At AXTON Finance, we are well-versed in the intricacies of property investment through a company structure. This investment approach, while potentially beneficial in terms of asset protection, tax management, and credit policy assessment, requires a thorough understanding of the specific lending criteria that apply to corporate entities. Our team, with its specialized knowledge and experience, is adept at facilitating these unique transactions, ensuring you secure approval with terms tailored to your investment goals.
Investors considering this route can access up to 95% financing for conventional investment properties or 80% for company low doc (reduced documentation) loans, with commercial properties evaluated individually but usually at slightly lower LVRs (loan to valuation ratios) again. Each lender has distinct policies and loan limits, making our expert guidance crucial.
Investing in property through a company structure presents unique challenges. Not all banks are equipped to handle loans under company names, due to specific processing requirements or policy gaps in their teams. These challenges may include restrictions on professional package discounts or the use of additional financial products like offset accounts and credit cards under a company name. Some lenders may even require all shareholders to guarantee the loan. This underscores the importance of selecting the right lender—one that combines competitive rates with the capability to manage corporate structures effectively. Our team at AXTON Finance is well-versed in these challenges and can guide you through the process.
For instance, if John and Jane Smith, directors of ABC Pty Ltd, decide to purchase an investment property, the setup would typically involve ABC Pty Ltd both as the borrower and property owner, with John and Jane as the guarantors.
Furthermore, companies acting as corporate trustees for trusts have specific borrowing capacities and structures, which our team can also manage by ensuring all legal documentation, like company constitutions and trust deeds, meet target lender requirements.
It’s important to understand that directors might still be liable if a company fails to meet its loan obligations. Banks often require personal guarantees from directors, especially if the company is a shell business or SPV (Special Purpose Vehicle) that does not earn significant income or has been set up solely for the purpose of purchasing the property. This underscores the importance of expert guidance when structuring company loans. At AXTON Finance, we can help you navigate these potential risks and responsibilities.
Any time that you may be considering a loan in a company name you must seek qualified accounting and legal advice to ensure the appropriateness of the proposed structure and that no unintended consequences occur.
At AXTON Finance, we pride ourselves on our expertise in setting up and managing home loans for companies, from simple setups with a couple of directors to more complex joint ventures utilising unit or discretionary trusts. Our extensive experience and deep understanding of lender criteria allow us to identify the best possible rates and terms for your situation.
To explore how we can assist you with your company property investment or to get a tailored assessment, contact us today. Our specialists are ready to provide you with the personalised advice and support you need to navigate this complex area efficiently.
Contact us today to discuss your scenario in detail, obligation-free.
Purchasing a property is one of the biggest financial decisions you will ever make, and at AXTON Finance we know the importance of having the right professionals by your side when embarking on your property journey.
There are several experts involved in the property buying journey, and each plays a vital role in ensuring that you make informed decisions and get the best result. These professionals will also be key to ensuring you receive the correct advice in the future.
Here are some of the important professionals to engage when purchasing a property:
Mortgage Broker: One of the first experts you should engage when purchasing a property is a mortgage broker. An experienced mortgage broker will help you secure the best possible mortgage by understanding your needs and unique situation to then compare various lenders and interest rates. They will also help you determine your borrowing capacity and assess your eligibility for government grants or incentives. By working with a mortgage broker, you can avoid costly mistakes, save a lot of time and money in the process. As one of Melbourne’s best mortgage brokers you will be hard-pressed to get a better professional in your corner. Book an obligation free chat with us today here or call on 1300 706 540.
Solicitor/Conveyancer: A solicitor or conveyancer is another crucial professional you need to engage when purchasing a property. These experts help you navigate through the legalities of the property-buying process. They can help you understand the terms of the sale contract, identify any legal issues, and ensure that you have a clear title to the property. They can also advise you on stamp duty, taxes, and other settlement legal obligations.
