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Investor clamp down could be serious for some

Investor clamp down could be serious for some

The two tiered growth evident across Australia’s property markets continues  with Sydney and Melbourne still on turbo boost.  However there is some indication that auction clearances are easing off. The recent clamp down on investment lending by APRA could cause further easing however it could have  a damaging impact on regions that have not enjoyed the recent boom.

Another area of concern is the off-the-plan market where approximately 90,000 units are under construction.  A significant number of buyers would have been aiming at a 90% LVR and may now find themselves seriously struggling to find that kind of lending in the current market.  We do have a few options available but suggest you get your finance sorted sooner rather than later.

Some practical tips on saving for a home loan deposit

Some practical tips on saving for a home loan deposit

Some people view rent as ‘money down the drain’ whereas mortgage payments go towards something tangible – your own home. That’s not quite right as in each case there is a payment for the rental of the asset – in the case of the rent it’s the house in the case of the mortgage it’s the money.

But owning a house generates a number of advantages. Firstly you capture for yourself – rather than your landlord – the rising value of the house. House prices have been rising strongly for some time, which means they probably won’t rise as fast in the next few years. But even if they rise at 1 or 2 percent per annum, over time that generates huge benefits. Secondly unlike virtually any other investment, capital gains on your house are tax free.

You may have seen advertisements for low deposit loans. When lenders lend above 80% of the value of your home they almost invariably purchase ‘lenders’ mortgage insurance’ – which they then require you to pay. This insures them (not you!) in the case of your falling into difficulties and default. Mortgage insurers are a pretty inflexible lot. Most won’t provide insurance above 95% of the value of the property there are some insure loans of up to 97% but this is basically 95% plus the LMI premium.

But in each case it’s hard to get approval if you cannot  demonstrate some savings – usually you have to have saved 5% of the value of the property – though there are some exceptions. And the most competitive loans are usually unavailable at LVRs of over 95% – and sometimes 90%.

Also, if you’ve made the decision to save for a deposit, it’s very important how you do so. Oddly, banks will often fail to accept the repayment of an existing debt as savings – though that’s what an economist would call savings and it sure feels the same! Savings in non-market assets are no good either. This goes for savings under the bed, savings invested in cars or consumer goods. Lenders see that as spending, not saving. Even if you could sell that vintage bottle of wine for more than you bought it!

Now, how can you maximise the amount you save?   Credit cards are a major issue so reduce the amount of credit cards you use. Credit cards can easily distract you from a savings plan. Failing that getting rid of the dreaded card.

Find something to give up! If you smoke cut down or give up. If you go out twice a week, go out once a week. Plan to save small amounts of money on a regular basis. Draw up a budget setting out your income and expenses.

Overall no matter what bank account you choose or whether or not you decide to invest in higher returning assets it is essential that you devise a good savings plan and stick to it. This will make saving a lot easier and faster. You’ll have your deposit with a lot less stress. Then you can usually relax a bit knowing that the mortgage payments will impose a savings discipline on you even if you don’t build up a lot more money in the bank, or the home loan.

Small amounts of regular savings can lead to an impressive total over time and will demonstrate your consistent saving to a lender.

You also need to find the right vehicle in which to put your savings. Generally the banks will tell you that you need to choose between transaction accounts – with low interest but low transaction fees and savings accounts with higher interest but higher transaction fees. Indeed a number of financial journalists say the same thing.

But there are some tricks. If you’re prepared to use Bpay and other internet based technologies for payments, you can get accounts with low or zero fees but high interest rates. (Also, if you don’t have a cheque book you can avoid banking taxes.)

Access to your money is always a bonus if you are house hunting. However, if you are likely to be tempted to spend the money you’ve saved, you might want to tie it up. Various savings accounts provide penalties for early withdrawal as do term deposits.

Another option, which is routinely ignored for the purposes of saving for a deposit is share investment. Share investment generates higher returns on average than most other normal investments, but it also is more volatile and comes with higher costs of establishment – brokerage etc. This means that you can lose some of your capital if you are unwise or unlucky.  However lenders will consider shares held for six months to be genuine savings.

So the share option is not for everyone. But if you are young and you don’t mind if things go against you, or waiting a little to buy your house as your shares recover then you might like to pile your savings into a unit trust. If the fund goes well, you save more money. The upside is that in most occasions this will help you achieve your deposit sooner, so long as you understand that if you’re unlucky it could take longer!

Also, especially if it is relatively short term, make sure you use a discount investment broker who will not charge you for entering the investment.  You usually need a thousand, or often several thousand, dollars to enter either a managed investment via a unit trust or a term deposit.

In some ways the important thing is not what you invest in – though investing in your own home is tax advantaged and a very good asset to own yourself. Whilst we live in a capitalist economy, it’s important to get some of that capital and get it working for you – rather than hiring it from others. That means the sooner you get into the savings habit, the sooner you’ll get on top of things financially.

Ridiculous that CHOICE slams family guarantee home loans

A recent AAP report quotes consumer advocate CHOICE as saying “family guarantees could see the borrower and the relative lose their homes”.  If this quote is correct then we believe it is quite misleading and in many ways hypocritical as it was not too long ago that CHOICE had an uncomfortably cosy relationship with a mortgage broker itself.

We have a very highly regulated mortgage market in Australia where every mortgage broker and lender must comply with the National Consumer Protection Act and must be licenced or registered with ASIC under the Australian Credit Licence regime. These two instruments place an enormous, some may argue over-arduous emphasis on ensuring that any borrower can afford to repay their loan. The penalties for failure are very significant and include penal provisions.

With home prices in most capital and larger regional cities continuing to grow at well above inflation the cost of entry for most first home buyers is a major barrier. This has been compounded by the removal or restriction of concessions on State imposed stamp duty and the reduction of availability of lenders mortgage insurance above 95%.

