Better Banking rules from APRA easing home loan approvals
APRA has told lenders they can immediately change the way they assess customers’ ability to meet mortgage repayments in Australia’s new low-interest paradigm.
As flagged two months ago, the Australian Prudential Regulation Authority has eased serviceability requirements by no longer expecting banks to ensure customers could still repay their loan if its interest rate increased to at least 7.0 per cent.
Lenders can from Friday set their own minimum interest rate floor and make their calculations using a 2.5 per cent buffer, which the prudential regulator has acknowledged could mean some people secure larger loans.
“The changes being finalised today are not intended to signal any lessening in the importance APRA places on the maintenance of sound lending standards,” APRA chairman Wayne Byers said.
“This updated guidance provides ADIs (authorised deposit-taking institutions) with greater flexibility to set their own serviceability floors, while maintaining a measure of prudence.”
Mr Byers said the new rules were appropriate in the current market.
The average interest rate on a standard variable rate loan is set to drop below 4.0 per cent when lenders reduce mortgage costs in response to this week’s second straight monthly reduction in the cash rate by the Reserve Bank.
“In the prevailing environment, a serviceability floor of more than seven per cent is higher than necessary for ADIs to maintain sound lending standards,” Mr Byres said.
“Additionally, the widespread use of differential pricing for different types of loans has challenged the merit of a uniform interest rate floor across all mortgage products.”
The official cash rate was 2.5 per cent when APRA first introduced the serviceability guidance in December 2014 in an effort to reinforce sound residential lending standards.
It since spent nearly three years at a historic low of 1.5 per cent before being cut by 0.25 percentage points in both June and July to sit at its current 1.0 per cent.
Some economists are tipping the rate to fall to 0.75 per cent by Christmas and to 0.5 per cent next year, which would likely pull down consumer borrowing costs yet further.
All four of the big banks have passed on a majority of the past two months’ cuts to customers, although all have pocketed some of the cut in the interests of savers, shareholders and their bottom line.
Mr Byres acknowledged that Australian households were already highly leveraged and said it was crucial lenders remained vigilant.
“With many risk factors remaining in place, such as high household debt, and subdued income growth, it is important that ADIs actively consider their portfolio mix and risk appetite in setting their own serviceability floors,” Mr Byres said.
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How to stop the Commonwealth Bank taking your money
“Pay yourself first” is one of the rules of Robert Kyosaki of Rich Dad/Poor Dad. Let’s look at how the banks have picked up this idea. Let me tell you a story of Kate to show you the Commonwealth Banks latest way of ensuring they get paid first.
Kate is working hard to save her money in the bank. She is using Mortgage Miser to plan out her expenses and income and is following the plan.
Her home loan repayment of $2,000pm Principle and Interest is coming out on the 26th of the month.
Note: The black line across the graph tracks the flow of cash across the month, with the rise being income and the loss expenses.
Last week she watched her Home Loan go out on the 26th. On the Thursday after she had checked her account and saw a redraw of $16,000. The next day she got paid $3,000 (fortnightly) had the whole lot added directly to her redraw so she could offset it straight away. She checked her balance but saw the redraw at $17,000. Needless to say that was the wrong number and a bit if a shock.
On the phone to the Bank (Which Bank?) and asking herself questions “Did I overspend?”,” Did a bill come in?”, “Is it a bank error?”. No, No and No. All good as the bank have a new policy.
The bank sees her account balance as $19,000. So why can’t she see her $2,000.
Because the banks have reserved that for themselves. They have put a hold on her $2,000 so Kate does not mistakenly spend it and have her account overdrawn.
Apparently this was brought in in February this year.
They will reserve your loan payment for themselves the moment your pay comes into the account. In the end you do not lose as the Principle is still offsetting the home loan and the bank will transfer the payment across themselves on the normal transfer day.
What changes for Kate though is that impact of the hold is a bit more graphical as from the moment her first pay comes in after the loan repayment is made the bank puts a hold for the next payment so it looks like it is gone from your account.