Buyers Advocate: Buyers advocates are professionals who work exclusively for the buyer NOT the vendor like real estate agents do. They help you find the right property based on your brief, negotiate the best price, and manage the entire property-buying process on your behalf. They have access to off-market properties, and they can help you avoid common property-buying mistakes. They can also provide you with independent advice on the property, its potential, and its value.
Accountant: An accountant is another important professional to engage when purchasing a property. They can help you understand the financial implications of buying a property, such as the tax obligations, ownership options, negative gearing benefits, depreciation, and expenses. They can also help you set up a structure to minimize your tax liability and advise you on any tax benefits or incentives available to you.
Financial Planner: A financial planner can help you assess the financial implications of buying a property on your overall financial plan. They can help you understand how property investment fits into your overall financial goals and advise you on the best ways to finance it. They can also help you structure your finances, assess your cash flow, assess the adequacy of your insurance protections and plan for your financial future.
So to help maximize the likelihood of a successful property transaction it is essential to surround yourself with the right professionals to guide you through your property-buying journey. Each of these professionals brings a unique set of skills and expertise to the table, and working together with you over time will not only ensure that you get the best result on the initial purchase but the best advice moving forward as you grow your wealth in the years to come.
The pandemic saw a torrent of ultra-low fixed interest rates set up for Australian homeowners and investors alike. However, many of these fixed loans are set to expire, and borrowers will face a sharp increase in their interest rates, which has been dubbed somewhat ominously by the Australian media as the “mortgage cliff.”
The expiry of these fixed rates over the coming months and years could cause significant financial stress for borrowers who are unprepared for the sudden increase in their mortgage payments. In some cases, monthly mortgage payments could double, putting a significant strain on an already elevated household budget.
Thankfully, there are some sound options available for those with fixed rates to mitigate the impact of the so-called cliff!
One of the most effective solutions is to pick up the phone and call your current lender to needle them to improve your rate. It is a well-known fact in the banking industry that it is cheaper to keep a current borrower than to seek out a new one so you might be surprised by what they may be able to offer you. Once you have done this you can compare the market yourself or use the services of a mortgage broker to assist you in comparing like-for-like options.
Failing a decent response from your current bank or lender, you can seek to refinance your home loan. This is best done by a professional mortgage broker, who will be experienced in comparing like-for-like products, policies and structures. Since interest rates started to rise in 2022 lenders have slowly increased the assessment criteria that may result in you being unable to refinance your current loan based on the revised stress-tested rates even though you are making repayments at a higher rate today! Further compounding this complexity is the fact that borrowers with higher LVR’s (Loan to Valuation Ratios) may have experienced a reduction in the value of their property which can make refinancing uneconomical. An experienced broker will help you clearly navigate the benefits and costs early on before you commit to any decision.
Switch your loan to interest only and/or extend the term. This really should be a last resort option because while your monthly repayments may drop considerably, the true long-term cost can add tens of thousands of dollars to the total cost over the life of your mortgage. Extreme caution needs to be applied when looking at this option and getting a professional broker in your corner to model out the effects is highly advisable.
By working with an experienced mortgage broker, like the team at AXTON Finance, we can help you understand the terms of your current loan, including any hidden fees or penalties that could impact the refinancing process. Will will have a high degree of confidence that your decision will be an informed one that one helps you avoid any costly mistakes.
The mortgage cliff is a looming challenge for borrowers with expiring ultra-cheap fixed home and investment loans. However, there are some simple solutions available, such as refinancing, that can help mitigate the impact of rising interest rates.
So you are an Australian citizen or an Australian permanent resident (PR Visa holder) living and working overseas and looking at buying or refinancing a property back here in Australia?
We look after lots of time poor Aussies needing help with tailored expat and non resident lending needs from our panel of over 30 major banks and lenders.
The following key questions provides a high-level summary of the available policies generally applied by the major Australian banks and lenders who offer mortgages to Australian expats and non resident with permanent residency status.
What is the maximum LVR that an Australian Expat can get?
