As the coronavirus pandemic continues to make headlines around the world, property and finance related matters continue to change in light of the current pandemic we are all faced with. Change is happening so fast I felt it was timely to update you on a number of key issues relating to home loans and property finance.
Firstly, I want to point out that announcements made through the media are not to be taken on face value, rather you should be across the detail before making any financial decisions. Case in point is the home loan repayment freeze offered by most lenders, with many home loan customers making the incorrect assumption that the interest also freezes. This is not the case as interest accrues monthly resulting in a higher home loan balance once the 6 month repayment pause period expires.
An experienced home loan specialist is the best person to have in your corner right now before making any financial decisions relating to your home or investment loan(s).
Here are 6 topics I wanted to update you on:
- Home loan repayment freeze option
- Mortgage Insurer imposes Lenders Mortgage Insurance (LMI) embargo
- Lenders scrutinizing loan applications
- Pre-approvals – are they still worth it?
- The current property market
- The latest relating to Landlords and Tenants
1. Home loan repayment freeze option
Let’s clear something up as this option has been widely misunderstood.
A repayment freeze (holiday) is a bit like “kicking the can down the road”. It’s not a free lunch. Take care with this option as it could lead to more pain in the future.
If you have financial buffers in place (via redraw in your home loan, or cash stashed in offset), then tap into these reserves – after all that’s why you set up financial buffers in the first place, for times like this.
A repayment freeze provides instant cash flow relief, however your loan interest will continue to accrue, adding a higher outstanding loan amount once you come off the repayment freeze. Furthermore, your loan repayments will increase once you come off the repayment freeze as the home loan still needs to be paid off within the terms of the mortgage contract.
The other issue to note is that interest is charged on interest accrued. What this means is that your total interest bill ends up higher in the end. At time of writing, CBA is the only lender than has announced it will refund the ‘interest on interest’ component once the repayment freeze is over.
If you have sufficient financial buffers in place, a good option is to tap into these in the first instance – without leaving yourself dry of course. Taking a break from your home loan repayments should be the last resort as interest will compound on the outstanding balance. Interest is calculated daily and charged to your home loan account monthly – meaning that in the long-run you end up with a bigger home loan and more (overall) loan interest paid.
By the way if you have no choice but to take up the repayment freeze option, your credit file won’t be impacted (on this occasion) as an exception has been made by all lenders due to the unprecedented circumstances we are all faced with.
2. Mortgage Insurer imposes Lenders Mortgage Insurance (LMI) embargo
QBE Australia – the largest mortgage insurer in Australia – has informed lenders that it has imposed a temporary embargo on the provision of LMI to borrowers employed in industries most effected by the COVID-19 pandemic. This includes (but is not limited to) the retail, tourism, and aviation sectors.
LMI applies when borrowing >80% of the purchase price, or >80% of bank valuation. In this environment, I recommend capping your lending to a maximum of 80% as LMI loans will be very difficult to achieve – at least during the pandemic.
We are currently assisting several medical professionals with higher LVR loans – such as 90% – however these borrowers have very secure incomes as you can imagine. In fact medical professionals usually qualify for an LMI waiver when borrowing >80% as some lenders favour such borrowers given the security of their income streams.
3. Lenders scrutinizing loan applications
Just when we thought lenders were easing off marginally and playing ball when it comes to lending, we all got smacked in the face with COVID-19. Loan applications are now being scrutinized like never before.
The main area of focus by lenders is continuity of income. Many businesses have had the door shut in their face literally overnight, which has led to millions of Australians losing their jobs. No job means no income, and no income means no borrowings possible.
Earlier today a lender on our panel announced a ban on using income (for serviceability purposes) relating to various industries – these include tourism, travel, hospitality, event planning, entertainment, retail sales, real estate services, and spas/salons. Just when I thought I had seen it all..!!
Whatever you do, don’t commit to an unconditional purchase unless your loan application is formally/unconditionally approved – in other words purchase with a finance clause. Auctions (in the usual way) are off the table right now therefore this enables you to make a purchase with a finance clause as private sales will be the new norm until things return to normal.
Over the past few days, we’ve witnessed (for the first time) lenders asking questions post formal approval to ensure the loan applicant remains employed and that no changes to their job/income has occurred since formal approval. As you can appreciate this is making borrowers nervous and anxious, particularly if a purchase contract is unconditional. There is no insurance policy against this latest issue and therefore it is now more important than ever to keep the communication lines open with your bank/lender and/or Mortgage Broker to ensure you’re not at risk of forfeiting on your purchase contract – as this will be very costly and stressful.
4. Pre-approvals – are they still worth it?
Yes and No. I’ve previously written on this very topic several times in the past. Here’s a blog I wrote sometime ago explaining what a pre-approval is and how reliable it is.
In the current environment, and in light on my comments above, lenders are scrutinising loan applications more than ever.
A pre-approval is based on your financial position and income sources at a point in time, therefore any adverse changes to your financial position and income sources makes the pre-approval worthless once the actual purchase is made.
Applying for pre-approval gives you a slight advantage over your competition as it means you’re ready to do business, however don’t assume that your chosen bank/lender will honor the pre-approval if your financial circumstances have changed since being pre-approved.
Before committing to a purchase, talk to an experienced and trusted Mortgage Specialist who is able to work through your borrowing capacity and borrowing options with a level of accuracy – in many cases without the need to apply for an official pre-approval from a bank or lender.
5. The current property market
The property market is still open for business and in fact transactions are still happening – just in a different way.
Given COVID-19, auctions are a no go zone – at least not in the usual way. Auctions are happening across Australia in a virtual on-line way.
Some vendors have been freaked out by the pandemic we’re all facing and have pulled their listings off the market – with some deciding to hold off selling in the current market, or at least until the pandemic passes.
Buyers are also transacting with caution and will only commit if there is certainty. Right now the market is lacking certainty resulting in a flow-on effect onto our property markets.
If you’re in a fortunate position where your income sources are secure, and you can afford the new borrowings, now may be the opportune time to make your move. As Warren Buffet once put it… “be greedy when others are fearful”…now’s that time..!!
6. The latest relating to Landlords and Tenants
Right now there’s confusion among both parties (landlords and tenants) as the federal government has announced a ban to tenants’ eviction for up to 6 months. At time of writing, the federal government is yet to announce another financial assistance package for rental distress.
Most experts are suggesting landlords to hold off reducing rent, or providing rent relief, until the government announces a financial assistance package, as any rent reduction may put at risk how much a landlord will receive if there is a tenancy relief package. Further, any variations instigated by the landlord to the rental agreement, such as rental concessions offered to a tenant, will jeopardise the insurance cover on that property.
Whilst a landlord can freeze mortgage repayments up to 6 months, interest continues to accrue (as noted above). Therefore the holding cost of an investment property increases. The federal government understands this issue which is why they’re working on a rental relief package – yet to be announced.
In summary… you can see that there is so much happening right now. Whilst this storm has turned our world upside down, have faith knowing that this will pass – it’s just a matter of time.
If we can help with providing you more details about the information covered here, please feel free to reach out at anytime. We’re here to support you in any way we can during this difficult time.
Take care and I wish you and your loved ones all the very best during this difficult time.
Disclaimer: The Information is general in nature and does not take into account your particular investment objectives or financial situation. It does not constitute, and should not be relied on as, financial or investment advice or recommendations (expressed or implied) and is not an invitation to take up securities or other financial products or services. No decision should be made on the basis of the information without first seeking expert financial advice. Your full financial needs and requirements would need to be assessed prior to any offer or acceptance of a loan product. Subject to lenders terms and conditions, fees and charges and eligibility criteria apply.