It’s been a few months since my last financial update and today’s article is timely to assist you with managing the tumultuous finance world we now all live in. I want to be very honest with you and in simple terms, the Banking world has turned upside down. A lot of the people in the industry are exiting because it is too tough and they lack the experience and skills to work through the red tape required to service their clients appropriately.
Here are the reasons why:
· The Regulators finally got the job done after two years of trying to slow the Melbourne and Sydney market. This has resulted in very tight guidelines around interest only loans, Investment loans and the overall assessment by financial institutions.
· The Royal Commission is six months in with a further six months to go and their findings have been surprising for all people outside the finance world. This has changed the behaviour of all lenders drastically in that they have increased debt servicing requirements by up to 35%, reduced the approval of loans “outside standard policy” by 80% and credit assessors are now reluctant to put a signature on the dotted line to approve a loan without further interrogation.
· Investor activity has been reduced significantly through capping of loan books, the capping of Interest only loans and the significant increase in interest rates for such loans. Major banks moving up to 5 times last year and some second tiers now moving due to the increased cost of funding themselves on the securitisation market.
· Monthly living Expenses are now calculated around your income levels, if you earn more, the banks will use higher living expenses, if you own multiple properties they will increase their internal numbers to ensure it is harder to borrow so you can’t buy the next property. All these changes are a result of deliberate regulatory action to slow the Melbourne and Sydney markets.
· Increased work load by up to 45% for all staff in the finance sector which makes its very hard to hold on to people that aren’t there for a long-term career, which I admit has hurt our business as-well. We are doing a lot around this by employing specific people who are career driven, tripling our staff training because when markets behave like this, the whole world seems to become 20% less educated overnight and we all start to second guess ourselves.
· Loans that reach their interest only expiry now need to go through a full servicing assessment. This has always been the case but was never adhered to by the banks due to lower levels of controls by the Regulators and the banks. This is a very big change that you need to understand. For example, a 3-year Interest only loan is expiring for the 3rd time. Remaining term is 30 years minus 3 x 3 = 21 years. The banks will assess the loan based on a remaining term of 21 years, a shorter loan term means you need to have higher income on paper to show you can pay this loan off fully in a shorter period. On a $650k loan, the repayment will increase from $2601 to $3956 per month if income cannot be proven and it is imperative that you are aware of this to be able to manage your own personal situations.
· Age is now a big issue. Not long ago a bank couldn’t discriminate against an older person applying for a loan. The regulators have now put a stop to this and from 50 years of age, some banks are reducing loan terms because they don’t think it is feasible to have a loan at 80 years of age after a 30-year loan term. This is a risky move by the financial institutions because it can eliminate half of the borrowing population and will reduce loan numbers significantly which brings a lot of other issues to the fore front.
· The second tiers and smaller institutions are now becoming very popular, they now account for 37% market share, but they are struggling to service such volumes and navigate this ever-changing financial system. Patience is required as they improve, gather staff to manage volumes and learn the ropes that the majors have developed over the past 30 years to be able to play in the big school ground.
As you can see a lot is happening and the banks are big organisations to be processing such change so please expect a much lengthier process than before. Together we can streamline this process if we communicate more and in my individual meetings with you share further insights that are more relevant to your individual circumstance.
Other Notable Financial Information You Need to Know
As discussed above, cost of funding is more expensive and has become more expensive over the last 12 months for the institutions to get the money in and hence rates could go up for this simple reason. The discussions are around 15-20 pts which has minimal effect. On the other side, the RBA hasn’t moved and doesn’t look like moving due to the current economy. If you read the literature from all the economists, the next rate increase is expected in 2020. Obviously, we can’t confirm or advise on this as a lending company but that is what is expected.
As far as rates are concerned, the Majors are still very expensive with variable rate loans for the Investor’s out there ranging from 4.4-4.6 % for Principal and Interest and 4.7-5.0 % for interest only loans if < 80% loan to value ratio.
The alternative to these high rate’s is getting a fixed rate term at 4.19% – 4.29% Interest only or going to a second Tier at 3.63% variable principal and Interest or 4.09% variable interest only for investment loans. Please make contact with me if you are concerned about your current rates so we can discuss a better/cheaper solution for you.
CGT / Negative Gearing:
Capital Gains Tax and negative gearing is a topic for discussion for the upcoming election and Labour have made it very clear that they want to change both of these which could affect investors dramatically moving forward.
