What Happens When House Prices Fall?

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Contrary to popular belief, property prices don’t always rise, and property prices aren’t skyrocketing all over Australia.

Sydney and Melbourne might be booming, but did you know that prices have actually been going backwards in Perth and Darwin.

The average residential property price in Sydney jumped 23.7% in the two years to September 2016, according to the most recent available data from the Australian Bureau of Statistics.

Melbourne prices also significantly increased in those two years – by 17.5%.

However, during the same time Perth property values fell by 7.2%, while Darwin declined 9.1%.

We all know that property moves in cycles so eventually the cycle should turn but what sort of things do you need to be mindful of when property prices fall? How does it impact everyday mortgage holders?

Typically, we think of the worst case scenario, someone who might have bought at the top of the Perth or Darwin market, and the property now not worth as much as what they paid for it. Even worse if it drops so far that your mortgage now exceeds the value of your home.

These are fairly extreme, but there are more broad reaching impacts that all property holders may want to keep in mind. Borrowers usually find themselves in one or more of three camps when property prices fall.

  1. Grin and bear it

Some property buyers are ‘flippers’ – within a short space of time they acquire a property, do a few improvements and then flip it for a tidy profit. While that can be a lucrative strategy in a rising market or even a flat market if you have renovated cost effectively, in a falling market people might be forced to hold their property for longer to avoid making a loss. This may involve having to change your plans, rent the property out and become a landlord for a while until the opportunity comes up to sell at a profit.

In a falling market, many borrowers have the painful experience of seeing their equity decline. (Equity is the difference between the value of the home and the amount of the outstanding mortgage.) Thinking that you have $150 to $200k in equity can feel pretty comfortable but if this starts to shrink it can be a bit disconcerting. Focusing on paying off extra then becomes your chief means of building equity and even then, these gains may dwindle if the value continues to fall.

You may have no intention to sell and so are not concerned, but you may find a loan with a cheaper rate or want to shift lenders to access better features. If the balance of your home loan is hovering around 80% of the value of the property, it may not be feasible to refinance.

As bank valuations tend to be conservative, if the lender’s valuation comes in and you owe more than 80% of the value, then you may choose to stay with your current lender rather than having to pay thousands of dollars in mortgage insurance. Any savings that you get from the cheaper rate can be far outweighed by these sort of costs. Not being able to refinance can make you feel trapped with your current lender.

  1. Forced to sell at a loss

Although property prices can fall when the economy is in good shape, property market downturns can often coincide with economic downturns. That can mean a double whammy for some borrowers – losing their job and losing equity in their home.

You may not even lose your job completely but things like overtime, bonuses or a cut in number of hours you work could mean things get pretty tight.

Struggling to keep up with repayments can be bad enough, but it’s even worse if the asset you’re struggling to hang on to is depreciating.

Even though you don’t want to sell when prices are depressed you may be left with no option but to put your home on the market. It can seem like you have gone backwards when the cash you will have left over from the sale is less than what you put in to purchase it in the first place. Having to realise a loss can be very painful indeed.

  1. Have to find alternatives

If you are used to regularly accessing equity to fund other things in your life, a property downturn may mean that you have to find other sources of finance. When prices are rising, it can be quite simple to have your house revalued and top-up your loan to pay for a renovation, add a new room, consolidate smaller debts, pay for a new car, go on an overseas holiday or to take advantage of an investment opportunity.

Having constantly increasing equity financing these things can become an expectation or way of life.

When house prices fall, paying off your mortgage becomes one of the primary ways to build equity. Savings for these additional things or needing to resort to taking out a personal loan to fund large purchases may be the new reality.

Conclusion

Falling house prices are not something that we have really had to deal with in the Australian market but just because they have tended to rise doesn’t mean they always will. To ensure that we are able to weather such an occurrence, forward planning is key.

First, be careful not to over commit when you take out any finance – any sort of finance.

Stretching things that bit further to get that extra outdoor area or the beautifully renovated bathroom and kitchen may mean that things are very tight from a cashflow and an equity perspective. Having a bit of breathing space on both counts may help you sleep at night.

Be a little bit conservative when you are tempted by an interest free deal or great sounding finance option. Lots of small debts do add up and repayments on these can cause strain just as much as home loan repayments.