The Maximum loan to valuation (LVR) ratio is generally 70% or 80% of a property’s value (some lenders may allow higher up to 90 or even 95% but there are caveats to this which are usually higher rates and mortgage insurance being applied).
How much foreign income can I use?
Your overseas income is usually shaded by 20% for currency risk purposes before converting to Australian dollars ($AUD). The resultant figure is then hypothetically ‘taxed’ at Australian tax rates to determine what net income (after tax income is available to support your loan). This is applied because Australian lenders are generally not resourced to deal with understanding every countries different tax systems.
What if I earn tax-free income in the UAE?
If you earn tax-free income in the United Arab Emirates (UAE) or similar tax jurisdictions – you may be in luck then. In many circumstances, we have a handful of lenders who will not apply hypothetical Australian tax rates to your expat tax free income in places like Dubai and Abu Dhabi. This will usually result in you being able to secure a larger loan size than what most Australian banks would otherwise approve.
Can I use bonus income as an expat?
This depends heavily on which lender is being proposed and how often the bonus income is paid. It can be difficult to use for servicing purposes when it comes to expat and non-resident lending.
How much income do I need to secure an expat loan approval?
Because of the rules above that most lenders apply, your taxable income generally needs to exceed $250,000 AUD PA equivalent. Shading due to currency risk and different tax assessment rules can significantly reduce your borrowing capacity as an expat. If your income is less than this it is often very difficult for us to meet current expat lending rules even for modest loan sizes.
What currency do I need to earn to be eligible for an Australian expat home loan?
Most lenders require that your income is earned in primary currencies like;
United States Dollars (USD)
Pound Sterling (GBP)
European Euros (EURO)
Singapore Dollars (SGD)
Hong Kong Dollars (HKD)
Japanese Yen (JPY)
A smaller list of lenders still accepts other countries depending on individual lender policies and includes but are not limited to;
Indian Rupee (INR)
Indonesian Rupiah (IDR)
Vietnamese Dong (VND)
Chinese Yuan (CNY) / Renminbi (RMB)
Emirati Dirhams (AED)
What if my payslips and other supporting information are in a foreign language?
If your support documents are not in English they must be translated into by an accredited translator (most Australian lenders accept NAATI as a standard translation service).
What if I don’t have Australian Citizenship or PR Visa status – can you help me?
Unfortunately if you do not hold Australian citizenship, PR residency or New Zealand citizenship we are currently unable to assist you based on our available lending policies.
I am a self-employed expat – can I secure loan approval?
Being self-employed has many benefits but borrowing money as a self-employed expat can greatly reduce the number of lenders who may be able to support your plans. While not impossible we may be able to assist you especially if your tax returns are up to date and are published in English.
I want to know more about expat mortgages – how do we meet?
Want to get some tailored mortgage advice from someone who knows what they are talking about then feel free to book a time here for a quick 15 minute chat or jump onto the chat box on our website now (it will confirm if one of our brokers are online for a chat).
Of course, you can also call us in the office on 1300 706 540 for a chat during normal business hours. If we miss your call leave a message and one of our team will usually get back to you within one or two business hours.
As you have probably heard in the media the nations lenders have clamped down on their lending criteria as a result of pressure from various government agencies like APRA and ASIC and from recommendations made during the Banking Royal Commission into banking misconduct.
It would be fair to say that many lenders have perhaps taken this a little too far which has resulted in a market place full of inconsistent applications of an incomprehensible set of rules for borrowers to deal with.
As a result of this we felt that the following information can be used as bit of a guide to help maximise your chances of securing finance approval by implementing any number of the following tips.
1. Fill out your application form in full
Lenders will often apply a score to your loan application based on the information you supply and if you skip on optional questions this can be detrimental to the strength of your application if things a little tight. For example even if you have a savings account with another bank with a small amount in – tell your proposed lender. If you have a middle name don’t forget to include it – it matters. If you have moved a couple of times try and be accurate with your living history as lenders often marry up data they can see on your credit file with the information supplied in your application.
