have an impact on the property market, the broader context of rising interest rates, higher inflation, and a potentially slowing economy mean that the impact on house prices is uncertain. However, APRA’s commitment to strong lending standards is an important step in ensuring the long-term stability of the Australian financial system.

If you’re one of the many homeowners in Australia who are feeling trapped by their mortgage, there is hope. Our Mortgage Action Plan offers a solution to the problem of being a mortgage prisoner.

Our team of experts will work with you to assess your situation and find a way out. We understand the intricacies of the serviceability buffers and can help you find a lender who is willing to work with your unique circumstances.

Our Mortgage Action Plan includes:

Comprehensive assessment: We’ll take a detailed look at your financial situation, including your income, expenses, and assets, to determine what kind of loan you can afford

Strategic planning: We’ll work with you to create a plan to pay off your mortgage as quickly as possible, while still allowing you to live comfortably.

Lender matching: We’ll find a lender who is willing to work with your unique situation, whether that means finding a lender who is willing to offer a lower interest rate, or finding a lender who is willing to work with your lower borrowing capacity.

Ongoing support: We’ll be there for you every step of the way, providing ongoing support and guidance as you navigate the process of refinancing your mortgage.

Remember, the serviceability buffer is not the end of the road for borrowers. With careful planning and strategic decision-making, it’s still possible to achieve your property ownership goals.

Home loans are often thought of as simple products. However, there are actually a range of different loan structures available, each with its own pros and cons.

Whether you’re shopping for a new mortgage or looking to refinance, it’s important to understand the different loan structures available to you. The wrong loan structure can end up costing you thousands of dollars in interest and fees.

Credit Connection ensures that you get the right loan structure for your needs

Let’s take a look at the different types of loan structures available in Australia.

1. Standard Variable Rate Home Loan

This is the most common type of home loan in Australia. Standard variable rate home loans have a variable interest rate, which means that your repayments can go up or down depending on market conditions. One of the main advantages of a standard variable rate home loan is that they usually offer more flexible repayment options than other types of home loans. For example, you may be able to make extra repayments without being charged a fee.

However, the downside is that you will be vulnerable to interest rate rises, which could increase your repayments significantly.

2. Fixed Rate Home Loan

As the name suggests, a fixed rate home loan has an interest rate that is fixed for a set period of time (usually between one and five years). This means that your repayments will stay the same for the duration of the fixed rate period, even if interest rates rise during this time. One of the main advantages of a fixed rate home loan is that it gives you certainty about your repayments for a set period of time. This can be helpful if you are on a tight budget and need to know exactly how much your repayments will be each month.

However, one downside is that you may end up paying more interest overall if rates fall during the fixed rate period and you don’t re-negotiate your loan.

3. Split Loan

A split loan is where part of your home loan has a fixed interest rate and part has a variable interest rate. This can be helpful if you want the security of knowing that at least part of your repayments will stay the same each month, even if interest rates rise. However, it’s important to remember that you will still be exposed to changes in interest rates on the portion of your loan with a variable interest rate.

4. Introductory Rate Home Loan

An introductory rate home loan typically has a lower interest rate for an initial period (usually six to twelve months) before reverting to a higher standard variable rate. This can be helpful if you want to keep your repayments low for an initial period while you get used to owning your own home. However, it’s important to remember that your repayments will eventually increase when the introductory period ends, so this type of loan may not be suitable if you’re on a tight budget.

5. Package Home Loan

A package home loan is where you bundle your home loan with other products and services from your lender, such as transaction accounts and credit cards . The advantages of this type term deposit rates as well as waive certain fees such as annual fees on your credit card . However , one downside is that package deals can sometimes be difficult to compare with other offers on the market , so it’s important to do your research before committing to one .

There are many factors to consider when choosing a loan structure for your mortgage.

It’s important to weigh the pros and cons of each type of loan before making a decision.

Credit Connection has nearly 20 years of experience helping Australians find the right home loan for their needs.

We’ll help you compare home loans from a number of lenders so that you can find the best deal for your situation.

With our help, you can ensure that you choose a loan structure that best suits your needs and helps save you money in the long run.

When the Reserve Bank of Australia raises interest rates, it’s big news.

For the fifth time in a row, the RBA announced on Tuesday an increase to the official cash interest rate by 0.5% to help fight inflation and keep price growth under control. The 2.25% in interest rate increases since May are the RBA’s sharpest rate rises since 1994.

