The shocking revelations at the banking royal commission mean getting finance could soon become far harder. DGI Founder, Dominique Grubisa, offers her take on how the commission will affect property investment in Australia.
If you’ve been following the banking royal commission, you’ll know that it’s produced evidence of all sorts of deception, fraud and bad behaviour by the banks. And some of the most disturbing evidence has been around so-called ‘liar loans’ – mortgages given to people based on poor or false estimates of their ability to repay. In order to win business, banks and their agents have granted loans to people who simply can’t afford them.
And we’re not just talking about one or two loans here – research suggests up to one third of Australian mortgage holders were given loans based on false information. That’s $500 billion in loans.
While the royal commission’s findings are still at least a year away, the issue of liar loans is likely to have major repercussions, not just for the people who will inevitably miss their repayments but for the whole housing market. The good news is if you act now, you can take some simple steps to secure your own financial situation and prepare yourself for the fall-out from the commission.
How the royal commission will slow down property investment in Australia
So, what’s the big problem with liar loans? It all comes back to the state of the wider economy. At the moment in Australia, the housing market is too hot in places like Sydney and Melbourne. With interest rates at a record low, lots of people have been investing in property, driving up prices.
Fixing this affordability problem isn’t as simple as putting up interest rates. The Reserve Bank of Australia which sets the official cash rate doesn’t want to put it up because that would hurt other areas of the economy, like retail. So, instead the Federal Government is working to cool the housing market through the banking regulator, the Australian Prudential Regulation Authority (APRA).
Because much of the lending that has been going on has been to investors, APRA has recently been making it harder for them to borrow. Banks have been forced to introduce strict limits on what proportion of loans can go to investors and have also been encouraged to dramatically scale back on their interest-only products. These are loans that allow borrowers to avoid paying back the principal on a loan – and to have far lower repayments – usually for a period of five years.
Meanwhile, out of shame, the banks are also moving independently to lift the proof they require for owner-occupier loans. Expect them in future to demand your tax returns before they hand over a cent. Here’s where the liar loans become a problem. As investors and homeowners come to the end of their interest-only, low-repayment periods over the next few years, they will need to refinance.
Many of them simply won’t be able to because they shouldn’t have been granted a loan in the first place and the interest-only loans have dried up. Combine this with an interest rate rise down the track and lots of people are likely to be forced to sell, pushing down prices and eventually slowing down the current rhythm of property investment in Australia — as it happened in America after the GFC.
The fall-out for you
What does this all mean for you or anyone engaged in property investment in Australia? You’ll want to put yourself in the strongest position possible to both service your loan and get another one down the track should you need to.
One way of doing this is by getting your accounts in the best order they possibly can be to pass the more stringent loan-application processes.
An excellent way to do this is by having an accountant familiar with lenders and who is up to date with all the changes. You’ll also want to put yourself in the best financial position by paying down the principal of your home loan sooner and increasing your negative gearing potential. DG Institute is one of the few places in Australia where you can access Loan Controller, a product with an ATO ruling that can improve your tax efficiency. In essence, it allows you to obtain the maximum discount possible on your home loan and optimise the tax benefits of your investment. Depending on your situation, it could dramatically improve your bottom line.
So, don’t panic. While there are changes afoot and it’s likely many people will feel mortgage stress, with the right strategies you can keep on track to achieve your financial goals.