If you are looking to refinance or buy your next property check out client fact find here – this is a fantastic form which is responsive to asking you the questions we know a lender will want to know – nothing more and nothing less! We can contact you after you have completed to run some tailored options past you.
2. Don’t submit your application to too many lenders or brokers
Lenders get very concerned when they see on your credit file that you have applied to a number of credit providers within a short period of time for about the same amount of money. The lender in question will often take the pessimistic view and think that there is something wrong with your application and has been declined by other lenders prior to it so will pick over your file with more detail trying to find out why you would apply so many times.
3. Do you have credit defaults?
This might sound scary and a reason for a lender to decline a loan but many lenders have different policies that may consider your scenario depending on the circumstances and what you have done to remedy the situation. As a general rule of thumb defaults from utility providers like power and telecommunication companies have less impact on your scenario than do defaults on financial service providers like personal loans, credit cards and home loans.
It is important to realise that with the evolution of the positive credit reporting regime lenders can now increasingly see the conduct of other institutions credit facilities. So if you are late on your credit card payment with the CBA and your home loan application is with Macquarie Bank, then there is a good chance that they can see this on your credit file down to which months you were on time and those that were not!
Treat your repayment history with a healthy level of respect and you will find your application will run pretty smoothly. A good mortgage broker or banker will be able to work with you prior to submission to identify any sort of severity and work out the best course of action and the lenders most suited the scenario you have presented.
If in doubt you can get a free copy of your credit file from mycreditfile.com.au (a service from Equifax Pty Ltd). We can take a look at it for you free of charge and provide you with some insight – feel free to contact us here.
4. To Afterpay or not…
The advent of the ‘buy now and pay later with no interest’ companies like Afterpay and Zip Pay creates an interesting situation for lenders. In simple terms these are not seen as a great look on your bank statements because the lender makes the assumption that these often relatively low cost purchases were made because you did not have the money in the first place and with retailers quick to jump on the band wagon with this offering its even available on products and services that may be considered essential. Our recommendation is generally not to have these buy now pay later arrangements if you are seeking to make a mortgage or finance application.
5. Support Docs
You will of course have to supply items like payslips, ID, mortgage statements and tax returns etc depending on your situation. This often slows down the process when the information requested is not provided in a timely manner. Many lenders simply get to your file and if information is missing they request whats needed and place your file at the back of the queue again. Sometimes information supplied can result in additional questions being asked so be prepared for this to happen and its nothing unusual albeit it can be frustrating.
6. How much do you spend?
OK I get it that a budget is boring but again an increased focus is being made on just how much borrowers are spending on living expense and there is a general reduction on the reliance of HEM (Household Expenditure Measures) standards and a more tailored approach. Having a summary ready before your finance meeting will help you have a more productive and realistic expectation of your borrowing capacity for any sort of approval. There are often many ways that you can reduce and improve your living expense without making drastic changes in the months lading up to when you are looking at securing a mortgage. Go through your statements and look at where you may save money via;
Reducing utility bills by shopping around suppliers
Reducing or eliminating credit card debt
Do your food shopping with a list and don’t buy by impulse
Take a packed lunch (this $10 per day can save you $216 per month in after tax dollars!)
Love coffee (so do we) but consider a pod machine or something similar over the 4.90 large flat white with almond milk once or twice a day
Pay yourself first (savings) – putting money away first before you pay for everything else is a simple yet powerful process to help you get ahead. Think of every time you get a pay rise how easy it is spend that new amount of hard earned cash! There are some great online tools that can help with this. One that we love is Raize.com.au and ING Bank – these two companies have variations of a system that automatically squirrels away savings by rounding up your purchases to the nearest dollar and allows a regular savings plan. Simple, effective and above all – happens without effort. (note if you click the link above to Raize you receive a $5 credit to your new account as do AXTON Finance)
7. What happens if you are having or planning for a child
Lenders are now required to ask about any expected changes to your future income that may affect your ability to meet repayments. This of course is a requirement to be answered truthfully and is strengthened by your ability to provide other information about how you may deal with such a situation. For example if you are about to go on maternity or paternity leave you could state that you have a certain amount of funds available for the estimated period of you being on reduced income to meet the commitments of your loan. A return to work letter and using a lender with a strong appetite for this sort of scenario will also help you a lot.
