At today’s board meeting the Reserve Bank decided to leave the cash rate unchanged at 1.50% (as of 4th July 2017).
You may have noticed that the RBA cash rate remains steady month after month. And YET lenders are regularly increasing interest rates!
Lending rates are increasing and the criteria for getting approved for a home loan is more stringent. The following article will discuss the recent shift in how financial institutions lend money and who to go to for help to avoid any future lending stress.
Buying a Home in Australia
Buying your own home in Australia is a great goal to set but is no easy feat. Likewise, paying an existing home loan has its challenges.
Both efforts require you to make some major sacrifices. You will need to establish a budget and stick to it as much as possible. If you are buying a home for the first time, you will need to borrow what you can reasonably pay back.
The Reserve Bank’s Decision
The Reserve Bank has decided to keep the cash rate steady at 1.50 percent. Although this rate remains consistent with each passing month, you have probably become aware of financial institutions recently starting to raise lending rates despite the Reserve Bank’s decision.
Finance Industry Changes
Finance industry changes will have a huge impact on investors, homeowners, and future property buyers alike. Aside from rates increasing, financial institutions are dramatically changing the rules and criteria for lending frequently.
Lending rules have the potential of changing even on a daily basis. For example, investors and homeowners are under scrutiny when applying for interest-only loans. Moreover, larger deposits are required since there is a decrease in preferred lending ratios.
Many consumers will notice that entering into a contract is becoming more frustrating and less flexible. Basically, the criteria for lending is a more involved process, particularly for investors and off-plan property buyers.
A bank valuation is used by the lender to determine how much money to extend to the borrower. This is to ensure that the loan does not exceed a property’s value. Unfortunately, bank valuations of property in most states across Australia are surprisingly lower than expected.
Avoid Sitting on the Fence
In spite of the existence of record low interest rates, lenders and regulators look beyond the present and predict how borrowers will manage their debt when interest rates eventually increase.
Loans that were easily approved for financing a few months ago are now being declined by many lenders. In light of these changes, there is little reason to sit and wait on the fence for a lower cash rate or to wait for an outstanding opportunity to refinance your mortgage debt.
Funding pressures cause lenders to make changes over time and banks’ lending rules are adjusted based on shifts in the financial market. Additionally, the APRA (Australian Prudential Regulation Authority) continues to tighten the squeeze on lenders in an attempt to reduce lending in a low-rate environment.
Taking Steps to Reduce Stress
With so many “mood swings” involved with lending, it’s prudent for you to regularly review changes that may apply to your loan to offset the potential of experiencing any future lending stress.
You can experience tremendous lending stress under specific scenarios such as:
- If you live from paycheck to paycheck.
- Requesting a review from your bank if you have multiple investment loans.
- When you come off a fixed interest period and have an interest-only loan.
- If financing is about to expire from a fixed period in the next 60 to 90 days.
- If you have an established loan approval older than 30 days and the terms have changed.
- If you have reached your credit cards’ limits and you are financially strapped paying off the balance.
The Role of Mortgage Brokers
There are situations when a borrower will need an intermediary party to find a bank or direct lender that will agree to provide a specific loan that the borrower is seeking. Over 50 percent of Australian homeowners presently use brokers for the following reasons:
- Brokers carefully research diverse lending products and recommend different lending options.
- They provide detailed information about the lending process so that the borrower can make informed financial decisions.
- Brokers are the best professionals to advise borrowers about rapid financial changes happening without becoming unravelled.
- Brokers are on call to help you regularly stay abreast of your finances.
Taking action to protect your borrowing leverage is especially crucial in the wake of an ever-changing financial environment. The stress of having a mortgage can be alleviated when you seek the help of an intermediary preferably before borrowing rates increase.
Lenders and regulators are hesitant to take risks, and carefully assess how borrowers will likely manage their debt when rates eventually rise.