Why are interest rates rising so rapidly?

After a few decades of relatively stable inflation, consumer prices have been sharply increasing in 2022. A year ago, the Reserve Bank of Australia was forecasting that inflation for 2022 would be around 1.75%.

The latest Australian Bureau of Statistics (ABS) CPI figures reported that the annual Australian inflation rate is 6.1%, which is the highest recorded since 1990. Now, Australians are facing the prospect of CPI inflation reaching a peak of 7.75%, or more.

This is a very big forecasting miss. Even according to Philip Lowe, RBA Governor at the Inflation and the Monetary Policy Framework speech on 8th September 2022:

Forecast misses of this scale should lead to soul-searching by forecasters and they certainly have at the RBA. It is important that we learn from this and improve our understanding of the inflation process.

The RBA has responded to inflation in the same way as other central banks have around the world: by raising interest rates.

Why is high inflation so bad?

When inflation is high, it eats into household budgets and can lead to higher mortgage repayments and other household debt repayments, which can in turn lead to decreased consumer spending and confidence.

As Philip Lowe put it this week:

High inflation is a scourge. It damages our standard of living, creates additional uncertainty for households and businesses, erodes the value of people’s savings and adds to inequality. And without price stability, it is not possible to achieve a sustained period of low unemployment. It is important, therefore, that this current surge in inflation is only temporary and that we once again return to the 2 to 3 per cent range.

How do interest rates affect inflation?

Inflation is determined by many factors including economic growth, unemployment, wages growth and money supply. To control inflation, the RBA uses monetary policy tools including changing the cash rate –which is what has happened on Tuesday.

Banks borrow money, sometimes from each other, to make loans to consumers and businesses. So when the RBA raises its cash rate, it raises the cost of borrowing for banks that need funds to lend out. Banks naturally pass on these higher costs to consumers and businesses. A rise in interest rates makes borrowing money more expensive and this usually leads to slower economic growth and increased unemployment as companies cut costs by shedding jobs.

When interest rates are lower and more people are borrowing money cheaply, there is a greater supply of money in the economy. When the RBA raises interest rates, it means the money supply circulating will start to decrease.

How high will the RBA raise interest rates to combat inflation?

The short answer; as high as necessary.

The Board expects that further increases in interest rates will be required over the months ahead… But how high interest rates need to go and how quickly we get there will be guided by the incoming data and the evolving outlook for inflation and the labour market.

Inflation is about to be reported monthly

On 26 October 2022, the ABS will commence publication of a monthly CPI indicator.

Until then Australia has been the only member of the G20 leading industrial nations not to provide monthly CPI updates, and one of only two members of the Organisation for Economic Co-operation and Development, the other being New Zealand.

With the RBA meeting monthly, it makes much more sense to release CPI information monthly, rather than the usual 3 month lag.

Watch this space.

According to the latest Australian Bureau of Statistics data released this month, the total value of mortgage refinance loans rose 20% year on year to over $17.1 billion.

10 years ago, that number was $4.99 billion.

We’re seeing more and more clients at Credit Connection who have been sold the idea that they should be refinancing their home loan every 7 years. I’ll show you why refinancing your mortgage isn’t always the best strategy and how it could end up costing you more in the long run.

What is refinancing?

Refinancing involves paying out your existing loan with a new loan. Refinancing requires a new home loan application and your new lender will examine your spending, income and employment history just like your old one did.

Beware of Banks bearing gifts!

Refinancing to a lower home loan rate might seem like a win-win situation, but it actually requires a serious amount of consideration. When you’re considering refinancing your home loan you need to work out whether it will actually improve your circumstances.

While it might sound nice that some banks are offering thousands in cash to refinance your home loan, is it too good to be true?

Unfortunately it’s no surprise that many of the enticements advertised by the banks are attached to uncompetitive products. A cash-back incentive is a juicy looking sugar hit to get borrowers over the line with a short-term feature on a loan that would ultimately cost them more in the long-term.

In short, a cash-back offer for a home loan refinance is a marketing incentive to attract new customers and have your mortgage debt on their books making them money for longer.

Have you thought about why you are refinancing?

Even when mortgage rates are rising, refinancing your mortgage may not be the right idea. The right idea depends on your personal goals, both long and short term.

Is your plan to put an extension on your property? Is your plan to buy and move in a few years’ time? Or is your plan to tap into your equity and buy an investment property? Those things might change what’s best for you.

