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.

How does a Reverse Mortgage work in Australia?

If you’re over the age of 60 and own your home in Australia, you might have heard about using a reverse mortgage to borrow money using the equity you’ve built up over the years.

With house prices rising at a much faster rate than income for a number of decades, three times the amount of people are carrying mortgages and other debt into retirement.

This is bad news for older Australians.

Reverse mortgages can be a useful tool to help you stay in your home, but there are also a number of risks involved. Make sure you understand all the pros and cons before making a decision.

In this blog post, we’ll cover the basics on what you need to know about reverse mortgages in Australia, including how they work, the benefits and drawbacks, and whether or not a reverse mortgage is right for you. Keep reading to learn more!

How does a reverse mortgage work?

Many retirees who own a home that has soared in value find they are asset rich but income poor.

Unlike a traditional mortgage, a reverse mortgage is a type of equity release product (ERP) that allows Australians over 60 to borrow money by using the equity in their home as security for the loan. With a reverse mortgage, you can choose to receive the funds as either a lump sum, a regular income stream, a line of credit, or as a combination of any of these options.

Because the loan doesn’t need to be repaid until all borrowers on the loan have either died, sold the house or moved into aged care, a reverse mortgage compounds the interest charged. This means the balance of the loan will continue to increase as the interest builds up.

Reverse mortgages are complex financial products

If you’re considering a reverse mortgage, make sure to speak to a financial advisor to see if it’s the right solution for you. While a reverse mortgage may cover your immediate expenses, you need to be aware of the long-term risks of the loan. Many people who take out reverse mortgages aren’t aware of those long-term risks.

According to regulator ASIC –

“Borrowers had a poor understanding of the risks and future costs of their loan, and generally failed to consider how their loan could impact their ability to afford their possible future needs.”

Before taking out a reverse mortgage, it is important to understand the impact it could have on your financial future and your retirement.

Moneysmart warns a reverse mortgage can impact your eligibility for the Age Pension, your capacity to afford aged care, your ability to pay for future expenses, the money you leave to loved ones when you pass away, and whether or not someone who lives with you can keep staying in your home when you move out or die.

There are a few things to consider before taking out a reverse mortgage.

If you’re considering a reverse mortgage, make sure you understand all of the risks involved. If you or someone you know is considering a reverse mortgage, we strongly urge you to seek professional financial advice first.

Want to know more about reverse mortgages?

ASIC’s MoneySmart website is a great resource to find out more about reverse mortgages, including a Reverse Mortgage Calculator to help you work out how much equity you may have in the future.

Visit the Australian Securities and Investments Commission’s free consumer website at www.moneysmart.gov.au

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.

As more Australians fall behind the rapid pace of the property market, the question on the lips of many Australians is whether they will ever pay off their debts. The number of mature age Australians who still have mortgage debt in retirement is consistently increasing – and on average, each older Australian with a mortgage debt owes much more relative to their income than 25 years ago.

How many Australians will soon be unable to retire comfortably amidst an international retirement savings crisis, compounded by COVID-19 and further economic uncertainty?

A study by the leading professor of economics at Curtin University found that “more Australians are finding it difficult to pay off their mortgage before retirement.”

Nearly 50% of Australian homeowners aged between 55 & 64 are still paying off their home loans.

People now have to work into their late 70’s, just so they can pay their debts off. In addition to this, there is an increasing number of older Australians who facing the reality that they will not pay off their mortgages before retirement. More than half of the Australian retirees are finding it increasingly harder to pay off their mortgages, and are being forced to rely on the senior’s pension.

The average mortgage debt among older Australians has risen by 600% since the late 1980’s.

With more retirees being unable to service monthly mortgage repayments, a larger number of them are forced to rent; getting stuck in poverty, with no way out. A shocking study by the AHURI found that the surge in mortgage debt among older Australians has outstripped growth in asset prices and incomes… meaning that it is becoming more and more difficult to pay off mortgages among all types of incomes.

Debt-free home ownership used to be a pillar of the Australian retirement strategy. It still can be, with the right support and planning.