Tag: Finder.com.au

What To Do When The Interest-only Period On Your Home Loan Ends

There is a sleeping problem in the Australian Mortgage Industry, stemming from households who have interest-only mortgages, who will have a reset coming (typically after a 5-year or 10-year set period). This is important because now the banks have tightened their lending criteria, and some may find they cannot roll the loan on, on the same terms. Interest only loans do not repay capital during their life, so what happens next?

Our friends at finder.com.au have put together this guide for households in this position, authored by Richard Whitten*.

Interest-only loans offer borrowers several years of very low mortgage repayments. However, there is always that fateful day when the interest-only period ends, and if you’re not prepared for that moment, it can really hurt. It’s a serious problem, with almost 1 million Australians already facing mortgage stress.

Many borrowers aren’t even aware of what it will mean financially when their loan switches from interest-only to principal and interest repayments. This makes interest-only loans a risky product, and it’s the reason why the Australian Prudential Regulation Authority (APRA) has been cracking down on interest-only lending.

Borrowers with interest-only loans need to be prepared for the day that their loan reverts. When that day comes, borrowers have three options.

Extend the interest-only period

You could try to extend the interest-only period. If you’ve crunched the numbers and you realise that you cannot meet the increased cost of principal and interest repayments, this could really help.

Of course, this is not a good position to be in and your lender could easily refuse your request. However, they probably don’t want to lose you as a customer, and if you’re facing genuine stress, it’s in both of your interests to come up with a solution.

But keep in mind that the bank always wins. Interest-only loans cost borrowers more in the long run compared to principal and interest loans and extending the interest-only period only adds to your overall mortgage costs.

Switch to the principal and interest period

You could opt to do nothing and your loan will revert to principal and interest repayments. However, you should definitely review your loan and your financial position before this happens. Make sure you calculate your new repayment amount so that you’re not caught out.

There are several advantages to this option: it requires the least amount of effort and by repaying the principal of your home loan you’ll finally be moving towards paying off your debt.

It also means that you’re building equity in your home. If you think about the equity in your home as a form of savings, those enormous monthly repayments don’t seem so bad.

But you do have one more option.

Refinance your home loan

You’re a customer, after all, and you’re not locked into your home loan. You could try to negotiate a better rate with your current lender or you could refinance to a completely new lender. This allows you to either switch to a new interest-only loan or find a principal and interest loan with a lower interest rate or better features.

Be sure to compare your interest-only options carefully and read the fine print on both your current loan and the one you’re planning to switch to. You might have to pay various discharge or early exit fees to leave your current home loan and application or establishment fees to begin your new one. You’ll need to balance these upfront costs with the potential long-term savings that come with a lower interest rate.

And as with most things in life, you just need to do your homework.

*Richard Whitten is a member of the home loans team at finder.com.au. His role is to explain all the complexities of the home loan industry in ways that help consumers make better life decisions.

Comprehensive Credit Reporting: What Does it Mean for Home Buyers?

Our friends at finder.com.au have written an excellent article for us on the impact of Comprehensive Credit Reporting, authored by Richard Whitten*. It highlights the changes afoot, and the impact on home buyers. Well worth reading!

Comprehensive credit reporting is coming, Australia. The new credit system has big implications for Australian borrowers and lenders and could make it easier to apply for a home loan and get a better interest rate.

So what is comprehensive credit reporting?

Unlike most leading economies, Australia still uses a purely negative credit reporting system.

This means that an individual’s credit report only contains negative events: defaults, debts, overdue payments, applications for credit, bankruptcies and court judgements. It doesn’t cover any positive actions and it doesn’t mention whether a credit application was successful (at the moment, applying for credit results in a negative mark on your credit report regardless of whether you get approved or not).

Comprehensive credit reporting (CCR) rounds out the picture of a borrower’s credit history by including information such as the state of your accounts, when you’ve paid back debts and how reliable you are in meeting your financial commitments.

It gives lenders access to more data about you, which some might find troubling, especially in light of recent scandals with data leaks in the credit reporting industry. But it could help you establish to lenders how credit-worthy you are with much less effort.

What does comprehensive credit reporting mean for home loan customers?

CCR could be very good news for responsible borrowers applying for a home loan. After all, it’s often easier to prove a positive than it is to disprove a negative. If there are a few red marks on your credit report, you’ll be able to offset these by showing a lender that you’ve made regular repayments on debt, saved a regular amount of your income and set low limits on your credit cards.

If you’re applying for a home loan and you can prove that you have a very good credit report (rather than a lack of negatives), you could get a better home loan rate. As lenders start to implement CCR, it’s likely they’ll offer lower mortgage rates to good credit borrowers.

If you’re a borrower with few details in your credit report, CCR means that you can build positive credit far more easily. This is great for younger borrowers, people who don’t have credit cards or people who live with their parents and may not have taken on many financial commitments yet.

Comprehensive credit reporting is good for lenders too, which could help home loan customers

With a greater understanding of the credit-worthiness of potential customers, banks can determine ahead of time which customers are likely to fall behind on their repayments and which aren’t.

With greater certainty, lenders may offer entirely new rates or products to home loan customers with good credit. We’re already seeing lenders offer a dizzying array of product variants with different interest rates determined by the loan-to-value ratio (the amount you borrow relative to the value of the property).

It’s easy to envision lenders doing the same with their applicants’ credit history, assigning grades based on reporting, with lower rates for customers with excellent reports.

There’s also the likelihood that CCR will increase competition in the home loan market. CCR requires more customer data and more systems to process it. The industry is already seeing new fintech players entering the home loan market with online-only, data-savvy platforms. They promise faster application approvals and lower costs.

Leveraging CCR is another method by which lenders can stand out in a crowded market, and greater competition and transparency will almost certainly lead to better rates.

At the moment, the federal government requires the big banks to have at least half of their credit data available for comprehensive credit reporting by July 2018. It remains to be seen whether the government will extend this requirement to all lending institutions. But in the words of the federal treasurer, the new credit reporting system represents “a game changer for both consumers and lenders”.

*Richard Whitten is a member of the home loans team at finder.com.au. His role is to explain all the complexities of the home loan industry in ways that help consumers make better life decisions.