Implications for consumers
An interest rate cut does not necessarily mean immediate savings for consumers. Most banks do not automatically adjust the minimum home loan repayment, which means consumers will still make the same scheduled repayments each period. In the long-term, benefits will be felt as a result of paying the loan down faster. In the short-term however, consumers will not feel the immediate benefit of more cash in their pocket at the end of the month.
Following the recent election, banks were given permission to adjust their affordability rates, which they use instead of the actual rates to assess whether someone can afford a loan. However, banks have not passed the entire rate cut on. Consumers are therefore being assessed at interest rates of between 7% and 8%, which has a big impact on borrowing capacity, as they are still not qualifying for higher levels of home loan. Access to credit, rather than level of interest rate, remains the issue for home loan borrowers.
Pitcher Partners strongly recommends checking the suitability of your home loan to your personal requirements every year. A quick review of your home loan rate and product against other offerings in the market, and switching to these, can result in savings.
Other consumer groups will be impacted in different ways. For example, rates on deposits are now very low, and anyone relying on interest income will experience a decline in their return. In particular, self-funded retirees may need assistance seeking viable options.
Implications for those offering financial advice to clients
For those in the business sector who offer accounting and business advisory expertise, the cost of funds is an unexpected bonus and your clients would benefit from ensuring they are receiving the benefit in their loan arrangements. When assessing borrowing capacity, it is important to understand a bank’s lending criteria. Pitcher Partners can assist you through this process and recommend a meeting between you (the business advisor) and the bank to discuss how they assess borrowing capacity; for example, whether they use actual rates or internal benchmarks.
Those with variable rate debt are being asked by banks whether now is the right time to fix in their rate. You and your clients should consider this if you want to lock in funding costs. However, if your clients are planning changes to their debt for any reason, such as selling property to reduce land tax burden or moving away from their current funder – be aware that break costs could be incurred, whereas when variable they do not apply.
For further advice and support, please get in touch with your Pitcher Partners expert.
Update (Tuesday 16 July 2019):
In last 24 hours the Banks have made changes to their assessment criteria via their affordability rates, these are used instead of the actual rates to assess whether someone can afford a loan. After many weeks without action post the regulator giving Bank’s permission post election, significant reductions on the assessment rates have occurred from between 7% and 8%, to now as low as 5.5% have occurred. The overriding rules will be that expenses will still be closely scrutinised and the loan assessment rate will be at least 2.5% over the actual rate. This has a big impact on borrowing capacity. As an example of the this, a customer that has a base income of $100k p.a. and $15k credit card, for Owner Occupied purpose on Principal and Interest repayments the borrowing potential has improved by $108k.
This is a welcome change and should you or your clients want to discuss how this impacts your personal borrowing capacity please reach out and discuss with your Pitcher Partners expert.