Second, make sure you have a buffer in place that you can rely on if you need it. Having savings put aside for a rainy day can give you peace of mind and options at the end of the day. Having to stick with a job that you hate because you can’t afford a few weeks or a month without an income can add a lot of stress and strain. Consistently paying more on your home loan can also build up funds for emergencies as well as get you used to paying more when interest rates rise.

By Peter Ellis

The Borrowers Advocate, Lending Mate™

Peter is a trail blazing campaigner with a vision to put power back into the hands of borrowers. He was disheartened by an industry where home loans were less about the individuals borrowing the money and more about sales targets. Those impacted most were people that didn’t tick all the boxes to fit the ideal profile, who were often being left to fend for themselves.

Lending Mate™ wants to restore this power imbalance and start a movement where borrowers get a fair go. Lending Mate™ is having someone on your side, genuinely working in your interest to enable you to get ahead financially. We aim to provide the information, help and guidance you need to put you back in control.

Disclaimer Statement:  Your full financial needs and requirements need to be assessed prior to any offer or acceptance of a loan product.

 

Free From Financial Worries Pty Ltd trading as Lending Mate™ (ABN 88 134 812 165), Credit Representative number 442518 is an authorised representative of Connective Credit Services Pty Ltd (ABN: 51 143 651 496), Credit License number 389328.

When Is Helping Your Kids Buy Their Own Home A Good Idea For YOU?

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When is helping your kids buy their own home a good idea for you?

Did you know that a whopping 54% of first time buyers receive financial support from their parents?

Also, according to research conducted by Digital Finance Analytics*, the average amount of support is $85,000.

This is not just limited to help with stamp duty, legals or going towards the deposit on a new home. Parental support could be allowing them to move back home while they save, helping out with repayments and ongoing expenses like childcare and private school fees. All of this can be a serious drain on your finances at a time when you should be ramping things up in preparation for when you are not working and earning an income yourself.

We all want our kids enter the property market and gain the benefits of home ownership that we have enjoyed – but it’s important to think of your own plans and finances before proceeding with something that could put your retirement plans on hold or lead to you facing financial difficulty.

At the end of the day, seeking good financial and legal advice will ensure that you go into this process with your eyes wide open.

Let’s check out the three main types of support parents are providing children, and some possible ramifications.

  1. Support your kids with one-off payments

A lump sum cash gift can seem like a no strings attached option that can be used to fund a deposit or pay property transaction expenses.

Pros

Doesn’t involve signing legal documents or tying up your property, and the funds are going towards a single transaction.

Cons

  • If you do it for one child are you then obliged to repeat it again for subsequent siblings? Don’t just consider the child who currently needs your assistance. If other children are coming along then it could turn out to be a significant sum.
  • If you are expecting the gift to be repaid, do you have definite plans for how this will happen? Just saying that it will be repaid when they see their way clear, may mean that it is never repaid or you only see a portion of what you gave. To save any misunderstanding and so you know whether you will see your funds again or not, you need to have a definite plan in place. If gifts are to be repaid, then lenders will also want to factor that into the “children’s” ongoing commitments.
  • What is your expectation if the property is sold? Your child may change their mind and decide that home ownership is not for them or they could change jobs that takes them to a different city or country and decide to sell the property. What happens then? Do you expect that the funds you gave them to be returned?
  • What happens if your child’s relationship breaks down? Although we don’t like to think worst case, how would you feel if in the divorce proceedings the gift you gave is divided between your child and their ex-partner.
  • Where are the funds coming from? If you haven’t paid off your home loan yet and increase your loan to access equity, are you going to be able to pay it off before you retire? Will this mean that you have to work longer than you want to or are able to in order to reach a debt free retirement.
  1. Support your kids with ongoing payments

Some parents go a step further by giving their children ongoing support, which is used for mortgage repayments or living expenses.

Pros

It gives the children the confidence to enter the property market knowing they have help and that things won’t be too tight.