Labour could either eliminate negative gearing or cap it at a certain number of properties for each individual.
This will make it a lot tougher for our more astute investors who own multiple investment properties. The Labour Government is also suggesting that the 50% exemption for holding investments greater than twelve months be eliminated as well. The impact of this will double your Capital Gains Tax when selling an investment asset and deter investors from hitting the market which could have a dramatic effect on the market.
Note that any changes have to be legislated which takes time, so all investors have 18 months up their sleeve to get into the market as the government would probably grandfather these changes meaning that all people that hold the current negative gearing benefits would continue to do so. A lot of Investors are getting into the market now so that they don’t potentially miss out on this if there was a government change to come.
The majority of major Banks want the Broker division closed and the Regulators & Royal Commission have been considering this which is concerning
Over the last three months, ALIC has been working closely with the top fifteen brokerages in the country to explain to Treasury and the head of the Royal Commission (Mr Hayne) exactly what brokers bring to the market and that they do cater for up to 57% of the loans in the country. This % has increased dramatically as the skills internally in the bank system have diminished.
The banks have lost 29% of market share since the GFC in 2008 and would be extremely happy if Brokers were eliminated to ensure that all consumers go to the banks directly for their funding requirements.
This could have serious implications on second tiers that don’t have branch distribution networks which would work to the Major Banks’ advantage in getting market share back, reducing competition and in turn would likely lead to an increase in interest rates to you, the consumer.
It’s imperative that consumers and our clients at ALIC understand the importance that Brokers bring to the market and the competitive advantage they offer. The industry is working to ensure all interested parties have the right information, and the outcome is to ensure that the consumer gets both choice, competitive interest rates and the right advice. We don’t believe forcing consumers back into branches to borrow with minimal options, nor lending advice offered to borrowers is the right choice for any of our customers.
What to expect over the next six months and have the regulators gone too far?
We personally believe if the financers don’t loosen up on a lot of their restraints and requirements the lending market this year will decline by 30% across the country due to their actions. This in turn, can offer you some amazing opportunities as Investors when a large % of borrowers struggle to get loans approved and are unable to go to auction.
In summary the regulatory changes and the Royal Commission had to happen, but we need to ensure that all parties are communicating and that the risk and compliance areas of Lending Institutions understand what is required.
Our commitment to you is to understand the changes that need to occur to keep ahead of the game and we will do everything possible to improve our service levels. This is the hardest time we’ve seen in the financial sector, we will train and employ our staff accordingly to ensure that you have a good experience within our business.
Huge Opportunities Out There:
90% of our clients at ALIC are investor clients and investors love change and opportunity to allow them to have an advantage in the market place.This market is exactly that and we need to have our eyes and ears open because there are opportunities here in the national market with a huge differential in property values in Sydney/Melbourne to the rest of the country.
Recent analytics and data stated that the medium house price differential between Sydney and Adelaide has never been greater than $250,000 and over the last twelve months it’s grown to $750,000 which they believe creates amazing opportunities in that city. Other markets such as Geelong and Ballarat have grown between 30-50% over the last 18 months which brings in growth opportunities in Bendigo and Cairns of all places where the market has not moved for 12 years according to our property experts.
As you know, ALIC is the leading Investment Lending firm in Australia on lending structures & strategies. Whilst we can’t advise where to buy, our professional advocates have some insightful data on growth areas which they can share.
To finalise this article, I wanted to thank you for being a client of ALIC and giving me the opportunity to update you on the financial world at the moment. We appreciate your patience with our team while we work through a lot of the red tape that has been presented to us since the Regulators and the Royal Commission started their good work. I will continue to touch base with you all individually but feel free to reach out if you want to discuss your current position further.
Natasha Choi is widely regarded as one of Australia’s leading advisers. For the past 4 years Natasha has lead the way in debt structure and strategy enabling her clients to create wealth through specialist advise from Natasha and Australia’s best property experts.
To make a time to review your current and future position please call Natasha on
1300 254 228.
https://www.alic.com.au/wp-content/uploads/2018/08/change-sign.jpg19083072immwpuser01http://www.alic.com.au/wp-content/uploads/2016/08/logo.pngimmwpuser012018-09-06 02:38:472018-09-06 10:49:17Things you need to know now! Part IV