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New credit reporting rules that come into effect from July 2022 will change what is shown on your credit report, especially when it comes to hardship repayments.

Here’s what those changes are and what they mean for you.

Parliament recently approved changes to the Privacy Act that improve the information that can be included in credit reports and give consumers better access to their credit reports. These changes:

• Enable each Australian to access their credit report free of charge every three months (previously every 12 months),
• Make it compulsory for credit reporting bodies to provide a credit score in the credit report, together with an explanation of that score,
• Help Australians who are experiencing financial hardship to protect their credit rating when they enter into a financial hardship arrangement with their credit provider.

 

But first, let’s go back to basics and look at what’s in your credit report and what that means when you next apply for credit.

A credit report is a detailed record of your credit history, including the types of credit you’ve had and how you’ve repaid those debts.

Your credit report may include a 24-month history of whether you’ve made your loan repayments on time. This is known as repayment history information and a good history will help you to get approved when you apply for credit.

A financial hardship arrangement is an agreement between a borrower and a lender to adjust the borrower’s loan repayment obligations because something unexpected has happened which has a big impact on the borrower’s ability to repay.

Payment deferrals caused by natural disasters are good examples of when this might happen, but other circumstances such as illness or relationship breakdown might also lead to such an outcome.

Previously, if you asked for a financial hardship arrangement, your credit report might have shown you had missed repayments during the arrangement – without making it clear that this was due to financial hardship and done with the agreement of the lender.

What this means for you

The recent changes to the credit reporting law mean:

 

• The repayment history information on your credit report will reflect what was agreed under the financial hardship arrangement. For example, if the lender agrees for you to temporarily make half your normal repayments, your credit report will show that the payment has been made if you meet that agreement.
• The credit report will also put a flag alongside your repayment history information that indicates the repayment history is associated with a special arrangement – in the credit report this will be referred to as financial hardship information. Lenders will have access to this financial hardship information in situations where the consumer is seeking to access new credit.
• The changes to credit reporting mean that if you need financial hardship assistance you can avoid having your repayment history impacted. At the same time, if you were to apply for a new loan with a different lender, they would understand you had received assistance and in order to be a responsible lender would likely want to discuss your current circumstances before agreeing to lend.

  Other changes

  Other changes to the law include extra protections for you, such as:

   

  • Limiting the circumstances in which other lenders can be told about your financial hardship arrangement – so other lenders can be told if you apply for another loan with them, but not if they are trying to collect overdue payments on existing loans
  • Limiting what a lender can do with your financial hardship information when they do find out e.g. a lender can’t use the information as the sole basis for closing down a credit card
  • Deleting the financial hardship information from your credit report after 12 months (compared to 24 months for regular repayment history information) so that a temporary setback doesn’t have a lasting impact on your credit report
  • Prohibiting a credit reporting body (which holds credit reports) from including any financial hardship information when calculating your credit score
  • Increasing how often you can get a copy of your credit report for free from a credit reporting body so that you have a better idea of what’s on your credit report
  • Requiring credit reporting bodies to include your credit score on the free credit report, with an explanation of what’s gone into that score, so you have a clearer idea of how lenders might view you (which will help you shop around for a better deal)

   

  These changes will not affect how existing hardship arrangements such as a COVID-19 payment pause will be reported. These changes will only apply to financial hardship arrangements that are agreed from July 1, 2022. COVID-19 payment pauses or other financial hardship arrangements agreed before then are not affected.

  Your next step

  It will be even more important to talk to your broker if you’re struggling to meet your repayments. They may be able to help you get through the problem in a way that will help protect your credit report.

With property prices soaring, knowing how to improve your home loan serviceability can be the difference between getting the keys or being shown the door.

What is home loan serviceability?

Lenders essentially make a business investment every time they loan money to home buyers. As such, they need to work out whether you’re a safe bet, and they do this by assessing your home loan serviceability.

It’s not just for the bank’s sake, either. If you get a loan and can’t pay it back on time, your capacity to get other loans down the track will be harmed due to chequered credit history.

How it is calculated

The serviceability is calculated by combining all of your income such as your salary, rental income and interest from investments, and then taking away your expenses and other repayments you have, including your mortgage repayments.

However, it is not always straightforward, especially when you take into account things like your employment status (ie. freelancer vs full-time) and how many dependents you have.

As part of the process of determining your serviceability, lenders will calculate your mortgage at 2.5% higher than the market rate to ensure that if there is a shift you will still be able to comfortably pay back your repayment.

This is a safety net that they build into the calculations to protect themselves, but it is also to assist the consumer to ensure that they are not in a position where they will be unable to make their repayments if there is a shift in interest rates throughout the life of the loan.

How income is assessed

Not all rental income is treated equally. Whereas 100% of your salary will go into the calculation, typically only 80% of rental income will be calculated.

The reason for this is that they need to consider that the property won’t always be tenanted, so the borrower won’t be able to depend on the full rental return to cover their mortgage repayments.