8. How good is your mortgage broker or banker?
Of course we may be a little biased here but having an experience broker working with you will help explain things in plain English for you and be across the lending policies of dozens of lenders and not just one (like you would get directly at a bank).
The quality of your application submission that is made by your broker or banker can really dictate how smoothly your application goes. Do some simple research like looking up your preferred broker or banker online through Google, LinkedIn and the other usual social media links. Usually you will get a pretty quick impression as to how experienced and professional they are. If in doubt trust your instincts!
9. Consider the wider market
It is often that the more competitive products and policies lie outside the big four banks. Well over 50% of all mortgage lending goes to just four of the major banks. At AXTON finance, only 20% of our lending in the last six months has gone to a majors! There are better deals to be had if you are willing to look outside of the square it can save you tens of thousands over the life of your loan.
10. Is the cheapest rate the best?
A business mentor once told me of the following three things;
Good, fast and cheap…. pick two. It is impossible to have all three.
Wise words to live by indeed.
A quick search of the internet may list some amazing rates that look too good to be true and while it is still may be worthwhile considering you should also think about;
How volatile is that rate online? Sometimes a great rate may be unsustainable for a lender to offer for a long term and you end up getting rate creep with increases outside of RBA changes. While you will be rather annoyed if this happens it would be good to understand what sort of history has been evident with the lender in question?
Does the lender’s computer say NO?. In many instances lenders try and shoe horn customers into rigid processes with offshore credit decisioning driven by computer systems. If you fall outside of this sort of lenders policy due to any complexity then you want a human with experience going into bat for you. Paying an extra 0.1% or 0.2%pa in rate can often mean the difference between submitting to a lender who may view your application as being poor versus another one that is fine with your set of circumstances. Use a quality mortgage broker who understands the rules to maximise your outcomes and reduce your stress.
Does the lender have a good application and onboarding process or is it a process with baked in systems that worked in 1991 when fax machines were cool? This can have a significant impact on turn around times – a good broker will have excellent experience of this fist hand and can guide you.
Cheap online specials often blow out credit application queues resulting in turn around times that can take weeks (even months). Currently there is one lender that is out to almost 20 business days to pick up a file – do you have that sort of time to wait?
Enquire about what sort of service the lender has with clients. A quick look up of reviews online can give you a feel about one lender over another. However read with caution as people often use the internet to complain and rarely to praise.
Ensure that you understand the product that you are seeking really does have the features you need. There is no point paying for stuff you are unlikely going to benifit from if there is a cheaper and/or simpler product available that does what you need it to?
So there you have it – ten tips on helping get your mortgage application approved!
Please feel free to contact us on 1300 706 540 and ask for Clint or one of the team to help you out. We a sure you will love speaking to an experienced person and not a call centre!
With auction clearance rates slipping below 50% in some markets right now, vendors are much more open to a pre-auction offer. You’ll also find more vendors choosing a private sale over an auction because it allows them to hold out for their price and save on auction costs.
That means, if you’re ready to buy a property in the spring market, you’ll also want to be prepared to drive a hard bargain. Here are some tips on how to make a successful pre-auction offer and negotiate your price like a pro.
Have your finance in place
If you haven’t already done so, ask us to organise pre-approval on your home or investment loan before you put in an offer. That way, you’ll be confident of your finances and have a clear understanding of your upper spending limit. Having pre-approval in place gives you an edge over the competition because the vendor knows the deal will go smoothly.
Offer the right price
Research is always the key to paying the right price for a property. Whether you’re buying at an auction or negotiating directly with the vendor, it pays to know the property’s correct market value before you go in guns blazing.