Kate is effectively paying her bank 3 weeks early.
For the Mortgage Miser system how do we record this when the banks have put a hold on it but have not paid themselves yet? Treat it like it is gone.
Mortgage Miser is a cash management system. The moment your first pay comes in mark that as the loan payment date. Your money is lost to you and locked away to the bank.
Note: Although the Running balance drops below positive you end up in the same Net position.
The only way Kate found out was seeing the balance change incorrectly and speaking to the bank directly. Nothing is shown on the Netbank interface but an improvement is on its way.
What to do if you do not want the banks to take your money early. Change banks (with good advice and research). Look for a bank with clear processes and a low fee. Pay them less and save more.
Please consider Mortgage Miser to help you get control of your finances and set you free from the burden of your mortgage.
Living debt free
What would it feel like to be debt free? If you could grab control of your expenses and know what you are going to spend next month how would that change your day? What if you had a plan and could choose to take the holiday you always wanted?
Mortgage Miser creates a plan to help you solve that problem. It enables you to map out your regular expenses and to set expected expenses so you can plan out the next year and on going.
Our goal is that you will be able to see your income, expenses, debts and home loan. Using the tools we will show you how to pay off your debts, to minimise your expenses and focus on paying down your Mortgage.
With your debts paid out and your money in the bank increasing each month you are in control.
From here options open in front of you were you can look at investments or super or even planning a holiday.
Let us help you
Please fill in the contact form and let us have a chance to show you our tools and how you can get in control of your future.
9 ways to Attack Expenses and Save your Income
The easiest way to make more money is to spend less of the money you already have. A $3 coffee a day costs you $1,000 per year before tax. An unused Gym membership, a poorly selected car insurance or medical insurance policy will erode what you have worked hard for. Have a look at these resources and see what you can save. Number 5 saved me a lot of money. The last one though is my favourite.
1. Medicare
Ensure that you and your partner and children are registered as a family for the Medicare Safety Net, rather than as two individuals. This will lower your Medicare safety net threshold.
2. Car Insurance
Shop around for your car insurance. The cost of a comprehensive insurance policy can vary by over one thousand dollars per annum!
3. Health Insurance
Health insurance can be another great place to make savings; even a 10% saving on an average package policy premium would be more than $300 per annum.
4. Phone Contracts
Review your telecommunications contracts. There are hundreds of different telecommunications plans available. Review your Contracts periodically to ensure that it’s cost effective.
5. Electricity and Gas
Review your electricity and gas options as well. Being on the wrong plan could be costing you. Also make small changes such as washing your laundry in cold water and drying clothes on the line. This website shows reductions in expenses of 38% on electricity and 25% on gas when signing up for a direct debit plan.
Combine this with a bill smoothing program where the post winter bill shock can be planned against.
6. Superannuation
Review your superannuation fund. A small difference in fees and/or return can make a big difference to your retirement nest egg. One in three working Australians have lost track of some of their superannuation, to the tune of around $18 billion. Track it down to potentially increase your retirement nest egg by thousands of dollars.
7. Lost Money
You may also have lost money sitting in bank accounts, company shares or life insurance policies. You can search for unclaimed money on ASIC’s consumer website.
8. Banks
Phone your bank and ask for a discount on your mortgage interest rate. Even a 0.15% discount could save thousands over the life of your loan!
Audit your bank accounts to ensure that you are not paying fees. If you are, there are plenty of fee-free options available.
If you owe money on your credit card, check what interest rate you are paying. Credit card interest rates can vary from less than 10% to more than 22% and on a $3,000 ongoing debt, that difference could save you more than $300 per annum. As a part of this consider using the balance transfer to temporarily stop all interest payments. This can be done by transferring the debt to another bank.
9. Money – Look at the Mortgage Miser System
Mortgage Miser has a new system for working out where your money is going and using that money to pay off your debts and ultimately your home loan. We would like to hear from you. We would like to sit down with you and review your finances and show you how to pay your home loan off faster. In all cases we have been able to save years off a home loan.
