Hold off on bat strategy

Bruce Brammall, The West Australian, 29 October, 2018

Sometimes, a bit of toughness is needed to get your point across. You need to send a strong message, because nice isn’t cutting it.

Sure, try silent treatment. Persuasive argument. Carrots and sticks. Screaming, ranting and raving has its place. Ask my DebtKids. I don’t think they don’t know what my normal voice sounds like.

It’s usually a case of progression. Up the scale. But at some point, you need to stop and watch, to see if your method is having an impact. Yes?

Can a baseball bat be an effective communication tool? Well, maybe, if your audience is the mob. Robert De Niro’s version of Al Capone used one to effect in The Untouchables (a piece of cinema burned in my brain).

When it comes to the property market, my fear is that the authorities are now reaching for the baseball bat.

While Perth’s property market was flushed through the S-bend some years ago, property markets on the east coast are now tumbling. Sydney is off 6 per cent and Melbourne 4 per cent in the last year, according to Corelogic.

It’s no accident. Sure, the two big cities had run too far and needed some common sense to prevail. But, equally, APRA and ASIC should take some credit – they’ve been fiddling with the levers to help engineer this for several years.

Since mid-2015, APRA has been constantly badgering the banks to adjust their lending criteria, to reduce borrowings to, particularly, property investors. ASIC’s moves have been progressive. And some haven’t had time to take effect yet.

So, with markets now moving in the preferred direction, surely it’s time to sit and watch?

Apparently not. Time for the baseball bat.

Anyone trying to get loans in the couple of years has found it harder. But we ain’t seen nothing yet.

In the next 12 months, Australians’ ability to get a loan – fundamental to buying a property – will become exponentially tougher.

We’re going to see new regulations from the banks around interest-only loans and debt-to-income ratios, which will have incremental effects.

Applying for an interest-only loan will become harder and, it’s likely, that we’ll see debt-to-income ratios reduced.

Let’s assume the current debt ratio is seven. That is, if the household earns $100,000 a year, then the maximum they will be able to borrow might be $700,000. If banks are forced to drop this to six times, that would reduce maximum borrowings to $600,000.

There are further changes coming around “genuine savings”. Gifts from mum and dad, or inheritances, are going to face tighter controls.

But the biggest one is credit cards. And this is truly scary.

From next year, banks are going to make you “service” the full value of your credit card limit, plus interest, paid in full over three years.

Here’s how this will impact you buying a home.

Let’s say you have a few credit cards with combined limits of $50,000.

Currently, a lender will assess you as needing to be able to afford approximately 2.5 per cent of that balance a month, or $1250. That is, you need the ability to meet repayments of $15,000 a year.

Under the new rules, you’ll need to be able to make repayments of around $1960 a month, or $23,520 a year.

There’s another $8500 a year that will be taken off your ability to service a loan. This will kill chances for thousands.

For many, there will be an easy fix.

Many borrowers have limits far exceeding what they need. They might have credit card limits of $50,000, but really only need $20,000 or less.

They could reduce their limits to $20,000.

But, even if you’re thinking of applying for a loan next year, don’t reduce your credit card limits just yet. You can do this as part of the loan process, where your mortgage broker will be able to tell you exactly what limit you’ll need in order to qualify for the loan.

Property markets on the east coast are doing exactly what everyone thought they needed to do. They’re heading south. And, as time rolls on, it will probably be painful.

So many levers have been pulled already.

Do we really need, Al Capone-like, a baseball bat? Or should they just stop and watch a while?

Bruce Brammall is the author of Mortgages Made Easy and is both a financial advisor and mortgage broker. E: bruce@brucebrammallfinancial.com.au.