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The finance news that really mattered in 2019

The finance news that really mattered in 2019

As Christmas creeps closer and the year comes to a close, it’s common practice to reflect on the twelve months just passed. In the world of finance, this has been a big year.

Cash rate cuts, a noticeable reduction in consumer spending and rumours of Quantitative Easing (QE) have placed the banking industry in the spotlight, and highlighted the need for financial literacy.

Following the Haynes Royal Commission, regulation has tightened in some areas, whilst in other areas, economic conditions have made it easier for consumers to access finance, with record low home loan rates and the announcement of the First Home Loan Deposit Scheme.

With open banking legislation to begin in February 2020, now seems a good time to review some of the major news stories that put finance front and centre this year. Here's the finance news that really mattered in 2019.

ASIC increased litigation after the Royal Commission

On 1 February 2019, the final report documenting the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was submitted to the Governor-General. Tabled in parliament on the 4 February 2019, the report called for tougher governance on banking misconduct, finding a lack of litigation from banking regulators Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA).

This has resulted in a number of legal battles between ASIC and the banking industry this year to ensure that financial services entities that broke the law were held to account, as the final report documented this was not previously the case. Litigations this year have included a lawsuit that saw an NAB branch manager sentenced to twelve months in jail, and an investigation into a money laundering scandal concerning Westpac CEO Brian Hartzer, which led to his exit from the bank in November, set off by a lawsuit from AUSTRAC, a financial intelligence agency.

Three RBA cuts took the cash rate to 0.75%

In the middle of this year, consumer spending was as low as the 1991 recession. This, amongst other factors, contributed to the RBA cut the cash rate an historical low of 0.75%.

Three 25 basis point cuts sent the home loan market into a frenzy, as the banks tried to keep up with media and consumer pressure to pass on these cuts in full.

The cuts are made to encourage lenders to reduce their current interest rates, so as to boost consumer spending and increase the overall inflation rate. Whilst these cuts did increase the inflation rate from 1.3 in July to 1.7 in December, and dropped home loan rates as low as 2.68%, the full effect is still yet to be seen.

The new Banking Code of Practice was launched

On 1 July 2019, the new Banking Code of practice commenced, managed by the Australian Banking association. This code, approved by ASIC, was created to keep banks accountable, ensuring that they commit to ethical, fair and responsible lending practices.

The document, which you can access here, not only sets the expectations for banks, but also acts provides safeguards and protections, outlining a set of enforceable rights for financial consumers.

Some of the expectations include all banks offering low-fee or no-fee accounts to low income customers, no more unsolicited offers to increase credit card limits and reminders when card introductory offers end.

Rumours of quantitative easing and negative interest rates

In August, after two cash rate cuts, the RBA’s Governor Philip Lowe spoke in parliament about unconventional monetary policy, specifically negative interest rates, and did not rule out Quantitative Easing (QE).

This caused media speculation about the potential of applying quantitative easing to boost the economy if negative interest rates were not in Australia’s best interest. Known as ‘money printing’, QE is a process where the RBA would use their cash reserves to purchase existing government bonds, to pump money directly into the financial system.

On the other hand, negative interest rates are where interest rates drop below 0 per cent, creating a bizarre financial scenario where consumers pay banks to hold their money, whilst ‘earning money’ for taking out a loan.

As of December, we are yet to see either of these unconventional methods employed by the RBA. However, if consumer spending refuses to lift this could be a potential reality in 2020.

The First Home Loan Deposit Scheme (FHLDS) was announced

Widely anticipated since its announcement by the Coalition before the Federal Election earlier this year, the FHLDS aims to give First Home Buyers (FHBs) a potentially better opportunity to get their foot on the property ladder.

Starting January 2020, 27 approved lenders will essentially act as ‘guarantor’ on FHB home loans, including National Australia Bank and Commonwealth Bank.

For FHBs who were previously locked out of the housing market by high deposit amounts and costly LMI fees, the scheme offers 10,000 FHBs each year an opportunity to secure the home of their dreams with as little as a 5 per cent deposit.