Cons

  • It could encourage your children to over commit as they don’t have to live within their means. When deciding how much they can borrow, if they don’t factor in things like private school fees or other expenses, will they feel as though they are able to borrow more, thus putting further strain on their finances.
  • Having parental support when things are tight is fine but is this the start of a dependent relationship that will continue on? Having a limit or end point to the support may be needed to ensure that your good will is not taken advantage of.
  • It may only seem like a few dollars here or there but what are your plans for your retirement. Do you have a sense of what you need to be putting away each week and each year in order to achieve them?
  1. Support your kids as a co-borrower or guarantor

If you own your own home, it can seem like a simple thing to offer it as additional security and become a guarantor instead of having to part with cold hard cash.

This involves providing collateral (usually a home) that the lender uses so that the loan in effect is secured by two properties – the one the children are purchasing and yours. The lender usually gets a limited guarantee on your property so they only have rights to a proportion of your property to keep the loan to below 80% of the value of the two properties.

Pros

  • Allows the children to borrow what they need and avoid mortgage insurance. Since there are two properties being used as security, lenders will often borrow up to the value of the property they are purchasing which can allow them to put their money towards stamp duty and costs of setting up their home.
  • Mortgage insurance can add thousands of dollars to the children’s loan and take years to repay. Helping them avoid this can enable them to get ahead a lot faster.

Cons

  • You will be required to hand over your title and to sign fairly extensive mortgage documents. It can come as a rude shock when it comes to signing guarantor documents as they can seem to be just as onerous as if you are the main party to the loan itself. You may want to get your own solicitor involved to help you understand what you are signing.
  • You will need to get your own legal and financial advice. The lender needs to know that you understand what you are committing to and that you are not being coerced, so will probably require you to get legal and financial advice. This will take time and potentially cost money to get covered off.
  • What are your future plans for your home and your equity? A guarantee can be in place for quite a few years until either property values increase and/or the loan gets paid down. If you wanted to sell the property at some stage, downsize or move to a coastal retirement location – the guarantee would have to be removed before you could do so. You could also be limiting the amount of equity that you would have access to if you wanted to renovate or invest.
  • Relationship breakdown can also impact a property you are a guarantor for. Ensure that you cover off what happens in this situation. You don’t want to be left as a party to a loan where both partners are estranged and no one is taking responsibility for the repayments.

Conclusion

Just because a lot of parents help their children enter the property market, doesn’t mean you should do it.

We believe it’s a good idea to help your kids buy their own home only if it meets these four criteria:

  1. There’s no chance it will damage your retirement plans

Get a financial planner to go over your own retirement plans first. Make sure that these are firmly in place first so that you know that any support that you provide won’t impact them. It would be difficult to help out your children now only to become dependent on them later on.

  1. Everyone knows exactly where they stand regarding repayments

Open ended plans for repayments leave too much for interpretation. Get an agreement either written up through a solicitor so that you are both clear on exactly what will be repaid and when. You don’t want to risk wrecking your relationship as a result of your nice gesture to help out.

  1. Your child will be able to keep making repayments

Ensure that your children don’t over commit due to your assistance. Whether it is buying a home that puts them further in debt than they would have without your help or don’t put savings aside for unexpected expenses. Ensuring that they can financially stand on their own two feet is vital and this includes having a contingency plan if things get tight.

  1. Be fully informed before committing to helping

This is no time to skimp on getting the right advice. There is probably going to be quite a bit at stake for you so seeking the advice of a solicitor, accountant, financial planner, mortgage broker, lender or the like can ensure that you proceed only after you feel comfortable that everything has been covered off. As difficult as it may be to discuss things with your children like relationship breakdown, repayment of the funds and financial hardship, if you proceed you will all go into it with as best an understanding as you can.

By Peter Ellis

The Borrowers Advocate, Lending Mate™

Peter is a trail blazing campaigner with a vision to put power back into the hands of borrowers. He was disheartened by an industry where home loans were less about the individuals borrowing the money and more about sales targets. Those impacted most were people that didn’t tick all the boxes to fit the ideal profile, who were often being left to fend for themselves.

Lending Mate™ wants to restore this power imbalance and start a movement where borrowers get a fair go. Lending Mate™ is having someone on your side, genuinely working in your interest to enable you to get ahead financially. We aim to provide the information, help and guidance you need to put you back in control.

