Are you planning to borrow new money shortly or re-finance current borrowings?
As the Royal Commission reaches its final stages of review into misconduct in the banking, superannuation and financial services industry, for clients and their advisors, it is worthwhile noting some of the current trends impacting new credit applications and/or review of existing credit facilities.
According to USB, up to 80% of all home loans written in 2017 utilised what is known as the HEM (Household Expenditure Measure). HEM is a benchmark lenders to estimate a loan applicant’s annual expenses – a figure that becomes part of the calculation that determines borrowing capacity.
In the majority of cases, it has been reported lenders have assumed loan applicant’s to have a “basic” lifestyle in respect of estimated annual living expenses, which as is low as $32,400.
As APRA (Australian Prudential Regulation Authority) now works with lenders to improve responsible lending practises, expect greater scrutiny of your true annual household expenditure details to be taken into account when next applying credit – gym memberships, UberEATS fees and all!
Tip: Review household budgets and spending patterns at least 3 months out from date of intended finance application – who knows, you may even find some extra savings by cutting back on unnecessary expenses you didn’t even know you were incurring!
While the tax benefits of interest-only loans for investors are well known, potential borrowers should be aware lenders are now applying more stringent serviceability tests on interest-only loan applications. From recent experience, this includes lender analysis of an applicant’s ability to repay should interest rates reach 7.5% or 8%, as well applicant’s ability to meet higher repayments required once the interest-only time period of the loan converts to principal & interest.
Tip: Consider preparing in conjunction with your accountant a detailed rental cash-flow forecast in advance of an impending purchase – this may be the difference in getting funding across line as compared to a lender using “default” assumptions only.
Comprehensive Credit Reporting (CCR)
As of 1 July 2018, the new CCR legislation was introduced for Australian credit providers, mandating the reporting of both “positive” (i.e. good repayment history) and “negative” (i.e. overdue payments & defaults) credit information to the credit market at large.
With the first bulk upload of both consumer and business credit information expected to be reported at the end of this month (September), expect lenders to query details in regards to any negative credit events recorded against the applicant and/or reject new credit applications based on CCR information.
Tip: Move to protect your credit score and CCR information by paying your accounts on time, ensuring ATO tax payment arrangements do not default, and reducing number of new credit enquiries.
It is recommended clients are also mindful of the number of companies they are Director for, as well as complexity of corporate/family group structure and multiple entities, as this can play a negative role on credit scores.
In summary, while the credit landscape in Australia is currently becoming tighter and lenders squeezed, for well informed and prepared clients and advisors, there should be no fear that borrowings can and will continue to feature as part of many business & family wealth plans.
This article was co-authored by Rob Fuller HLB Mann Judd Melbourne