There are some restrictions of course, including limits on income and property thresholds. However, this is the first scheme of this kind to help FHBs in a time when a 20 per cent deposit can be hundreds of thousands of dollars.

Did you find this helpful? Why not share this news?

This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.

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Learn more about home loans

What are the features of home loans for expats from Westpac?

If you’re an Australian citizen living and working abroad, you can borrow to buy a property in Australia. With a Westpac non-resident home loan, you can borrow up to 80 per cent of the property value to purchase a property whilst living overseas. The minimum loan amount for these loans is $25,000, with a maximum loan term of 30 years.

The interest rates and other fees for Westpac non-resident home loans are the same as regular home loans offered to borrowers living in Australia. You’ll have to submit proof of income, six-month bank statements, an employment letter, and your last two payslips. You may also be required to submit a copy of your passport and visa that shows you’re allowed to live and work abroad.

When does Commonwealth Bank charge an early exit fee?

When you take out a fixed interest home loan with the Commonwealth Bank, you’re able to lock the interest for a particular period. If the rates change during this period, your repayments remain unchanged. If you break the loan during the fixed interest period, you’ll have to pay the Commonwealth Bank home loan early exit fee and an administrative fee.

The Early Repayment Adjustment (ERA) and Administrative fees are applicable in the following instances:

  • If you switch your loan from fixed interest to variable rate
  • When you apply for a top-up home loan
  • If you repay over and above the annual threshold limit, which is $10,000 per year during the fixed interest period
  • When you prepay the entire outstanding loan balance before the end of the fixed interest duration.

The fee calculation depends on the interest rates, the amount you’ve repaid and the loan size. You can contact the lender to understand more about what you may have to pay. 

Cash or mortgage – which is more suitable to buy an investment property?

Deciding whether to buy an investment property with cash or a mortgage is a matter or personal choice and will often depend on your financial situation. Using cash may seem logical if you have the money in reserve and it can allow you to later use the equity in your home. However, there may be other factors to think about, such as whether there are other debts to pay down and whether it will tie up all of your spare cash. Again, it’s a personal choice and may be worth seeking personal advice.

A mortgage is a popular option for people who don’t have enough cash in the bank to pay for an investment property. Sometimes when you take out a mortgage you can offset your loan interest against the rental income you may earn. The rental income can also help to pay down the loan.

Does the Home Loan Rate Promise apply to discounted interest rate offers, such as honeymoon rates?

No. Temporary discounts to home loan interest rates will expire after a limited time, so they aren’t valid for comparing home loans as part of the Home Loan Rate Promise.

However, if your home loan has been discounted from the lender’s standard rate on a permanent basis, you can check if we can find an even lower rate that could apply to you.

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

What is the best interest rate for a mortgage?

The fastest way to find out what the lowest interest rates on the market are is to use a comparison website.

While a low interest rate is highly preferable, it is not the only factor that will determine whether a particular loan is right for you.

Loans with low interest rates can often include hidden catches, such as high fees or a period of low rates which jumps up after the introductory period has ended.

To work out the best value for money, have a look at a loan’s comparison rate and read the fine print to get across all the fees and charges that you could be theoretically charged over the life of the loan.

How much deposit do I need for a home loan from ANZ?

Like other mortgage lenders, ANZ often prefers a home loan deposit of 20 per cent or more of the property value when you’re applying for a home loan. It may be possible to get a home loan with a smaller deposit of 10 per cent or even 5 per cent, but there are a few reasons to consider saving a larger deposit if possible:

  • A larger deposit tells a lender that you’re a great saver, which could help increase the chances of your home loan application getting approved.
  • The more money you pay as a deposit, the less you’ll have to borrow in your home loan. This could mean paying off your loan sooner, and being charged less total interest.
  • If your deposit is less than 20 per cent of the property value, you might incur additional costs, such as Lenders Mortgage Insurance (LMI).