Research will allow you to make an offer that’s too good for the vendor to pass up, without overpaying. It pays to be realistic – you’ll have a better chance of beating the competition.
Discover the vendor’s motivation
Knowledge is power. Ask the real estate agent why the vendor is selling and use the information to your advantage. For example, if they have already put down their deposit on their next property, the vendor may have time constraints that you could exploit by offering a faster settlement. If they are in a divorce situation, you could provide a more substantial deposit so that both parties will have more money for their next property deposit, which could help the vendor choose your offer over someone else’s.
Play your cards close to your chest
When it comes to liaising with the vendor’s real estate agent, be mindful about giving away too much information. Never tell them your budget in advance, as they could use the information against you. Always indicate that you’re interested in several properties and have other options – if they think you’re too keen on the property they’re selling, then they’ll be less flexible during negotiations.
Time your offer well
Timing is crucial when you do make an offer. Some experts suggest that you go in hard and early, well before the auction – as vendors may be more inclined to accept your offer because of the convenience factor, which may also be a good tactic in a softening market.
Others recommend waiting until right before the deadline to make the offer, to eliminate the possibility that the real estate agent will shop your offer around to other prospective buyers.
Another tactic is to stipulate a time limit – for example, tell them it’s only on the table for 48 hours. Whatever your strategy, be prepared to stay firm on your offer – don’t be too quick to budge from your original offer price as it could make you look comfortable.
Keep your emotions in check
It’s important not to be distracted by your emotions during negotiations. If the price is being pushed up, you may have to walk away if it goes beyond the correct market value you have researched. A common mistake is to be manipulated into paying more than a property is worth because you love the property or don’t want to be the loser in the negotiation process.
Making a winning pre-auction offer comes down to being informed and employing some strategic negotiation tactics. I can help you prepare by organising a pre-approval on your home loan.
Get a buyers advocate
If it is just getting all too hard you might like to consider some professional help.
Utilising the services that buyers advocates offer is becoming more popular across Australia, as buyers recognize the benefits having their own advocate brings to the entire purchasing process.
Buyer’s agents are professionals who specialize in searching, locating, evaluating and negotiating the purchase of property on behalf of buyers. They do not sell real estate. They are engaged independently and paid for by the buyer to act on their behalf. The key difference between a selling agent and buyer’s agent is who they represent as, by law, an agent cannot act for and accept a commission from both parties in the same transaction.
Buyer’s agents offer a number of different service options, ranging from complete searches through to auction bidding and single property reports. Their aim is to ensure that the purchaser is as fully informed as possible and doesn’t overpay for the property. Having an experienced advocate on side who is familiar with suburb values and the purchasing process also assists in maintaining objectivity when it comes to negotiating the best possible outcome.
Give us a call to find out more or for an introduction to one of our preferred buyers advocates.
This article provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed before acceptance of any offer or product. It does not constitute legal, tax or financial advice and you should always seek professional advice about your individual circumstances. Subject to lenders terms and conditions, fees and charges and eligibility criteria apply.
Have you ever had that feeling of frustration that comes from buying an item at a store, then seeing it substantially cheaper at another shop?
It can also happen with your home loan. And if you’re refinancing your mortgage, it’s smart to shop around for a better interest rate.
The reality is that, even though your interest rate might have been fantastic when you first applied for your mortgage, other lenders are competitive and can have better deals on offer.
And if your current interest rate is not ideal, the end result can be many thousands of dollars wasted over the life of your home loan.
The good news, though, is that you can take practical steps to fix the situation.
In the current Australian home loan market, there are always discounted interest rates available and by comparing the different options available to you, there could be valuable savings to enjoy.
To help you refinance your home loan, try these tips to save money on your mortgage by shopping for a better interest rate deal.
1 – Improve Your Credit Rating
Even if you already have a home loan and you are keen to refinance your mortgage for a better deal, improving your overall credit rating can still have an impact.
With a healthy credit rating, you have more choice available – and the more options you can access, the better chance you have of securing a competitive interest rate.