The same goes for income from shares, due to the fluctuations in the market and the risk that shares could also depreciate in value.

This means that lenders cannot accept 100% of investment income and will generally consider 80% (this varies between different institutions).

The benefits of increasing your home loan serviceability

The good news is that home loan serviceability isn’t a static condition you’re lumped with – there are ways you can improve it and thereby improve your chance at securing a loan at a good rate from a wide amount of products.

Another benefit of increased serviceability is having a greater buffer to minimise risk if interest rates move. This will take a considerable amount of pressure off, and give you a safety net to fall back on if there is an unexpected change.

Five things you can do to improve your home loan serviceability.

1. Reduce credit limits

Even if you don’t owe anything on your credit card your limit will still be considered as potential debt when lenders are assessing your position. As a borrower, this will make you much more attractive to the lender due to having fewer lines of credit and removing that potential risk.

2. Aim for stable employment

Being self-employed or a contractor can be viewed as a risk by some institutions. If you are in a new job and still under your probation period, this can also affect your serviceability, which is why it’s best to start applying for the loan when you have passed probation as it allows you to demonstrate a constant and stable income stream.

3. Pay off BNPL loans

Buy Now Pay Later (BNPL) products are readily available in most stores now, they are easy to use and can be seen as a great way to manage cash flow, however, what many people don’t understand is the effect that they have when applying for a home loan.

BNPL transactions often show up on a credit check, and generally, this will have a similar effect to credit cards that demonstrate when you are overextending yourself through these companies. To increase your serviceability, make sure you pay all of these debts off before applying for a loan.

4. Rein in spending

Before buying a home, it is important to budget and save money, not only for your deposit but to also demonstrate your spending habits to the lending. When you start thinking about getting a home loan it is important to cut back on your spending habits.

To borrow money, the lender will need to see your bank statements, and if there is a considerable amount of spending on takeaway and entertainment costs, this will affect your serviceability. Institutions want to see that you’re demonstrating responsible spending habits, ensuring that they will trust you to make your repayments.

5. Pick the right lender

Know what you want and always shop around. Currently, in Australia, there is so much competition and with rates the lowest they’ve been for years, there is no better time to find the best products in the market.

Information is power. Knowing how much a property is worth can help you secure a great price during negotiations.

Whether you’re a buyer or a seller, having an accurate property valuation conducted can give you the confidence you need to close the deal in your favour.

And it doesn’t matter if you’ve had one conducted recently. The housing market is constantly shifting.

A house worth $600,000 a year ago could be worth much more – or even less – today.

So it’s vital to always obtain reliable, up-to-date advice on the value of a home when buying or selling.

Who conducts property valuations?

Property sellers can approach either real estate agents or private valuers for a valuation.

While private valuers are not used by banks when lending decisions are made, they are useful for a guide to the estimated market value.

In fact, “bank valuations” are altogether another thing. They’re conducted by a lender to determine their risks when you apply for a home loan. And they’ll usually be more conservative than the market valuation.

What exactly is meant by “market value”?

The market value of a property reflects the price that a willing buyer and willing seller negotiate before a transaction takes place.

It is not the current listing price of the property or the amount of money that was last offered for the property.

How property is valued

A property valuer takes a number of different things into account before coming up with a figure.

Typically, they look at the number and type of rooms, the size of the property, location, and areas for improvement.

They may also look into whether the building has a sound structure, the quality of the property’s interior design and fittings, ease of access, and planning restrictions.

Outside the property, they will look into any local council issues and compare recent sales figures in the area to understand how in-demand the property may be.

Factors that influence value

Many of the factors that decrease a property’s value are beyond the control of homeowners.

The popularity of a property’s location and surrounds will have a huge impact on its price. For example, a new whizz bang unit block may go up next door making yours look outdated, or a new high rise could block your ocean view.

Government legislation – such as changes to foreign ownership or Labor’s proposed changes to negative gearing and capital gains tax – can also impact the market.

There are, however, ways that sellers can increase the value of their home outside fluctuations in the market. We’ll take a look at a few below.

Kitchen and bathroom: These areas attract the most interest from potential home buyers. Consider allocating a chunk of your budget towards new sinks, countertops and cabinets.

Fresh paint job: Painting can make a property feel new. Neutral creams and whites suit most people’s preferences. Lighter shades also give the impression of spacious rooms.

Get trimming: If your property looks gloomy, try trimming overgrown bushes, mowing the yard, and growing flowers.

Improve energy efficiency: Buyers may dig deeper into their pockets for a home that helps them save on energy costs. Install appliances with positive energy conservation ratings. Also, replace old windows with ones that have a durable sealing.

And a quick warning to the buyers out there. Make sure you don’t allow yourself to get “wowed” by cosmetic upgrades. Remember that there are other important factors you’ll want to consider when you evaluate a property too.

Want to conduct a property valuation?

If you’d like help finding out exactly how much a property is worth, then give us a call.

We’d be more than happy to put you in touch with a reliable, independent valuer who will help give you an insight into the market value of the property you’re looking to buy or sell.