How much deposit do I need for a home loan from NAB?

The right deposit size to get a home loan with an Australian lender will depend on the lender’s eligibility criteria and the value of your property.

Generally, lenders look favourably on applicants who save up a 20 per cent deposit for their property This also means applicants do not have to pay Lenders Mortgage Insurance (LMI). However, you may still be able to obtain a mortgage with a 10 - 15 per cent deposit.  

Keep in mind that NAB is one of the participating lenders for the First Home Loan Deposit Scheme, which allows eligible borrowers to buy a property with as low as a 5 per cent deposit without paying the LMI. The Federal Government guarantees up to 15 per cent of the deposit to help first-timers to become homeowners.

Who offers 40 year mortgages?

Home loans spanning 40 years are offered by select lenders, though the loan period is much longer than a standard 30-year home loan. You're more likely to find a maximum of 35 years, such as is the case with Teacher’s Mutual Bank

Currently, 40 year home loan lenders in Australia include AlphaBeta Money, BCU, G&C Mutual Bank, Pepper, and Sydney Mutual Bank.

Even though these lengthier loans 35 to 40 year loans do exist on the market, they are not overwhelmingly popular, as the extra interest you pay compared to a 30-year loan can be over $100,000 or more.

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.

However, if you do your research, you’ll find there is still a fairly wide selection of banks, credit unions and non-bank lenders that offers low-deposit home loans.

Why does Westpac charge an early termination fee for home loans?

The Westpac home loan early termination fee or break cost is applicable if you have a fixed rate home loan and repay part of or the whole outstanding amount before the fixed period ends. If you’re switching between products before the fixed period ends, you’ll pay a switching break cost and an administrative fee. 

The Westpac home loan early termination fee may not apply if you repay an amount below the prepayment threshold. The prepayment threshold is the amount Westpac allows you to repay during the fixed period outside your regular repayments.

Westpac charges this fee because when you take out a home loan, the bank borrows the funds with wholesale rates available to banks and lenders. Westpac will then work out your interest rate based on you making regular repayments for a fixed period. If you repay before this period ends, the lender may incur a loss if there is any change in the wholesale rate of interest.

What is the Home Loan Rate Promise?

The Home Loan Rate Promise is RateCity putting its money where its mouth is. We believe that too many Australians are paying too much for their home loans. We’re so confident we can help Aussies save money, if we can’t beat your current rate, we’ll give you a $100 gift card.*

There are two reasons it pays to check your rate with the Home Loan Rate Promise:

  • You can find out how much you could save on your home loan by switching to a loan with a lower interest rate
  • If we can’t beat your current rate, you can claim a $100 gift card with our Home Loan Rate Promise*

What is a low-deposit home loan?

A low-deposit home loan is a mortgage where you need to borrow more than 80 per cent of the purchase price – in other words, your deposit is less than 20 per cent of the purchase price.

For example, if you want to buy a $500,000 property, you’ll need a low-deposit home loan if your deposit is less than $100,000 and therefore you need to borrow more than $400,000.

As a general rule, you’ll need to pay LMI (lender’s mortgage insurance) if you take out a low-deposit home loan. You can use this LMI calculator to estimate your LMI payment.

How much deposit will I need to buy a house?

A deposit of 20 per cent or more is ideal as it’s typically the amount a lender sees as ‘safe’. Being a safe borrower is a good position to be in as you’ll have a range of lenders to pick from, with some likely to offer up a lower interest rate as a reward. Additionally, a deposit of over 20 per cent usually eliminates the need for lender’s mortgage insurance (LMI) which can add thousands to the cost of buying your home.

While you can get a loan with as little as 5 per cent deposit, it’s definitely not the most advisable way to enter the home loan market. Banks view people with low deposits as ‘high risk’ and often charge higher interest rates as a precaution. The smaller your deposit, the more you’ll also have to pay in LMI as it works on a sliding scale dependent on your deposit size.