Always pay utility bills on time (or, better yet, pay them well before the due date and save money with the earlybird discount).
When it comes to credit cards, get rid of any unnecessary extras and keep the available balance as low as possible on the one you do keep. By reducing available credit and avoiding late payments and defaults, you give your credit rating the best possible boost that lenders appreciate.
2 – Research The Rates
In these days of the online world, when comparison rate websites put information at our fingertips, shopping around for great interest rates is easier than ever. The days of approaching your bank for a home loan because of some sense of customer loyalty are gone and the truth is that the interest rates deals that can benefit you the most may be found in some unexpected places.
For access to the best interest rate comparison, talking to an experienced mortgage broker is always recommended. Researching available rates is more than just comparing numbers on a screen – it’s about understanding which lenders service which client demographic best and what unique criteria each lender has as a potential barrier to your entry into doing business with them.
By putting some effort into researching a great rate that is actually available to you, you can save tens of thousands of dollars – and years – from your home loan.
3 – Be prepared to switch banks
Switching banks for a better deal on your mortgage payments is not the enormous hassle it once was. Make sure you do your research – checking application fees and other associated costs will reveal the true picture of the complete cost of your mortgage. If crunching the numbers reveal that switching banks really will save you money in the long-term, it is worth making the switch to save money on your interest rate for the life of your loan.
4 – Ask For A Better Interest Rate
Sometimes, it’s possible to access the benefits of these competitive interest rates without even having to change home loans. Depending on your lender and the history of your loan with them, simply letting them know that you are keen to shop around for a better interest rate can be enough to get them to offer you a lower interest rate in an effort to hold on to your business.
Try asking your current lender this question: “I’m shopping around for a better interest rate and I want to know if you can give me a better deal on my mortgage?”
Or, better yet, get an experienced mortgage broker to do it for you. By having a thorough understanding of different interest rates available at a wide variety of lenders, professional mortgage brokers are in a strong position to negotiate a more positive deal.
For more information about refinancing your property, talk to our team today.
If the Reserve Bank of Australia (RBA) cash rate is so low, then why is your interest rate going up?
We are asked this question a lot.
The official cash rate, as set by the Reserve Bank of Australia (RBA), has remained at 1.5%pa since August 2016 when it was then cut by 0.25%. The below graph shows the last thirty years of the official cash rate – you would have to go back to the 1950’s to see rates this low.
There are a few simple reasons why some rates are increasing. As you probably know in the past few years, we have experienced a boom in property prices (mainly only in Melbourne and Sydney though). This has resulted in significant growth in investment and interest only lending.
Interest only loans are of course an attractive form of mortgage lending as it reduces your monthly cash flow commitments but it does significantly increase the total cost of a loan over its effective life. You can actually simulate this using one of our online calculators to see for yourself here.
Most accountants and financial planners will rightly recommend that you setup your investment purpose lending as interest only (the theory being do not pay down a debt that gives you a tax deduction first if you have a home loan mortgage that does not). While this structure is in most cases a wise one, it has also seen a significant increase in owner occupied home loans that have been set up as interest only. This of course means that borrowers have had more cash flow available to them to either spend on more investment debt or, more worryingly so, on living and lifestyle expenses – without having to pay off what they owe.
The government has recognised this trend and has been concerned with the level of indebtedness that Australian households have taken on; coupled with low wage growth and rising house prices. When interest rates increase (and they will) and if left unchecked this could create significant economic pain for borrowers and the government alike.
Subsequently APRA (Australian Prudential Regulation Authority), the government body tasked with ensuring sound governance of our banking system, set a speed limit that states that lenders cannot exceed 30% of all new loans being interest only – which has been running at something closer to 40% of all new loans approved.
Until recently, interest only and investment lending has traditionally been priced at the same rates as owner occupied mortgages and even the same as interest only loans – so effectively the rate you paid was the same across the board regardless of what the purpose or structure was.
