Low Document lending in the current environment

You may have observed media commentary over the past months discussing the “reckless” lending of banks to selfemployed customers via the misunderstood structure of Low Document [Low Doc] lending.
The original concept of this form of financing reflected;
  1. Mature businesses [older than 2 years] needing to borrow because their latest tax returns had not been completed.

  2. The overall gearing of property was limited to 60% of the property value.

  3. The directors of the business certified that they could afford the repayment and that the additional cash flow impost would not detrimentally impact on their business, and

  4. Future earnings would also assist in meeting future mortgage obligations.

When the credit crunch associated with the Global Financial Crisis [GFC] happened many businesses suffered a fall in revenues and struggled to meet all financial obligations. This together with falling property values & borrowers who should never have been able to use this borrowing structure started to default on mortgage repayments at a greater degree than those who held a traditional mortgage.
It should be noted that the mainstream Low Doc market provides borrowers and companies with good credit ratings an opportunity to leverage their property. Prior to 2002, companies relied upon the technical skills of their mortgage broker or bank manager to demonstrate capacity to service all debts.
Much has now changed for those wishing to borrow under this structure. These include;
  1. Businesses having an ABN for a minimum two (2) year period.

  2. Providing copies of the businesses’ last four (4) BAS quarters.

  3. ATO Tax Portal confirmation of lodgement of BAS & tax returns and those ATO payments are up to date [repayment of tax debts is an unacceptable purpose of this form of financing].

  4. The last three (3) months of bank statements demonstrating revenues and debts being serviced from this account, and

  5. Rental statements for any investment property you own.

In many cases this form of verification actually more thorough than providing annual tax returns. Tax returns effectively reflect the historical earnings & profitability of a period up to 18 months in the past!

Negative vs Positive Press on Housing Market Bubble

Christopher Joye from the Australian Financial Review wrote an interesting article on 25th August about how print media sells more papers from negative press regarding the housing market than positive press.

[The article concludes:] Reflecting on the housing debate, [the RBA’s Glen] Stevens concludes: “It has to be said that the housing market bubble, if that’s what it is, seems to be taking quite a long time to pop – if that’s what it is going to do. The ingredients we would look for in signalling an imminent crash seem, if anything, less in evidence now than five years ago.”

Here is the link to the article, it is well worth a read:
Read the Christopher Joye article in full

Certainties of Life

On the pathway of life we all confront the inevitability of sickness, the passing of friends & family and, in some instances, the breakdown of the family unit. The random nature of these events leaves us needing to reflect on our own circumstances and how best we can protect ourselves from the fallout.

These times are often stressful for those directly involved and many seek the need to offload frustrations and to understand a way clear & financially sustainable pathway forward. Some answers and solutions are provided by way of pro-active estate planning, adequate personal insurance [possibly linked through your superannuation] and identifying people to assist through the financial & credit conundrum.
A number of our clients have utilised our services in conjunction with their financial planners & Executors of Estates to identify this pathway. As professionals we have access to many contacts in various fields that will enable those involved some sense of comfort that some control is being re-established.
Should you find yourself or a close friend in this position seeking assistance, please call us.

Parents acting as guarantors for their children’s Home loans

Parents who have the means are often keen to help their children get into their first home. One option is by acting as a guarantor where the parents use some of the equity in their home to help the child to purchase their own property. While this works well for many families it is important for parents to understand the risks so they don’t end up getting into a financial difficulty themselves.
It is important for parents to think through what it might mean to them if the borrower defaults. The lender will ask the guarantor to pick up the repayments or pay out the loan. Financial counsellors see parents that are not prepared to deal with that when it happens. 

Some alternatives to consider:
Give a gift. The advantage of this is it does not tie the parents up in any ongoing contractual arrangement or obligation. The disadvantage is if the homebuyers separate, the gift becomes part of the joint property of the relationship, with both parties claiming their share.

Lend money. A loan will give the parents greater security than a gift but not expose them to the risks of a guarantee.

Buy the property yourself. The parents buy the property, let their children live in the property either rent-free or charging rent. If the parents charge rent they will be liable for tax on the rental income but will be able to claim tax deductions for interest costs and maintenance. This option gives the parents full protection over their asset but has the drawback of not giving the child the opportunity to own their own property.

Buy the property together. This option allows the parents to use the equity in their home as security and share the ongoing cost of the mortgage. The disadvantage here is if the child stops making payments the parents will be in much the same position as if they were guarantors – they will be liable for the full amount.

It is vital that you seek independant legal and financial advice before entering into such a guarantor arrangement. You don’t want to turn a financial difficulty into a family breakdown.

Housing affordability is the best its been in a decade.

Reserve Bank Governor Glenn Stevens spoke yesterday about housing affordability saying it’s the best it has been in a decade.He said he was unconvinced house prices were overvalued or considered unreasonably high even if the ratio of home prices to income was higher in Australia than it was 15 years ago.

House prices have become more affordable over the past few years but they are still high by world standards and he has put Australia in the middle of the pack with those in comparable countries. Critics though have warned for years that the Australian housing market is in a bubble, much like the credit bubbles seen in Europe and the US before the global financial crisis and fear for Australia’s housing market if global growth seriously faltered.  The world is so interconnected that if major problems did arise, then things will get much worse (for Australia) and the biggest problem is the Australian property market.

It has to be said that if in fact we are in a housing market bubble, it seems to be taking quite a long time to pop – if that’s what it is going to do. The warning signs we would look for signalling an imminent crash seem less in evidence now than five years ago.