For many first home buyers there is little possibility of raising the required 5 percent deposit plus a further 4 percent stamp duty and possibly 2 to 3 percent LMI. As a result for these borrowers the family guarantee may offer the only stepping stone onto the property market.

We agree that family guarantees should not be taken or treated lightly and that the guarantor must be fully aware and capable of making an informed decision. Not all lenders offer good guarantor outcomes however there are some very good options where the guarantee is limited only to the amount required to cover the deposit gap.

In a recent blog article our head broker, Andrew Hunter describes his experience when arranging a guaranteed home loan for his own son see http://keychange.com.au/will-you-guarantee-my-home-loan/. In this article he points out that parents have been guaranteeing car loans, personal loans and home loans for decades. The difference now is that consumer protection legislation is more than ever in  favour of the borrowers. As a result lenders impose significant padding in both income and equity calculations when considering a guaranteed home loan.

Of course circumstances can change but this is true for every mortgage and as a result there is a risk, however the risks can be mitigated and managed. The secret is ‘get good home loan advice‘ and don’t take populist one line throw away comments too seriously.

The dream of my generation was to pay off a mortgage, the dream of today’s young families is to get one.

The dream of my generation was to pay off a mortgage, and the dream of today’s young families is to get one. This is a one liner I read on a web site and it is almost too true to be funny. Especially where our state governments have been fiddling with the stamp duty concessions and first home buyers schemes at a time when rental affordability is at an all time low, many young families simply can’t find a way to save the deposit required.

In NSW, Qld and in Victoria (subject to legislation passing) the First Home Buyers Grants will only apply to people purchasing a newly constructed home. This is further compounded for NSW where the stamp duty concessions for first home buyers again only receive concessions on newly constructed homes. Some commentators would argue that Australia does not have a housing shortage – but it does have an affordable housing shortage. Funnelling all first home buyers into new constructions is simply pushing up the price on this end of the market, for the benefit of developers. Meanwhile these governments have widely adopted a ‘user pays’ attitude to housing development which has further increased the end cost of housing – in the specific market where it is most needed.

Prior to the GFC lenders offered 100 percent home loans where a first home buyer being fully exempt from stamp duty could use their first home buyers grant to cover establishment costs and effectively borrow the full amount of the property purchase price. This then became a problem with the Federal Stimulus tactics of the GFC offering double home grant and encouraging so many inexperienced young buyers to rush in to get the additional grant. Of course the reality was the rush forced prices up and then when the grants were removed prices adjusted down and the young borrowers are in a position of negative equity ie: they owe more than their homes are worth.

Today the mortgage insurers (LMI) have no appetite for risk and so much stricter requirement on genuine savings are imposed – typically 5 percent of the purchase price saved over a minimum 3 month period with an explanation required on all lump sum payments. For young buyers lucky enough to have wealthy family who can gift them funds then 10 percent deposit will generally mean that no questions asked on genuine savings. There are a few lenders who will accept 12 months timely rent repayments through an agent in lieu of savings however the borrower still needs 5 percent deposit from some source.

Probably the best outcome for struggling young families is a parent being a guarantor for 10 or 20 percent of the purchase price ie: a limited guarantee. This allows your kids to effectively borrow all of the purchase price and even the stamp duty if applicable. Yes there is some risk and parents should seek independent advice but it is an option that can work well.

Concentration of banking ownership and control in Australia

Many Australian borrowers are so disappointed with Australia’s major banks that many have vowed to never borrow from them instead  looking for mortgages from smaller banks and other financial institutions but according to a story at news.com.au, it seems that people are often still borrowing money indirectly from the big four.

An Abacus survey of 1000 Australians revealed that most Australians are unaware of lenders, banks and mortgage broking companies that are owned as a whole or part by the major banks. Of the people surveyed, only 53% were knowledgeable that St George is owned by Westpac and only 36% knew that Commonwealth Bank owns BankWest.

The main reason why people don’t want to get mortgages from the major banks is because of the major’s refusal to pass on rate cuts by the RBA in full. The value of the major banks, as stated in a report in brokernews.com.au, is said to be worth more than the entire economy of Singapore’s, as it increased by more than 90 billion last year, or $340 billion altogether. Of all the major bank’s products, it is from home loans that they generate a significant amount  of their income and the lack of borrower awareness that many financial institutions are owned by the big four just adds more money to the major’s pockets.

A story at propertyobserver.com.au says that the IMF released a conclusion last year, that Australia has a banking ‘oligopoly’ saying that compared to the other countries in the world; it has one of the most concentrated banking systems.

At the moment we have the following owned outright or controlled:

  • RAMS  – Westpac
  • St George – Westpac
  • Aussie Home Loans – CBA
  • Bankwest – CBA
  • uBank – NAB

Another issue that arises is the potential for conflict of interest that concerns  people who are aware of the hold of the major banks on the other smaller lenders and even mortgage broking companies.

The majors also have their influence in the mortgage broking industry with  NAB holding the most influence by taking control of mortgage broking networks in Plan Australia, FAST and Choice Home Loans and now reselling a white label product under their brand name Advantedge.

When the lender controls the mortgage group and the mortgage products they can then manipulate the commissions.  Of the 13,500 mortgage brokers in Australia, NAB owns the mortgage group that controls 5,500 of them and CBA about 1,000 or more.  As a result the potential for conflicts of interest to arise.  Brokers are by law not allowed to have a conflict of interest when making recommendations to their client.

The wealth management industry is also part of the growing major tentacles like CBA buying the Colonial Group, NAB buying Lend Lease’s MLC businesses, Westpac with BT Financial Group and ANZ holds ING Australia now known as OnePath.

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