I have encountered over the last 6-8 weeks clients assuming that their maximum borrowing capacity will be based on current residential home loan rates – around the 3.8% – 4.0% mark. It comes as a surprise that when I start reviewing their numbers that they become horribly short of the mark, and it hasn’t got anything to do with their own calculations!
What we don’t know is that the banks are still assessing their loan servicing calculations on rates of between 7.4% and 8%, which is nearly double where the current interest rates now sit. In addition their assessments include higher day to day expenditure then what you normally spend, discounted rental income by up to 20%, higher credit card assessment rates, and lower then market property valuations.
Whilst we applaud the banks for being conservative and ensuring that we can meet our loan repayments when rates start to move up, I do think they are being overly cautious and probably a little spooked by the regulator who is trying to reduce the risk of a potential property bubble in the local economy. However what we are seeing is a high risk, low interest rate environment, one that I haven’t seen in my over 30 years in the industry. This highlights that the regulator continues to be concerned at the overheated market, although personally I am not in full agreement with ASIC on this fact given lower local and global growth forecasts. If in fact ASIC are right on this issue we then should start repaying down debt quicker or setting aside some funds to cover the “rainy day” scenario.
I do believe lower interest rates will be the norm for the foreseeable future and my thinking on this is re-inforced by the fact of what we have experienced in the past month or so with the recent Brexit vote, the current political instability from the latest Australian elections, and potentially a President Trump!
Its interesting to have read recently, but not surprisingly, that if you have your home or investment mortgage with a Major 4 bank then on average you are paying approx. $14,000 extra in interest then with a an alternative cheaper option over the life of the loan. This could be more if you have a business loan as well! I would urge you if not already to chat to your broker (hopefully me!) as there are home and investment deals some 50-70 basis points below what the Big 4 offer. This also applies to business loans.
If you know your paying too much on your home or business loan, then give me a call and I look forward to shortly touching base with you again!