The borrowing capacity screws are about to get turned AGAIN.

Discussion in 'Property Finance' started by Jess Peletier, 15th Nov, 2018.

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  1. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    The newest thing to grab the regulators attention is credit cards.

    Well it's not actually new, but it's starting to look like it's actually going to happen now so here's the heads up.

    By about July next year, it looks like banks will start to assess credit card limits as P&I over a set term - possibly 3 years (as per head of FBAA, Peter White.)

    Currently, they're assessed at 3% of the limit/month and if it's a problem for servicing you just reduce the limit safe in the knowledge it'll be about a month before you're lucky enough to have an increase offered to you, just like that.

    It hasn't been sorted out completely yet but this is the next way that people are going to have to prepare - many people we see have high card limits that don't get used but moving forward it may not be as easy to regain those limits once they're closed off.

    In real terms it's going to depend whether they treat it at actual P&I over the chosen term, or if they then buffer the repayments as well (similar to how some lenders buffer personal loan payments.)

    All in all, it's not a massive hit on it's own, but when deals are getting harder and harder to place, and a $200/mth pass is quite refreshing (!) the difference it will make to servicing is definitely going to be felt.

    Fun times! :)
     
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  2. Redom

    Redom Finance Strategist Business Plus Member

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    Interesting point @Jess Peletier - thanks for sharing.

    I don’t think this makes much too much sense. They’re already assessed with a large buffer in place. 3% per month is a harsh treatment. I don’t quite see the benefit or issue.

    In fact, lenders have already started to exclude them altogether again if fully paid off. Personally I see credit card treatment heading in this direction to allow prudent households to have credit card limits impact serviceability appropriately.
     
  3. MC1

    MC1 Well-Known Member

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    I thought those pre approved increase offers were a thing of the past
     
  4. Marty McDonald

    Marty McDonald Mortgage broker Business Member

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    The change coming is minimum repayments on cards will need to be calculated so that the card debt owing is paid off within 3 years. Doing the sums....

    Actual repayments required by card providers.... $10,000 balance at 18% pa over 3 years = $361 / month.

    Lender assessment $10,000 limit @ 3% / month = $300 / month

    Not that big a deal??
     
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  5. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    I agree, at $10k it's not such a big deal for most people, but when you've got business owners with $50k in total across biz and personal - I did a quick mock up based on a $50k cc, and at actual payments it's still not such a big deal. BUT - if they then load them like some lenders do with PL's for eg, then it really can make a difference.

    And TBH, sometimes that $61 is all you need to be the difference between a yes and a no - more and more these days! Death by a million cuts, so to speak.
     
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  6. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    It's just more of being 'seen' to be doing the right thing. :rolleyes: Doesn't seem to matter if it has any real benefit, these days!

    (Congrats on your Top 100 btw - awesome work!)
     
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  7. Redom

    Redom Finance Strategist Business Plus Member

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    @Jess Peletier - Thanks! :)

    Yep agree, some of this is smoke and mirrors (DTI ones in particular!).
     
  8. Eric Wu

    Eric Wu Mortgage Broker Business Plus Member

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    interesting Jess.

    for ppl with hard debts on Credit Card ( paying min repayment month by month), this will be an real issue.

    good thing with CC limit is, ppl can reduce it straightaway if they clear the balance every month, it is a phone call to the bank, then limit reduced.
     
  9. miximitosis

    miximitosis Well-Known Member

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    Another bureaucratic measure which has very little impact in improving consumer outcomes. Seems to be the flavour of the month (...or year).

    You are right though Jess, death by a thousand cuts is what we are seeing with some cuts bigger than others.
     
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  10. hammer

    hammer Well-Known Member

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    If they're paying minimum repayments on a ccard...then maybe this being a real issue is a good thing?
     
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  11. TheSackedWiggle

    TheSackedWiggle Well-Known Member

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    I thought DTICap was the final defence in case a loan manages to get thru gaps.
     
  12. Eric Wu

    Eric Wu Mortgage Broker Business Plus Member

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    I am a bit lost here, can you please re phrase your question?
     
  13. miximitosis

    miximitosis Well-Known Member

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    How does this policy which specifically relates to customers applying for a mortgage help those who are currently paying the minimum on their credit card each month?

    If policy makers want people to pay off their credit card debt faster, all they have to do is implement a new minimum repayment that pays out the balance over the desired (arbitary) period.

    In this case, why don't policy makers make it legislation that the minimum repayment on credit cards is calculated by the current balance repaid over 3 years? Wouldn't that achieve the exact outcome they are chasing rather than implementing something which is merely perceived to be doing the right thing?

    EDIT: This isn't specifically targeted at you @Eric Wu but you raised a good point about people that are currently paying the minimum on their credit card.
     
    Last edited: 16th Nov, 2018
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  14. TheSackedWiggle

    TheSackedWiggle Well-Known Member

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    @Redom @Jess Peletier,

    I hold close to 100k of interest free BT in my offset account, rinse and repeat after free term expires.

    How much of a borrowing capacity hit 120k of CC limit brings?

    As long as its repaid and cc closed at least a month before new loan application it should not effect my borrowing capacity right?
     
  15. hammer

    hammer Well-Known Member

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    Sorry Eric....what I mean is that people who are only making minimum repayments on a credit card debt should be a red flag to lenders regardless.

    If they can only meet mininum payments on a ccard, how are they going to go with a mortgage?
     
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  16. TheSackedWiggle

    TheSackedWiggle Well-Known Member

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    For some reason CC debt seems quite acceptable to many I know in spite of its penalising highIRs, I don't quite get that.
     
    Last edited: 16th Nov, 2018
  17. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    3% of $120k = $3,600 per month
    yearly this would be $43,200

    Roughly this would mean a reduction in borrowing cap of 6 x this or $260,000
     
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  18. TheSackedWiggle

    TheSackedWiggle Well-Known Member

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    Thanks Terry,

    And if I close just before loan app no hit to BC?
     
  19. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    if you close it then there is no debt so the borrowing cap won't be effected.
     
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  20. Redom

    Redom Finance Strategist Business Plus Member

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    A 120k credit limit will mean a ~500k impact on owner occupier borrowing cap.

    ~43k increase in the annual expense column which has a multiplier of 12 (post tax). Income has a multiplier of around 5.5-7.5 (depending on type of income).