Please discuss any of the above concepts with your Professional Advisor, Accountant or Financial Planner prior to making any changes to your particular situation.
Our Story
Hello, my name is Warwick Foster,
I co-founded Mortgage Miser because I am passionate about helping families pay down their mortgage faster and get control of personal debt. In a word I want to give people HOPE.
Home mortgages are the largest forgotten debt people have. In Australia the average family will pay double the value of their home to their banks. Half of that is interest. Banks are great at lending money but they are not as interested in helping people save money. What they focus on is making record profits on home loans and personal debt, day after day after day.
I know what it is like to struggle with personal debt. As a single guy I racked up credit card debt even when the money was coming in and struggled under the weight of repayments. I worked past it but not without learning some lessons.
When I first entered into a mortgage, I had a basic understanding of how to pay of the loan faster but not the right plan on how to get ahead. My mortgage enabled me to get into our home other than that I did not pay attention to it.
Needless to say the bank was happy with this scenario.
At university I studied computer science and accounting. Through that and my work I was able to learn about the mathematical side of mortgages. Let’s have a look at what I found …
Mortgage Mathematics
Generally home loans are designed to benefit the lender. Mortgages are described as Principle and Interest Loans but here is a graph of loan repayments that shows what portion of the repayment is Interest and which is Principle.
Assumptions This is a loan for $340,000 over 30 years at 4.9%. This results in a repayment of $1,800 per month for 30 years. click to see more
The banks organise their loan systems so that you pay off most of the Interest to them first. This is clearer in the second graph where in the first fifteen years of the loan most of the money goes to the bank. During the initial stages of a loan very little of the actual amount you borrowed (called ‘Principle’), is being paid off so the actual amount you borrowed reduces very slowly. The banks can continue to take more interest from you that way because your principle balance remains higher for longer.
You can clearly see the average loan situation in the graph below shows the size of the Interest and Principle against each other over the average 30 year loan term. Wouldn’t it be great if they were the other way around? What’s interesting though is there is a crossover point just after halfway. After the halfway point more and more principle is being used to pay down the loan which increases the speed of the mortgage coming to an end.
Cofounder David Box and I have known each other for about six years and discussed and analysed ideas relating to mortgage management and personal finance. David and I discussed different ideas for managing debt and reducing the interest we pay on expenses and lifestyle choices. Our own experience as well as encounters through our personal and work interests became the impetus for developing these Mortgage Miser strategies to help people become smarter about their financial choices.
What we found was a suite of really solid stable ideas that when put together gave a solid path for people to get control of their mortgage. The goal of our program is to teach people how to shift the “cross over” to the left so you can pay out your mortgage sooner.
These strategies work and families benefit. During his career as a mortgage broker David suggested these ideas to a couple in 2012. Here is what they had to say …
Testimony – October 2015
“In 2012 we were in serious trouble with our credit cards and our home loan when we were introduced to David Box. We have since reduced our home loan by $60,000-00, paid off our credit cards and we are keeping on top of our finances by making the two simple changes David suggested.”
“We are years ahead and we will be paying off our home loan in approximately 7 years, instead of 30 years. If we can do it anyone else with an open mind can from what we learnt from David.”
Mr & Mrs G, Self Employed Painter & Teacher,
Cranbourne North, Vic.
Working with David we tightened concepts into workable strategies and I produced the visual models to David’s ideas. We worked on these models to create the initial Mortgage Miser website. We established methods that:
- help you reduce your mortgage,
- find lost income and
- help you take control of personal debt.
Refining the ideas over the last twelve months we established our Company Mission Statement:
Mortgage Miser is an Australian owned company that has a singular focus to set you free from the burden of your mortgage.
What we would like to do is meet with you and explain to you how to bring down your mortgage faster.
If you are in a situation where you want to see how to pay down your mortgage faster, learn how to get control of personal debt, and be financially free please fill in the following survey and we will contact you to organise for a sales consultant to make a time and take you through the Mortgage Miser system.
Thank you!