* www.digitalfinanceanalytics.com/blog/discussing-the-bank-of-mum-and-dad/

Disclaimer Statement:  Your full financial needs and requirements need to be assessed prior to any offer or acceptance of a loan product.
Free From Financial Worries Pty Ltd trading as Lending Mate™ (ABN 88 134 812 165), Credit Representative number 442518 is an authorised representative of Connective Credit Services Pty Ltd (ABN: 51 143 651 496), Credit License number 389328.

Four Reasons For A Home Loan Decline That Might Surprise You

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Did you hear Kylie Minogue recently called off her engagement because her partner cheated on her?

It seems strange that such a beautiful, vivacious star could be treated that way. After all, shouldn’t that sort of thing only happen to ‘undesirable’ men and women?

Funnily enough, applying for a mortgage is a bit like looking for love: even successful people can get the cold shoulder.

Yes, it’s true: being declined for a home loan is a lot more common than you think.

Just as romantics hear all sorts of strange reasons why he/she is just not that into you, lenders can also take us by surprise. Here are four strange reasons they might decline your loan.

  1. It’s not you, it’s me

Lenders like to have balance in their loan portfolio as a way of spreading their risk. That means they don’t like to have too many loans from the same lending sector (ie: investors) or the same postcode or the same industry. So they might decline your application just because they already have too many similar loans on their books.

  1. They’re not ready to move on

Lenders might automatically reject your loan if the information in your application doesn’t match what they’ve got on file. That seems reasonable, but what if you’ve made a genuine mistake? Or what if you’ve experienced a change regarding your marital situation or how many children you’re supporting or how many credit cards you have? If you are lucky they will ask you to explain if not, you may never know.

  1. You once messed up

Remember that time when you fell behind on your credit card repayments or you overdrew your savings account a few times? No? Well, unfortunately, your bank might. Even though it might’ve been a one-off mix-up that happened a few years ago, lenders can have memories like an elephant, and might decline your application even if your subsequent behaviour has been exemplary.

  1. You party too much

Banks can get suspicious if you make too many withdrawals from ATMs on weekends and this is stopping you from saving. Not having assets to show for the money you earn and subsequently spend can be an issue especially when it is an ongoing thing. You might be stereotyped as a spendthrift who can’t stop making impulse buys or who has a gambling problem. Unfortunately, banks don’t like to give mortgages to people who are not good with money.

Conclusion

Having a home loan application get declined is serious stuff – and not just because of the amount of time wasted but because of the psychological impact of being told ‘no’. If you have never had an issue getting finance before it can be a serious affront which can make you want to retreat to the nearest exit and never apply again.

You will also have an enquiry on your credit report which subsequent lenders may ask you about. They will want to know if it proceeded and if it didn’t why it didn’t. Having to ‘fess up to a decline can be a humbling experience and the new lender may be more cautious because of it.

What all this shows is that there is a lack of transparency in lending. None of the above is written down anywhere for consumers to tick off and so ordinary people can’t know ahead of time whether or not their application is going to be approved.

There is probably more information about a new car you purchase for tens of thousands of dollars than a home loan that you take out for hundreds of thousands of dollars. The vast amount of detail behind the loan and who qualifies is not freely available and this is where borrowers need to show caution.

That’s where the idea of Lending Mate came to be. Peter Ellis wanted to be able to give borrowers a better deal than what they were currently getting. To cut through the secrecy and educate borrowers on what’s actually going on behind the scenes. His dream was to give people all the information they needed to make proper decisions about lending.

Borrowers deserve better. I am sure you would agree that if Kylie Minogue had been told in advance that her partner had a roving eye, she probably would’ve made better romantic decisions.

By Peter Ellis

The Borrowers Advocate, Lending Mate™

Peter is a trail blazing campaigner with a vision to put power back into the hands of borrowers. He was disheartened by an industry where home loans were less about the individuals borrowing the money and more about sales targets. Those impacted most were people that didn’t tick all the boxes to fit the ideal profile, who were often being left to fend for themselves.

Lending Mate™ wants to restore this power imbalance and start a movement where borrowers get a fair go. Lending Mate™ is having someone on your side, genuinely working in your interest to enable you to get ahead financially. We aim to provide the information, help and guidance you need to put you back in control.

Disclaimer Statement:  Your full financial needs and requirements need to be assessed prior to any offer or acceptance of a loan product.
Free From Financial Worries Pty Ltd trading as Lending Mate™ (ABN 88 134 812 165), Credit Representative number 442518 is an authorised representative of Connective Credit Services Pty Ltd (ABN: 51 143 651 496), Credit License number 389328.