Do you know your current home loan inside-out?

Worryingly, a recent Finder survey of homeowners revealed that 17% of mortgage holders “have no idea” what their home loan interest rate is. While a further 45% only have a general idea what interest rate they are paying. Only 38% of respondents knew what their exact home loan interest rate was.

Refinancing your home loan is not without its pitfalls

Banks don’t do anything that isn’t in their interest in the long-term. Refinancing your home loan without a thorough mortgage review by a professional, could leave you facing a number of unintended consequences.

Pitfall #1: Refinancing your home loan will reset the debt clock

Refinancing your mortgage will result in you resetting the clock on your mortgage debt and ending up at payment square one.

For example, if you have 15 years left on your current 30 year mortgage and refinance into a new 30-year loan, you will be making 15 extra years of loan payments.

Refinancing also resets the amortization schedule of your mortgage so you will be going back to paying a higher percentage of your payment as interest as well. Having a clear sense of how mortgage amortization works is important if you’re trying to pay off your mortgage.

Think of an amortization schedule as the bank’s way of pre-charging you the interest on your loan up front.

When you start paying off your mortgage in year 1, only 25% of your repayment will be going toward paying down the loan principal. 75% of your first year repayments go towards covering interest.

During the first 10 years of your mortgage more than half of your total repayments go towards covering the interest. That’s one of the reasons banks love customers who refinance their home loan regularly.

The bank always makes sure they get their money up front.

Pitfall #2: Underestimating refinance closing costs

Make sure you get a written estimate of closing costs from your bank instead of trying to guesstimate them on your own. Those costs commonly exceed $5000 and coming up short could halt your refinance deal or force you to put the balance on your credit card.

You’ll need to know all the details of your current mortgage, your credit score, and the market value of your home before you apply for a refinance loan.

Pitfall #3: Getting cash out with a refinance

Lenders who offer cash-out refinancing frame it as a bonus for you, as extra money you can use to pay down other bills, cover your closing costs, or take a vacation. But all it really does is put you deeper in debt with your house on the line.

Don’t base your financial strategy on “I’ll just Google it”

If you’re just searching on Google for answers to specific questions, how will you know you didn’t miss anything important?

What makes professional financial advice worth it is the ability of your advisor to keep you on track and proactively identify financial risks and opportunities for you before they arise.

I’ve often found that the greatest risks facing a new client weren’t even on their radar.

Our Mortgage Action Plan delivers guaranteed results and allows you to start living the life you deserve.

Tighter new credit card rules mean that providers must strictly assess card applications… which could come to impact mortgages down the track.

Credit Card Rules: What’s Changed?

In the past, credit card contracts were assessed as unsuitable if the applicant couldn’t repay the minimum monthly repayment for that limit. Under the new rules, credit card providers must assess whether the applicant can repay the entire credit card limit within three years.

If a credit card applicant cannot repay the full credit limit in three years, it’s assumed that they will be in substantial hardship. This is because a consumer who cannot afford to repay the limit within three years will probably pay a staggering amount of interest that will take an extraordinarily long time to repay. If the applicant is in substantial hardship, the credit card provider must decline the application as being unsuitable.

Other Lenders and Brokers May Be Affected

Technically, this new rule doesn’t apply to other lenders or brokers; even when they’re assessing an application from a borrower who holds a credit card. This means that when assessing the suitability of a mortgage or a car loan, the credit licensee can assume that only the minimum monthly repayment will be made on the credit card.

But all lenders and brokers have an obligation to reject a credit contract if it would place the consumer into substantial hardship.

If the inability to repay a credit card within three years is considered to be a substantial hardship when assessing a credit card application… how can it also not be substantial hardship when a consumer is no longer able to repay their credit card within three years, because they’re meeting new repayment obligations on a car or home loan?

These Two Scenarios Highlight the Common Problem…

In scenario 1, an applicant with a $500,000 mortgage applies for a $15,000 credit card. When assessing the credit card, the provider determines that the applicant is unsuitable because they won’t have enough income to repay their credit card limit in full within three years. So, the credit card provider declines the application.

In scenario 2, the same applicant already has a $15,000 credit card and then applies for a $500,000 mortgage (on identical terms as in the first scenario). The licensee is only required to consider whether the applicant can make the minimum monthly repayment on their credit card when determining if they will suffer substantial hardship. On this basis, the licensee approves the mortgage.