Again these are general comments on the Australian real estate situation as a whole not actually specific areas or suburbs.


News for First Home Buyers

The State Budget has been released and the First Home Owners Grant will be abolished from 1 October 2012 and replaced with the First Home Owner Grant (New Home) Scheme which will only apply to first home buyers who purchase or build a new home valued up to $650,000.00. The grant will be for $15,000.00 and be reduced to $10,000.00 from 1 January 2014.
The State Budget also revealed that from 1 July 2012, a new $5,000.00 grant will be provided to buyers of new homes, whether off the plan or newly built, with a value of up to $650,000.00. The grant is targeted at all non-first home buyers and available to investors as well as owner occupies.

For further information you can visit http://www.osr.nsw.gov.au/legislation/budget/2012/.

Risks & Opportunities

Like many things in life, risks & opportunities present themselves by actions or inactions. How we respond to these challenges determines much of our personal temperament over an extended period. We now need to adjust our lifestyles back to a realistic level of 20 years ago before the big debt and equity bull market started.
For those of us with mortgages, the constant talk in the press concerning whether the Reserve Bank of Australia [RBA] will or won’t adjust the cash rate dominates our “front of mind” thought processes. When the inevitable decision is made by our current lender to pass all or some of the RBA cash rate adjustment on, we then become further agitated by press coverage demanding what the banks should pass on.
Passionate headlines, conspiring commentary, and rehashing statistics of what the CEO gets paid are regurgitated to remonstrate those who take these decisions.
The economic reality is the world, and more specifically Australia, needs strong & well capitalised banks. Some finer points for closer consideration are;
  1. What many are unaware of is in countries like the US & UK, banks aren’t lending unless you have a 40% deposit, sometimes more. In Australia we can still borrow up to 95% and many still do.
  2. Our property prices have remained relatively stable [less than 10% discounts off the peaks of 2006 & 2007].
  3. We still have competition between banks even though the competition has reduced in numbers.
  4. Our government hasn’t had to nationalise any banks to protect deposits and to stop a run on these banks.
  5. For most of us who want a job, we can get one. Our unemployment rate is rising but the UK & US have unemployment rates exceed 9 or 10%.
Yes, we all want to pay as little as possible on our mortgages but we also need to understand that interest rates, like property & the stock markets go through cycles, both up down. Short term adjustments are appreciated but can’t be relied upon for long term life style sustainability.
As referred to above the, opportunity to reduce your mortgage amount quickly in a falling interest rate environment should be accepted if your cash flow is strong enough to maintain existing repayments & conversely when rates rise, as they will, we need to accept the risk that if we don’t change our repayment patterns we eventually get further behind.

No change from RBA but Banks increase rates!

Are you surprised? The RBA seems quietly confident about policies in place in Europe and consumer sentiment here in OZ is on the up again. Personally, we think things are tracking quite positively and we don’t get too caught up in the doomsayers.

A cynic might think that the banks are relieved there was no reduction in interest rates, after all, they would have been under pressure to reduce them quick smart. So what do they do, increase instead suggesting their funding costs are higher! How does CBA reconcile a $3.6 Billion half year profit with higher funding costs? That needs some explaining!

It’s a good time to get a mortgage broker to take a look at your loans – make sure you’re getting the best you can. It’s tougher at the moment to borrow money, you need to be prepared to do quite a bit of groundwork. But that’s not to say that it isn’t competitive.

Make hay while the sun shines we say.


Welcome back!

Belated Happy New Years also – if you’re like us you’ve been slowly getting back to normality, making plans and no doubt resolutions for the new year. 

We read a great blog recently from a colleague of ours, Paul Dunn of Belief1st, with the above title.   For us, the article was a great reality check and probably one of the more pertinent we’ve read in a while – particularly this quote…..

‘The definition of insanity, “doing the same thing over and over, expecting a different result”’! 

Too true!  Read more of Belief1st blogs.

So, have a look and see what you can take out of it, particularly in relation to your financial goals.  This is one area where you can clearly articulate your goals and put in place a succinct plan and timeline to get there.  We have numerous tools and pertinent bits of advice to help you in this area.  So, as Paul Dunn says, make a plan and just START. 

Have a great week and enjoy the return to normality.

To fix or not to fix in 2011?

Using your ‘downtime’ to review a few fundamentals for the New Year?  No doubt you’re giving thought to the ‘fix or not to fix’ question. 

With the talk of interest rates undoubtedly on the rise, here are a few points to put in the mixer:

* Possibility of rates on the rise of up to 1% over the next 12 months – we think that a rate rise is likely, but there have been some interesting signs just over the last month that may impact on this.

* The housing market has slowed somewhat very recently and there’s a perception that it may very well have hit a peak – for the short term anyway.
* Business confidence is still a little subdued although depending on what business you are in and where your clients are this effect will be varied.

So – what do we think?  Yes, there will definitely be some rate rises but by how much remains to be seen.  Remember also, that if fixed rates sit at traditionally around 1 % higher than a variable rate, there still quite a catch up that’s must occur before you start to see some ‘savings’ – that’s a decent amount of time to try and put the equivalent into a variable mortgage.

But, if managing cash flow in either your business or at home is a priority then it’s always a good option to help with this.

Every individual and every circumstance is different – we don’t have a glass ball, just good analysis and dialogue with you to figure out what’s the best option for you.

Enjoy your week of downtime.