Why Am I Being Asked So Many Questions When I Apply For A Home Loan?

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Applying for a mortgage can be a frustrating and even invasive experience.

Not only do lenders ask lots of questions, but some of the questions can seem irrelevant and unnecessarily personal.

So why do lenders do this?

Lenders always ask themselves two big question when considering home loan applications: ‘If we do approve the mortgage, will we get our money back and, am I covering off my responsible lending obligations?’.

But before they can answer these big questions, they first need to ask you lots of little questions. Almost like piecing together a jigsaw puzzle.

A mortgage is a significant amount of money to borrow. Because the bank is loaning you the funds, they will go into a very detailed analysis to ensure that you are a good risk. Finding out all about you, how many addresses you have lived in in the past few years and details of your financial history may seem like overkill to you but to lenders they all help piece together a picture of you as a borrower.

In years gone by lenders would rely on demographic averages which gave a profile around based on national averages of households living in certain areas with a certain number of children etc. In recent times regulators have been critical of using these preferring a more complete assessment on an individual basis.

That’s why they dig into your unique circumstances – your age, your marital status, your postcode, your credit history, your employment situation, your spending patterns and your saving skills.

It’s all about establishing you as an ‘individual’ borrower rather than an ‘average’ borrower. About ensuring that they don’t lose money as well as ensuring that they are being responsible in lending you the money.

Lenders also think about what might happen in adverse circumstances. For example, would you be able to afford the mortgage repayments if you lost your job or interest rates increased? What if the your investment property were to remain vacant for a period of time? What happens when your child support income no longer applies? Factoring in rate increases, periods when the property is vacant and knowing how you manage your money all help answer the questions above.

Once they’ve worked out who you are, lenders also need to understand what sort of property you’d be buying. This property is the security for the loan and their “insurance” if it all turns pear shaped.

Valuers detail a lot more information than just the value when they inspect a property. Lenders are interested in things like how long it will take to sell, any risks associated with the property or the area that the property is located, does it have an odd zoning or in close proximity to power lines and what sort of repair is it in and is it readily saleable in its current state.

You may be able to provide this type of information yourself but they will usually want it to be verified by an independent third party.

What’s in it for me?

All of this means that when you are approved for a loan both the lender and the regulator are comfortable that you are a good risk and can afford the repayments. The rigour around this process is to help ensure that you don’t get into trouble down the track.

A lot of this is being driven by the NCCP, or National Consumer Credit Protection Act, which the federal parliament introduced in 2009 to help borrowers survive what can sometimes feel like a ‘lending jungle’. After the GFC, regulators wanted the onus to be on the lender to act responsibly and in the best interest of borrowers.

It is in no one’s best interest when loans fall over and people experience financial difficulty. Even in the GFC an excess of bad loans led to a financial crash that caused severe economic pain. Sometimes when house prices are increasing quickly and we feel an urgency to just get into the market, we need to be saved from ourselves.

So the next time you apply for a home loan expect to get asked some really detailed questions. It might be a good idea to come prepared with an annual budget of what you spend and save each month as well as your ongoing commitments. Think of it as putting time into something that could save you from financial distress sometime in the future.

By Peter Ellis

The Borrowers Advocate, Lending Mate™

Peter is a trail blazing campaigner with a vision to put power back into the hands of borrowers. He was disheartened by an industry where home loans were less about the individuals borrowing the money and more about sales targets. Those impacted most were people that didn’t tick all the boxes to fit the ideal profile, who were often being left to fend for themselves.

Lending Mate™ wants to restore this power imbalance and start a movement where borrowers get a fair go. Lending Mate™ is having someone on your side, genuinely working in your interest to enable you to get ahead financially. We aim to provide the information, help and guidance you need to put you back in control.

Disclaimer Statement:  Your full financial needs and requirements need to be assessed prior to any offer or acceptance of a loan product.
Free From Financial Worries Pty Ltd trading as Lending Mate™ (ABN 88 134 812 165), Credit Representative number 442518 is an authorised representative of Connective Credit Services Pty Ltd (ABN: 51 143 651 496), Credit License number 389328.