Spotlight on living expensesJanuary 23, 2018
With a buoyant property market only just starting to show signs of easing, APRA, the government regulator is still strongly focused on bank lending. In November the Chairman of APRA, Wayne Byres, publicly announced that banks need to “devote more effort to the collection of realistic living expense estimates from borrowers”. As a result, we’re seeing lenders requesting a detailed breakdown of your actual living expenses.
Given that it’s the start of a new year and you’re likely mulling over what you’d like to achieve for the year ahead, it’s the perfect time to review your spending habits and plan out a budget or update your current one. If you’re not inclined to put together a detailed budget, a simple alternative is to take 3 to 6 months of your day to day transaction account and work out where your money has been spent during this time. It will give you a good indication of your overall spending habits and help identify areas to save. It’s also a good time to review and update your insurances also to ensure they are still adequate to your current financial situation.
If you want to cut down on spending and prefer not to analyse your expenses on a regular basis – another tip is to work out your expected costs each month on essentials such as groceries, electricity, rent, dining etc., plus a marginal buffer and on the day you are paid, leave this amount in your day to day bank account and transfer the rest to a high interest saver or offset account. Ensure you don’t have debit card access to the high interest saver account, just internet banking so it’s harder to access. That way you restrict your access to excess cash each month, helping you to save.
We’ve seen clients who have used this method of budgeting take it one step further by having their employer split their pay to two separate accounts for them. That way they don’t even see the surplus income hit their day to day account.
However you do it, if you’re planning to borrow any funds in the next few years, expect lenders to request your expenses. And if it doesn’t meet their assessment of your expected expenses, they’ll be asking you to provide three months bank statements evidencing your declared expenses if you’re not an existing customer. If you are an existing customer, they’ll be reviewing your accounts internally themselves and can possibly decline applications if your declared expenses don’t match your transaction history. So planning is the key, no one likes to budget but it’s important to understand your cashflow.
We’re still seeing super competitive fixed rates and with a number of economists predicting at least one rate rise in 2018, it might be an appropriate time to fix some or all of your current loans. If you do consider fixing however, remember that you are penalised if you pay out or refinance a fixed rate during the fixed rate period. This is called paying a ‘break cost’ and is calculated on a number of factors including the remaining term of the fixed loan and variable rates at the time.
Generally speaking you can’t have a full offset account against a fixed rate and you are limited to the amount of additional repayments you can make each year. Additional repayments can’t be accessed during the fixed rate period either. In addition to the fixed rates, we’re seeing some very competitive variable rate options, especially if you opt to pay principal and interest along with cash rebates to help cover the associated costs of refinance, which are usually around the $1,200 mark.
If you would like to discuss whether fixed rates are suitable to you, ensure your current rates are competitive or check if your current loan structure best suits your needs please contact me to review your options.