Savings: The new king

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    Canstar's Steve Mickenbecker on how brokers can help Aussies save

    AUSTRALIA’S HOUSEHOLD savings rate has been falling since 2014 when it was 8% and has now nearly hit rock bottom at almost 2.5%.

    This is significantly lower than rates in Europe (10%) and the US (6%).

    Why are Australians so bad at saving?

    We are different.

    Our superannuation scheme is the envy of the world and soaks up 9.5% of our pre-tax income Canstar’s Consumer Pulse Report 2018, a recent study of more than 2,000 Australian adults, found that 16% list retirement as the number one motivation for saving.

    Meanwhile, the other 84% have obviously concluded that their super will take care of it.

    We are world champions at household debt, with a large chunk of our income going towards home loan repayments.

    The worry now is that interest rates will eventually rise.

    Our current savings performance suggests that households aren’t prepared for that inevitability.

    According to the survey, 43% of borrowers are less than three months ahead with their loan repayments.

    The top savings priority for respondents to Canstar’s survey is saving for a house.

    However, the data right now shows a slowdown, and we do know that banks are being tougher with their credit assessments post-royal commission.

    Qualifying for a loan has become a whole lot tougher, something brokers know better than most. We have moved from escalating house prices in most parts of the country to prices declining in the two biggest markets.

    Banks aren’t going to be generous in their property valuations.

    The standard for borrowing without lenders mortgage insurance is still 80% LVR, but what lender is going to feel comfortable with the market valuation when values are expected to fall? A straight 20% deposit will not be enough if the bank applies a conservative valuation.

    We are world champions at household debt, with a large chunk of our income going towards home loan repayments

    So that means Australians’ savings will have to stretch even further.

    When it comes to affordability, rules of thumb are out and analysis of the loan applicant’s actual spending behaviour is in.

    Lenders are reviewing the quantum of their household expenditure.

    A disciplined and consistent savings history is the best evidence your customers have of proving that they can meet loan repayments.

    Borrowers don’t have to convince the bank that they’ll be able to tighten their belts to cover the monthly repayments, but what they do have to demonstrate is a pattern of good savings behaviour over an extended period.

    Savings history will be king.

    How can brokers help with the savings challenge?

    Brokers are usually at the pointy end of the home loan application cycle.

    By the time the broker sees the customer, the customer has researched the property market to form a view of what they can afford and where they want to buy.

    Often they have a conditional contract in their hands.

    They may have explored borrowing options online or with their bank.

    Importantly, and specifically for first home buyers, they may have spent the past three years putting together their deposit.

    It’s a bit too late to be giving them advice about saving.

    But night follows day, and if banks toughen standards, loans will be declined.

    Brokers will be seeing more people who will not qualify for the loan they are after.

    The broker may either give it a shot and submit the loan to the most likely lender, or deliver a little tough love about adjusting expectations about the house and location.

    The other option is to have a conversation with clients about timing, and not just about timing but what to do during that time.

    The ‘to do’ is a savings plan, which should outline how to clear up other debts and include a tally of the necessary deposit and transaction costs.

    As they embark on this plan and start saving, they need to demonstrate their ability to meet future repayments.

    Nobody is happy about a decline from the bank, and sometimes the broker will get the blame.

    But what better way to build empathy with the prospective borrower than to be frank about the reasons for the decline and advise on an action plan to get them to their objective? Savings are the future for homebuyers, and proactive brokers who set buyers on a savings trajectory are investing in their own future as well.

    Steve Mickenbecker is group executive, ­ financial services, at Canstar. He has decades of experience in the finance sector, having worked in management, strategy and leadership roles at NAB and Suncorp prior to joining Canstar in 2008.

    Original Article