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.

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Learn more about home loans

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 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.

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.

What is a comparison rate?

The comparison rate is a more inclusive way of comparing home loans that factors in not only on the interest rate but also the majority of upfront and ongoing charges that add to the total cost of a home loan.

The rate is calculated using an industry-wide formula based on a $150,000 loan over a 25-year period and includes things like revert rates after an introductory or fixed rate period, application fees and monthly account keeping fees.

In Australia, all lenders are required by law to publish the comparison rate alongside their advertised rate so people can compare products easily.

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.

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

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 do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

What is a variable home loan?

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

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.