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Your Guide To Low Doc Loans In Australia

Posted in Getting Started on 14 Mar 2019

Businessman reading newspaper

 

Low doc loans are one of many loan types out on the market. Are you looking to improve your loan options and financial situation? Informing yourself on the latest news will help you make the right decisions for the future.

 

Many Australian’s who work as a freelancer, contractor or are a small business owner may find that their loan options are limited. If you’re looking for a loan there are options such as a low doc loan. You can read more about low doc loans here or by contacting us at anytime.

 

Many Australian’s believe that assessing their own financial situation is enough to consider their decision an informed one. It might seem like a rational choice but it’s not an informed decision, one that doesn’t take into consideration the bigger picture; the climate in which they’re taking out a loan.

 

Many economic factors should influence your decision on whether a loan is right for you. Many business owners, contractors or self-employed individuals will only consider the big one; interest rates — this is a mistake.

 

In this blog, we will outline all the external factors that influence your current or future loan options, and help you understand how these different economic shifts affect your financial position.

 

We go into the following:

  1. Housing market predictions in Australia
  2. RBA and interest rates; forecasting unpredictability
  3. The Royal Commission
  4. Low doc loans meaning; how it affects you

 

Housing Marketing Predictions In Australia

An Australian house

The last decade of housing prices in Australia has seen the trend of one year up and one year down, the notable outlier being 2012 to 2014 where there was a steady rise throughout both of those years.

 

This year we are seeing a sharp correction in the market off the back of 2017, where we saw strong growth that posted the third highest price surge in the last 10 years. There are many ways to view these figures, one of which is through the Australia house price index.

 

Despite these ups and downs, since 2008 we have seen a steady increase in the value of dwellings nationwide which averages out to be an increase of just under 38%. The largest dwelling increases came from the capitals Sydney, Melbourne and Brisbane respectively.

 

CoreLogic, a property finance analyst company, also predicts that these changes in dwelling prices will cool off due to several economic factors. Marketing-cooling measures such as stricter domestic lending conditions, higher taxes on foreign investment and rising debt will all contribute to a slow 2018.

 

Lending Stress

 

Tighter lending standards were introduced in March 2017 because of 2 reasons: the rising property prices and the growing risk of household debt rising. As such, the APRA limited interest-only lending to 30% for new mortgages.

 

A number of other lending measures were introduced which include:

  1. LVR/LTV ratio limited to 80%
  2. Interest-only lending above 90% LVR must be examined thoroughly
  3. Restrictions to high-risk loans (high loan-to-income loans, high LVR and long loan periods)
  4. 10% annual cap on investor housing credit

 

In April 2018, the 10% annual cap was removed for housing investment portfolios, meaning that individuals could now exceed a 10% growth in their investment lending over a 12-month period.

 

While the 10% limit removal helps lower interest rates for investors and reduces the deposits need for the loan, the APRA has indicated they will replace the 10% cap with more permanent measures to improve lending standards in the future.

 

Rising Debt And Low Wage Growth

 

The mortgage market worldwide has seen considerable growth, and as a result our domestic market is following suit.

 

Did you know in the 1970s our mortgage market was the size of 15% of our GDP? Nowadays, it’s almost 100%.

 

Our housing loan market is made up of two segments, owner-occupier loans and investors loans. Owner-occupied loans are rising at a rate of around 6% each year with investor home loans rising just over 1%.

 

Here are some key factors to watch out for moving forward:

  • Debt-to-GDP ratio climbing over 100%
  • House price increasing
  • Rising household debt levels
  • Slow economic growth
  • Stagnant wage growth
  • Stretched loan affordability with higher LVR

 

The two major factors to watch for will be the wage pressures in combination with rising household debts. Low-interest rates allow households to take out loans that they otherwise wouldn’t be able to afford if it were higher.

 

Seeing as this safety bubble of low-interest rates have remained since late 2016, this unprecedented record low may catch people off-guard when they rise in the future. The borrower’s sensitivity to rate rises is at an all-time high.

 

These key economic factors will place an increased burden on the lending services industry as risk amplifies during a housing downturn with record low-interest rates. It is believed that this pressure will increase mortgage pricing while reducing lending products and their features.

 

RBA And Interest Rates; Forecasting Unpredictability

Picture of the Australian CBD

There are tough times ahead for the Reserve Bank of Australia as it must decide on where they will keep the official cash rate. The problem for the RBA is that there are several economic concerns coming from international and domestic markets.

 

The RBA cannot solve all of them at once since moving the cash rate up or down will solve some issues but worsen others.

 

The official cash rate has remained at the record low since 3 August 2016, where it has stayed at 1.5%. This record low was meant to bolster the economy, but pressure from internal and external sources is mounting.

 

These areas of stress come from many places including:

  • Foreign property demand for Australian housing is falling
  • Housing affordability remains a significant problem
  • Rental yields and residential rents are rising
  • Interest rates remain low
  • Mortgage market continues to grow
  • Tighter lending standards introduced
  • Residential construction is slowing down

 

Current Interest Rates, Australia And The RBA

 

The uncertainty of the RBA’s next move is placing a fair amount of pressure on the Australian economy as many analysts disagree as to what issues the RBA should tackle first.

 

Regardless of whatever economic issue the RBA plans to address, a hike or cut will affect many Australians. For many months now, it was believed the only choice the RBA would make was how far the cash rate will go up.

 

However, moving into 2019, analysts around the country are now predicting a further cash rate cut that will add to the historic low. Future predictions suggest a 25 basis point decrease is likely due by November 2019.