The end result for the applicant is the same in both scenarios. They have a $500,000 mortgage and a $15,000 credit card limit. So, how can we say that they are in substantial hardship in one scenario, but not in the other? It’s an absurd outcome that the same person could be approved or declined for a credit product… just because they applied for them in a particular order.

Regulation Shifting the Credit Landscape

Over time, the courts and AFCA may seek to align the obligations of all credit providers and brokers. In the meantime, ASIC has said it expects all credit licensees to apply the rule to existing credit cards by 1 July 2019.

This means that credit providers and brokers should consider the implications of this situation when determining how they will assess a credit card holder’s capacity to pay, and whether they are in substantial hardship, for other loan applications.

Home loans, mortgage brokers, interest rates, big banks, Royal Commissions; five major talking points for economists, journalists and everyday Australians over the last few years.

The Reserve Bank of Australia has now dropped the cash rate to its lowest level in history; 0.25%. Many first home buyers and property investors alike have questions over the state of everything.

Just like you wouldn’t sell your house without seeking advice from a number of professionals, you should always seek professional help before selecting a mortgage or home loan.

What if there was a way to minimise the stress of applying for a home loan, while improving your chances of approval, at the same time?

Quality mortgage brokers have many years of experience negotiating home loans for a range of clients – from the simplest to the most complex. These loan advisors know of many ways to help you fast-forward through your loan process, including seeking out and negotiating the most suitable loan rates, appropriate structures, the right leverage and flexible terms to fit your personal situation.

Mortgage Brokers Can Help You!

Unfortunately for home buyers, there is a long-standing stigma surrounding all mortgage brokers – that they are money hungry snakes, no better than a shady used car salesman.

However, thousands of our happy clients currently smashing their home loan goals will tell you that the tag is false and unjustified.

Financial Advice is Designed to Help You:

Develop a range of strategies to help achieve your financial goals
Identify your short, medium and long term financial goals
Implement systems to help you manage your money better
Maximise your superannuation
Minimise your tax liabilities
Ensure you are adequately insured
Develop a suitable investment plan for your life stage
Plan for your retirement

How do you choose the right mortgage broker or financial planner for your own circumstances?

It can be easier said than done. Luckily, there are a number of tools you can use to compare advisers in Brisbane and beyond… as well as a number of steps you can take to ensure you are making the right choice.

First of all, you need to identify your financial advice needs. This will give you the scope you need to make sure you are choosing a financial solutions provider that is qualified to give advice in that field.

Once you have chosen a financial adviser, the next step is to ensure you are able to provide them with accurate information pertaining to all aspects related to your financial situation. Be prepared with your financial goals, financial statements, all assets and liabilities along with any other finance-related information. Be open and honest about your current situation, as failing to do so could result in incomplete or incorrect advice for what you require.

Make sure you feel comfortable with the adviser. You do not want to feel pressured into making any decisions.

Follow the above advice, do as much research as you can and be as open and honest as you can be. You should be able to find a reputable financial adviser, fit for your needs.

The Benefits of a Broker

The pros of using a mortgage broker are plentiful. They will collect your income evidence and the other documents you need to provide as part of your application and take care of the whole process from application to settlement… as well as everything in between.

Mortgage brokers tend to be very strong negotiators, which is where they can really help you. They can get you stronger positions and lower interest rates than what your bank is offering. Brokers also keep in contact with credit officers to provide further evidence they may need to assess your application. They keep in contact with your solicitor, valuers, your builder and even real estate agents, to ensure a smooth application process. They are your number one contact during the whole procedure – keeping you updated throughout the entire process!

A 2016 report from one of Australia’s major banks found that the most common reason people approached a bank instead of going to a mortgage broker was due to the fact that they already had accounts with them. So, convenience is the most common reason why people go to a bank directly, but it doesn’t necessarily ensure that you’ll get a smooth loan application process or the best deal/interest rate.

Banks are large companies, and communication between departments is a big problem. There can be delays with your property valuation. The credit assessor can misinterpret your payslips because they don’t understand your income. The bank may question prior loans that you’ve applied for. Your file can be handed over to someone else without clear communication. They sometimes even lose entire mortgage applications. These are just some of the examples of what can go wrong if you go to a bank.

Mortgage brokers can be perceived as scary and untrustworthy people, as a result of the poor practices of a minority. However, if you seek out the help of a quality mortgage broker, you’ll find the importance of one really quickly.