Banks take one-two punch

Banks take one-two punch

Australia’s leading banks have been hit with a double-whammy, with the Senate passing the Major Bank Levy, and Moody’s downgrading their credit ratings.

The controversial levy was passed in the House of Representatives yesterday, despite impassioned protests from the affected banks. The levy then passed through the Senate on Monday evening to become legislation.

While Australia’s Big Four banks (plus Macquarie Bank) start calculating how to handle the new levy as of 1 July 2017, they and several other Australian banks (minus Macquarie Bank) have been hit with a new problem – a credit downgrade from Moody’s.

The investors service reportedly made its decision based on the high level of risk that comes with the high levels of debt currently being shouldered by Australian households.

Which banks were downgraded?

Banks on the receiving end of the credit downgrade include:

Bank Previous Credit New Credit
ANZ Aa2 Aa3
Commonwealth Bank Aa2 Aa3
NAB Aa2 Aa3
Westpac Aa2 Aa3
Bendigo and Adelaide Bank A2 A3
Heritage Bank A3 Baa1
Members Equity Bank A3 Baa1
Newcastle Permanent Building Society A2 A3
QT Mutual Bank A3 Baa1
Teachers Mutual Bank A3 Baa1
Victoria Teachers Mutual Bank A3 Baa1
Credit Union Australia A3 Baa1

On top of this, Moody’s downgraded Australia’s Macro Profile from “Very Strong-“ to “Strong+”.

This follows Standard and Poor’s reducing the credit ratings of 23 Australian lenders in May 2017, citing similar concerns around the risk of a housing market crash. Unlike the recent Moody’s downgrade, the Standard & Poor’s downgrade did not include the Big Four.

Why were these banks downgraded?

According to Moody’s, these credit downgrades are due to high and increasing levels of risk in the Australian economy, with factors contributing factors including:

  • high levels of household indebtedness
  • increasing prevalence of interest-only and investment home loans
  • low wage growth
  • rising underemployment

While APRA regulations are doing their part to manage Australia’s level of risk in the banking sector, Moody’s considers the nation to be sailing uncharted waters on a sea of risk, with unknown consequences should the worst happen:

“While Moody’s does not anticipate a sharp housing downturn as a core scenario, the tail risk represented by increased household sector indebtedness becomes a material consideration in the context of the very high ratings assigned to Australian banks.”

“The resilience of household balance sheets and, consequently, bank portfolios to a serious economic downturn has not been tested at these levels of private sector indebtedness.”

What does this mean for Australia?

It’s possible that the banks being hit with a credit rating downgrade may find it more difficult to source wholesale funding for their financial activities, which could be a contributing factor to future interest rate rises.

This news comes is on top of concerns that the cost of the Major Bank Levy could also make an impact on Australia’s interest rates, bank fees, share dividends, or all of the above.

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Learn more about home loans

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Yes, ANZ, Commonwealth Bank, NAB and Westpac all offer guarantor home loans. These mortgages are also offered by many other banks, credit unions and building societies.

What is a bad credit home loan?

A bad credit home loan is a mortgage for people with a low credit score. Lenders regard bad credit borrowers as riskier than ‘vanilla’ borrowers, so they tend to charge higher interest rates for bad credit home loans.

If you want a bad credit home loan, you’re more likely to get approved by a small non-bank lender than by a big four bank or another mainstream lender.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

Is there a limit to how many times I can refinance?

There is no set limit to how many times you are allowed to refinance. Some surveyed RateCity users have refinanced up to three times.

However, if you refinance several times in short succession, it could affect your credit score. Lenders assess your credit score when you apply for new loans, so if you end up with bad credit, you may not be able to refinance if and when you really need to.

Before refinancing multiple times, consider getting a copy of your credit report and ensure your credit history is in good shape for future refinances.

I have a poor credit rating. Am I still able to get a mortgage?

Some lenders still allow you to apply for a home loan if you have impaired credit. However, you may pay a slightly higher interest rate and/or higher fees. This is to help offset the higher risk that you may default on your repayments.

I can't pick a loan. Should I apply to multiple lenders?

Applying for home loans with multiple lenders at once can affect your credit history, as multiple loan applications in short succession can make you look like a risky borrower. Comparing home loans from different lenders, assessing their features and benefits, and making one application to a preferred lender may help to improve your chances of success

Will I be paying two mortgages at once when I refinance?

No, given the way the loan and title transfer works, you will not have to pay two mortgages at the one time. You will make your last monthly repayment on loan number one and then the following month you will start paying off loan number two.

If I don't like my new lender after I refinance, can I go back to my previous lender?

If you wish to return to your previous lender after refinancing, you will have to go through the refinancing process again and pay a second set of discharge and upfront fees. 

Therefore, before you refinance, it’s important to weigh up the new prospective lender against your current lender in a number of areas, including fees, flexibility, customer service and interest rate.

Can I refinance if I have other products bundled with my home loan?

If your home loan was part of a package deal that included access to credit cards, transaction accounts or term deposits from the same lender, switching all of these over to a new lender can seem daunting. However, some lenders offer to manage part of this process for you as an incentive to refinance with them – contact your lender to learn more about what they offer.

How do I know if I have to pay LMI?

Each lender has its own policies, but as a general rule you will have to pay lender’s mortgage insurance (LMI) if your loan-to-value ratio (LVR) exceeds 80 per cent. This applies whether you’re taking out a new home loan or you’re refinancing.

If you’re looking to buy a property, you can use this LMI calculator to work out how much you’re likely to be charged in LMI.

How common are low-deposit home loans?

Low-deposit home loans aren’t as common as they once were, because they’re regarded as relatively risky and the banking regulator (APRA) is trying to reduce risk from the mortgage market.

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