 

If this cut does come, it will tackle international uncertainties like the global trade tensions and softening growth of China which are Australia’s biggest worries in terms of the international marketplace.

 

In our domestic economy, the RBA seeks to tackle the correction in housing prices, falling investors’ appetite, sluggish consumer spending, minor wage growth and rising household debt.

 

The Royal Commission

Picture of Australian money

In recent months, there has been national talk about the Royal Commission into the finance industry.

 

Here is the timeline summary of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry:

  • Announced: 30 November 2017
  • Formally established: 14 December 2017
  • First round of hearings: March 2018 — lending practices
  • Second round of hearings: April 2018 — financial planning and wealth management
  • Third round of hearings: May 2018 — small and medium enterprises
  • Interim report: 30 September 2018
  • Final report: 01 February 2019

 

Summary of the report

 

The final report has been published and is now being assessed by half the country on its finding and recommendations. For more information, you can visit the Royal Commission website to find more.

 

The Royal Commission proposed many findings and recommendations; however, we will focus on the finding concerning mortgage broking and home loan lending.

 

What does it all mean?

 

There were many suggestions made in the final report regarding 3 separate entities and the interactions they have when it comes to home loan lending:

  1. Borrowers
  2. Lenders
  3. Intermediaries

 

For reference, intermediaries are defined as a third agent from borrowers and lenders that come in the form of brokers and aggregators who help liaise, find and review home loans.

 

What it means for lenders, brokers and borrowers?

 

In the report it outlined the relationship between borrowers, lenders and intermediaries, there were 8 key sections.

  1. The sustainability of loans
  2. The relationship between brokers, lenders, aggregators and borrowers
  3. Duties of a mortgage broker
  4. Best interest obligations
  5. Investigation and reporting obligations of all parties
  6. Duties of mortgage aggregators and lenders
  7. Remuneration
  8. Implications

 

There were many proposals and findings that will affect brokers, lenders and aggregators in the months and years to come. We have summarised them into the following:

 

The sustainability of loans

 

The current lending criteria set out in the NCCP Act 2009 is adequate but needs enforcing.

 

The relationship between brokers, lenders, aggregators and borrowers

 

A mortgage broker should act as the agent of the borrower, not the lender or aggregator, thus avoiding conflict of interest.

 

Duties of a mortgage broker & Best interest obligations

 

Mortgage brokers should be regulated by the laws that apply to entities that provide financial product advice.

 

Brokers under an ACL have been excluded from CA 2001 regulations, recommendations suggest aligning ACL with AFS regulations.
Alignment proposals include:

  • Convert ACL licensees with the same information-sharing and reporting obligations that AFS have. Also, amendments to the NCCP Act 2009 would need to be made
  • Brokers giving advice should be regulated by the duty to act in the best interest of the borrower; like the duty placed on financial planners

Investigation and reporting obligations of all parties & Duties of mortgage aggregators and lenders

 

ACL holders, as a condition of their license, should be bound by information-sharing and reporting obligations, which require holders to take the following steps:

  • Report any compliance concerns about individuals acting under their license to the ASIC on a quarterly basis
  • If misconduct has occurred, provide advice to the retail client
  • Similar duties apply for when a lender or aggregator detects misconduct

 

Remuneration

 

Payment of trail commission and upfront commission costs by the financier should not continue as no benefit to other borrower is obtain from ongoing payment or support.

  • Trail commission, as suggested, should be phased out within 18 months to 2 years
  • Upfront commission costs phased out within 18 months to 2 years

 

Borrowers should pay brokers. This could be achieved by capitalising fees into the loan amount.

  • However, problems would occur as lenders could deal directly with the borrower to minimise costs
  • Financiers may be forced to charge a fee to ensure competition remains

 

Aggregators should be paid by either the borrower, broker or the financier depending on the service. The market should determine those fees and no regulation on the fees charged should be implemented.

 

Implications summary

 

The report found that the following implications would arise from the suggestions and recommendations:

  • ‘Duty to act’ regulation suggestions benefit all parties
  • The transition of fee structure will be problematic and difficult to implement
  • Aim of the Royal Commission was to provide a transparent system
  • Concerns remain about how to ensure competition remains, with regards to giving banks an unfair advantage

 

Low doc loans meaning; how it affects you

Businessman pointing at you

The Royal Commission has proposed stricter verification that will make it harder for people to get a home loan. The falling house prices and housing credit have also stunted growth which is contributing to consumers not being able to borrow as much as they want.

 

The reduction in maximum borrowing capacity will likely lead to a full credit crunch that will affect other types of debt such as car loans, personal loans and credit cards.

 

There will be increases to borrowed loan sums as broker fees are added to the loan’s value as well as rising borrower’s confidence with brokers acting in the best interest of customers with the proposed ‘duty of interest’ regulation changes.

 

What can I do?

 

The keys to success for 2019 will come down to planning and knowledge. Keeping up to date on the latest information whether it’s the royal commission, housing prices or financial news will result in your being more informed and making better decisions. Here’s what you can do:

  • Plan your year accordingly with budgeting
  • Get your current credit score
  • Research loan options and market trends
  • Consult Guardian for a free home loan health check

 

Home Loans for Business Owners

 

A home loan is as easy as calling us on 1300 LOAN STAR or by sending us an email at . Contact us today and we’ll make sure we get back to you in 24 hours at any time during the week.

 

Disclaimer
The article on this website was correct at the time of writing but lender policies are subject to frequent change. This information is for general purposes only. Whilst we strive to keep our information up to date and correct. We take no responsibility for any loss of inconvenience caused from a person(s) or organisation(s) relying on this information. We recommend you contact us before acting upon any of this material.

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