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Five minutes of finance

October 2018

Why are the majors pulling out SMSF Lending

Starting this Friday (12 October), CBA will no longer offer its SMSF lending product ‘SuperGear’ for residential and commercial investments, citing a desire to become “a simpler, better bank” with a more streamlined product portfolio.

It’s not the only bank to make this move: Westpac stopped lending to new SMSF home loan borrowers in July and AMP has also announced it will follow suit by 20 October.

So what is this all about? SMSF loans are more complex, and as brokers know, this is not something the banks are too hungry for right now.

This move by some banks to simplify their business models and focus on basic home loans doesn’t surprise Liberty’s group sales manager John Mohnacheff.

“SMSF lending involves a more specialised understanding of customer needs and the inherit risks, which are things that banks are not set up to do,” he said.

By concentrating on home loans, the banks can continue to rely on automatic processing, which is not as easy to do with SMSF loans, said La Trobe Financial’s vice president Steve Lawrence.

“The SMSF type product is a bit more complex in structure and more difficult to fit into [the banks’] automated credit model. We also believe that the banks may be required to manage their onerous capital requirements for these types of loans compared to a straight home loan for individuals,” he said.

Peter Vala, Thinktank Commercial Finance’s head of sales and distribution, echoes this sentiment. “SMSF lending is more process and detail oriented than any other type of lending and requires an intimate knowledge of what the SIS Act requires of all parties.”

“It would be extremely difficult to manage such a high level of compliance consistently across a vast retail distribution network and can open an institution up to issues that are then hard to resolve.”

While credit underwriting, origination and documentation around SMSF loans need to be tightly managed and controlled, he said, that doesn’t mean SMSF lending is risky or that brokers and borrowers should shy away from this option.

In fact, contrary to some press reporting, Lawrence said La Trobe Financial’s SMSF portfolio “has demonstrated stellar performance” and has proved to be low risk with high quality prime borrowers using this strategy to save and invest for long term retirement purposes.

SMSF lending is a legitimate way to help customers accumulate wealth and diversify their investments, Mohnacheff adds.

“Borrowing through your SMSF can be an effective way to invest in residential or commercial property. It’s also an effective way for brokers to diversify into new revenue streams,” he said.

“There is a perception that SMSF lending is harder than other forms of lending. But through partnering with the right lender, SMSF property investing can be simpler than expected and highly valued by customers.”

While the number of lenders willing to write SMSF loans has contracted, Vala says there’s still a balanced level of appetite from the non-banks and healthy competition among them.

“There are still a number of lenders very active in the market, so it remains quite competitive. New entrants are also likely to emerge as wholesale funding options continue to be strongly supported by domestic and global investors,” he said.

While it’s likely that other banks will withdraw from this market, all three non-banks said they’re committed to SMSF borrowers and the brokers who assist them.

‘Surprising’ take up with First Home Super Saver Scheme

Figures from the ATO indicate that around $5.3 million in voluntary super contributions and earnings has been released under the First Home Super Saver Schemes to individuals looking to purchase a home.

The First Home Super Saver Scheme (FHSS), which received Royal assent on 13 December 2017, enables individuals over 18 who have never owned a home to apply to release voluntary contributions from their fund to buy their first home.

From 1 July 2018, individuals have been able to withdraw these voluntary contributions along with the deemed earnings, for a deposit, with withdrawals taxed at a marginal tax rate less a 30 per cent offset.

ATO data indicates that during the period 1 July to 6 August 2018, 1,449 FHSS determinations were made and 592 people requested a release of their FHSS amount.

In the same period, the ATO issued 498 release authorities to super funds totalling $5,341,856. This equates to an average requested release amount of about $10,727.

In an online article, SuperCentral said the level of uptake of the FHSS in its first few months of operation is surprising for a couple of reasons.

“There would seem to have been too little time for a material amount of eligible contributions to have been made and only one year’s worth of earnings accrued to make a release worthwhile. Qualifying contributions are subject to the double cap requirement of $15,000 per financial year and $30,000 in total,” said SuperCentral.

The document provider acknowledged that the government did provide a sweetener for the 2017-18 financial year by allowing earnings on those contributions to be treated as though they were made on 1 July 2017 as the ATO had no means of capturing the date on which the contribution was made during the 2017-18 financial year.

“The second [reason] is that the scheme operates on a once-only access basis. While an individual can make any number of requests for FHSS Determinations – these are simply a determination by the ATO of how much an individual can access – they can only make one request for an FHSS release authority,” SuperCentral explained.

“If the authority is issued, then the individual can no longer request another release authority even if they continue to make voluntary super contributions or did not use the released amount.”

Australians to benefit from credit changes

Millions of Australians could directly benefit from coming changes to Australia’s credit reporting system, according to new research.