This has now changed so there are effectively four types of rates on the market (excluding fixed options) They are summarised as follows and ordered cheapest to most expensive;
– Owner Occupied – Principal and Interest (3.7%pa – 4.2%pa)*
– Owner Occupied – Interest Only (3.9%pa – 4.5%pa)*
– Investment – Principal and Interest (3.8pa – 4.5%pa)*
– Investment – Interest Only (4.2%pa – 5.00%pa)*
*Approximate interest rate ranges as at early July 2017
In summary – interest only and investment lending is now more expensive.
Mortgage lending policy is being tightened
As a result of these restrictions we are seeing significant changes in lending policies and rules across all lenders. In combination these rules have a direct effect of reducing demand for interest only and investment lending purposes.
Across the board there have been countless changes which cannot be summarised in this brief blog but at a high level they can be summarised as follows;
Reducing higher lending ratio loans
Generally higher lending ratio loans for investment and interest only lending are being capped at around the 90% loan to valuation (LVR) ratio with strong pricing incentives for borrowers to be at 80% or less.
Increased stress testing of borrowers
While the mainstream media may have made broad brush statements about irresponsible lending by the nation’s banks and lenders, this is simply not quite true. Banks have always maintained rigorous assessment criteria and have always sensitised interest rates in their calculations to account for a ‘what if’ scenario for when, not if, interest rates rise. Most lenders test borrowers for affordability at around 7.0% to 8.0%pa and apply minimum benchmarks to acceptable living allowances to determine affordability.
This latter requirement has come under significant scrutiny recently with most lenders demanding borrowers to summarise their own basic living expenses which will be compared against the banks own standards (some lenders now will also index living expenses according to the amount of income an applicant earns with those on higher incomes having higher minimum living expenses applied.).
Lender rules first, rates second
In this environment, more than ever before, it is important to get quality advice around your finance options. There are significant differences between what one lender’s rules are and anothers. There may be a slight difference in the rate but a huge difference in policies that will affect your ability to be approved, your structure and of course your total borrowing capacity.
What you can do about it
Fortunately there are a few simple things you can do about it. If you are completely unsure then just get in contact with us here or fill out our FREE mortgage health check link here
A few recommendations include;
Consider fixing some of you loan
Some of the lenders are offering some pretty attractive fixed terms that are the same or cheaper than many variable investment and interest only loans. With the likelihood of further increases for this sort of lending, now would seem like a pretty good time to consider your options around locking in a near historical low rate
Switch to Principal & Interest
Given that the banks are under significant pressure to reign in interest only lending taking a principal and interest repayment is attractive to all lenders these days and they have priced their products accordingly to increase demand for principal and interest repayments. It does of course increase your monthly repayments but you are paying down the loan and ultimately paying much less interest in the long term
Set up an offset account
If you have some funds sitting in a interest bearing account it can be a suitable option to put the same funds into an offset account. The effect is it reduces the balance of your loan and interest charged on your mortgage by the amount you have in offset (eg $10k in an offset account reduces the balance of a $100k loan to an effective balance of $90k). The rationale being that an interest bearing account may earn you a poultry 2.0%pa currently, less tax, less the effect of inflation and you aren’t really going anywhere. Where an offset account saves you interest at a much higher rate with nil tax payable on the saving. Consider it that saving money is better than making money.
Ring your current lender
You might be surprised at how a simple phone call may result in you getting a better rate. The recent rate increases have been a pretty broad brush 0.15%pa increase here or a 0.3%pa increase there on top of whatever you are paying. If your product is out of date and hasn’t been looked at recently you could be paying well above what is available currently. It also helps to use the magic words ‘Im looking at refinancing what can you do for me?’
Refinance to a new lender
There are dozens of lenders out there and you might just be better off refinancing to a new lender. We can of course give you some options around this. Here are two useful tools to help you start that process.
We hope that this helps shine some light on the current situation around why mortgage interest rates have been increasing recently. As mentioned please feel free to contact us here or call the office on 1300 706 540 to discuss your option tailored to your scenario.
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