May 15, 2014 is_admin

Know your limits

 

Whilst driving to work this morning I was flicking between SEN and ABC’s AM program.  As I was looking forward to my first coffee of the day and getting annoyed at the amount of adverts on SEN, my attention was piqued by an interview on the ABC with Dr. John Laker, Chairman of the Australian Prudential Regulation Authority (APRA).

The report was about a creeping trend from Aussie banks to ease off the credit standards in pursuit of increasing the number of mortgages they sell.  This is illustrating an observation that banks are advertising 5% deposits for new borrowers.  A transcript of the interview is here.

In summary, Dr Laker’s concerns were that whilst Australian banks are currently acting responsibly in the majority of their lending practices, there needs to be close monitoring to ensure standards don’t slide too far. Dr Laker stated “We are pathologically worried about poor credit standards if they became pervasive.”  He went on to say LVR must not be the only measure of suitable lending, that serviceability is the key.

Taking out a mortgage to buy a home is a massive commitment, and the decision to embark on this journey should not be taken lightly. Each person has a responsibility to themselves to genuinely weigh up whether or not they are taking on a level of debt they can really afford both financially, and at the comprise of other lifestyle activities and future goals.

The question is, if a bank makes it easy for you to borrow is it because the branch manager is a good bloke and wants to help you out?  Or is it because they will derive a benefit from committing you to many long years of future repayments?

Without foreshadowing a repeat of the tumultuous times that hit world economies as a result of the US sub-prime crisis, let’s remember we now know it was lax lending criteria, aggressive selling techniques, and a willingness to provide debt to those who really couldn’t afford it which led to the headlines we have read over recent years.

Key things to consider:

  • Where does owning a home and the commitment to re-paying a mortgage sit in line with your other lifestyle goals?  Are the two compatible?
  • Without making a prediction on rates are you being prudent and considering the likelihood of future rate rises when you work out your ability to repay a loan or are you potentially overstretching?
  • Have you considered your life stage; for example is your household about to drop down to one income as you start a family, which will impact the budget?
  • Just because the bank is willing in to lend you the money are you comfortable with the percentage of your income that will be committed to mortgage repayments (the banks serviceability calculators are worked on averages for cost of living and can’t account for your personal expenses)
  • Have you saved enough for the deposit to buy the property, and if you haven’t saved the minimum 20% do you really understand the impact of Lenders Mortgage Insurance?

For more considerations associated with taking out a mortgage there is a basic fact sheet on the ASIC website https://www.moneysmart.gov.au/media/400940/home-loans.pdf. Income Solutions holds regular First Steps presentations designed to give simple but smart advice around eliminating non-deductible debt from your personal balance sheet as soon as possible.

By Gareth Daniels, Financial Planner

Please note: The advice in this article is of a general nature only and has not been tailored to your personal circumstances.  Please seek personal advice prior to acting on this information.

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