Proposed changes soon to be debated in parliament would require the big four banks to report repayment information on credit accounts, enabling consumers to show recent positive repayment behaviour.

From 1 July the major lenders were given three months to share at least 50% of their credit information with credit bureaus.

Data and analytics company Equifax said it is “good news” for Australians who pay their mortgage on time, as this behaviour gives direct evidence of their financial capability.

The credit reporting changes also offer hope for people who have previously been through a period of financial difficulty, often because of a period of unemployment or relationship breakdown.

Data from the Equifax consumer credit bureau reveals there are approximately 200,000 Australians who have a credit report that only shows an historic black mark of a default, judgement or bankruptcy that occurred more than four years ago.

That single piece of historic negative information can exclude a person from accessing new credit or getting better-priced credit for many years after the event took place.

The company’s group managing director Australia and New Zealand, Mike Cutter, said, “These changes are about financial inclusion, giving people who have an old black mark on their credit report a chance to show they have recovered from a rough patch and are now making the regular repayments on their credit accounts.

“Showing that these consumers are back on track is a major benefit of comprehensive credit reporting, and one that may allow them to access cheaper rates or a better deal.”

The reforms are also good news for those who pay their minimum mortgage payments on time every month.

Cutter said, “The majority of consumers make repayments on time each month, but this has not been shown on their credit report until now.

“These reforms are about providing a more accurate picture of consumers and giving them the opportunity to showcase their positive repayment behaviour.”

Where the money is being spent on bricks and mortar

New construction and extensive renovation are a mainstay in our established residential suburbs. For investors and homeowners who want to stay ahead of price rises, it’s important to spot addresses where action is on the rise. When streets are undergoing a lot of build activity, value gains are likely to follow.

This month, our teams let you know where money is being spent on bricks and mortar.

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September 2018

Major pulls rate trigger

Just days after Westpac announced that it was raising rates out of cycle, both ANZ and CBA have announced similar hikes. Effective 27 September, ANZ will increase interest rates on its variable owner-occupied and investment home loans by 16 basis points.

Commonwealth Bank (CBA) is also set to lift rates on all of its variable rate home loan products by 15 basis points, effective 4 October.

CBA noted that for owner-occupiers, the standard variable home loan rate will increase to 5.37 per cent per annum for customers with principal and interest repayments, and 5.92 per cent per annum for customers with interest-only repayments. For investors, CBA stated that the standard variable home loan rate will increase to 5.95 per cent per annum for customers with principal and interest repayments, and 6.39 per cent per annum for customers with interest-only repayments.

Both banks have cited a “sustained rise in wholesale funding costs”, with ANZ adding that its decision followed a “consideration of business performance and market conditions”.

At the same time ME Bank announced:-

From Friday 31st of August, there are some important changes to ME fees and interest rates you should know about.

ME will be reducing some variable rates on its Basic Home Loan. ME will be reducing by 75 basis points the variable rate for owner occupiers paying Principal and Interest on a Basic Home Loan with an LVR over 80%. ME will also be reducing by 20 basis points the variable rate for owner occupiers paying Principal and Interest on a Basic Home Loan with an LVR equal to or less than 80%.

Contact us if you would like to know if your rate is competitive.

Gen Z thinking about home ownership

A new report has revealed exactly how the different generations view financial advice and saving for home loans. The cross-generational research by ING looked closely at how each age group planned for the future and what the most important financial considerations were.

The research showed that Gen Y (24 to 28 y/o) and Gen Z (16 to 23 y/o) ranked home ownership as one of the most important longer-term goals.

‘Saving for a home’ was in their top five concerns, as well as paying for a mortgage, whereas baby boomers (54 to 64 y/o) had neither of these as concerns.

According to the data, home ownership was more of a priority for the future for the youngest generation than saving for a car, affording children or saving for university/education fees.

In fact, nearly 50 per cent of Gen Z’s said they were most worried about saving for a home at this moment in time.

The research also looked at how the generations would rather receive advice or help with financial decisions.

At least 60 per cent of Australians across all generations preferred face-to-face advice, however younger generations were more open to receiving digital advice. The younger two generations were also happier to pay for advice.

While the younger generation were worried about buying a house, the latest figures from the Australian Bureau of Statistics (ABS) showed that while owner occupier loans were up from the previous year, investor loans had dropped.

Really driving home how the investment market has dropped are the CoreLogic and ABS figures that show the proportion of investors in all new finance commitments.

In March 2015 investors reached a record high of 55 per cent of overall mortgage demand. As of July 2018 this figure had dropped to 41per cent.

Not everywhere in Australia has seen a drop in investors. Every state and territory across Australia apart from Tasmania saw a decline. Between July 2017 and July 2018 Tasmania saw an increase of 16.3 per cent.

Spring property selling

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