Good morning, everyone, and welcome back to Sugar Mama's Fireplay.

Today's episode is a really important one if you have a mortgage, a large mortgage, and you have an investment property.

There have been some recent changes which you may have seen on the news, on the headlines, on social media, and it's around afra's new DTI rule.

Now, there are some important things that you need to know about and understand right now so that you know whether you need to act on this or not, because if you don't, I'm worried that there may be some regret.

So to help explain all the finer details about what this involves, why it's a concern, and what you can actually do about it so that doesn't become a concern, we have John Mikolzzi from the Blue Lantern Home Loans.

Now, for anyone that listens to this and thinks, oh my goodness, what do I do?

Where do I go?

Who can help me?

Of course, John is more than happy help, so to make it as easy as possible, I'm just gonna pop John's mobile phone number and his email address in the podcast notes, so feel free to reach out to him when it's appropriate for you.

Obviously, sooner rather than later, because this is so time sensitive.

And please know there is absolutely no incentive from me whatsoever should you work with John or anyone else from lou landon.

I'm just happy to put you in contact with someone that I have worked with for many many years, I know and trust and have used for my own clients, family and friends.

All right, let's get into this, because this is urgent.

John, how are you thanking so much for jumping on this and I can and helping us digest this and understand this in such a time, such a prompt manner.

I really appreciate it, as all of our listeners.

How are you.

I'm really well, Canna, and as usual, thank you for the opportunity to discuss what you and I believe is what could be quite an important issue for people that are affected by.

The change, and quite serious too as well.

So let's get straight into it.

What exactly is this new rule by OPRA, the DTI rule?

And why has this been introduced?

Okay?

So DTI stands for debt to income ratio, So, as the name suggests, the calculation is what are your total debts compared to your total income?

So, as a really simple example, if you're on one hundred thousand dollars gross salary and you have a five hundred thousand dollar mortgage, your DTI debt.

To income ratio is five.

OPRA is bringing a new rule on the first of February that states that deposit taking institutions will be capped to twenty percent of new loans.

Only twenty percent can have a DTI of six or more.

Okay, so why are they doing this.

So they've noticed that these high DTI loans above six have increased recently, and they then jumped to well, that could create weakness and vulnerability in the financial sector and in the housing market.

So they've turned at almost like a preemptive strike.

They're they're not going to wait until bad things happen.

They're putting this in now to get ahead of the curve, to try and avoid any potential problems down the track.

So it's a proactive measure, a proactive form of protection for our economy.

Yes, that's right.

And when you say gross income, is it combined gross income.

It's combined gross income, it's or it's total income, right, So it's total income total debt.

So that would include rent dividends, any form of income.

But importantly it includes all debts, not just your mortgage, so it includes credit card limits, HEX, debts, personal loans, the whole lot.

Wow.

I bet so many people didn't even know that.

No, all right, who is most impacted by this rule and who you know doesn't need to worry so much?

And as at this point in time, assuming there are no new adjustments to this rule, you know, who's currently sitting safe?

Okay.

So the people that are sitting safe are people with a DTI less than six.

Okay, So if they're well below six, no need to worry, no need to panic, you know, business as usual.

Although as you and I have often talked about, that doesn't mean that you just sit there and you know, not review your own position.

Should You should always be reviewing your own position.

Right, absolutely, on a regular basis.

Yeah, And with that information they've just shared about, you know, debt income ratio includes all your debts.

You know, it never hurts to understand your DTI try and reduce it, you know, get rid of those unnecessary credit cards HEX.

That is also included, so you know, can you do anything about that now with the government's discount et cetera.

Right, So the people who it could affect is the people with a DTI above six, right, So this could be people who have decided to take on a big mortgage because they want a particular property for themselves, or they're aggressively investing in property.

So they are the people that it could affect.

The loans that aren't affected by this rule loans for any new construction and bridging loans.

So does this include people with a home loan, you know, a principal place of residence that they're living in.

Yes, if it's above six, it doesn't matter whether you're owner, occupy or investment loan.

It's a blanket rule.

And APRA has said they're applying their cap equally to owner occupy loans and invest the loan as well, so it'll be twenty percent cap owned and occupy loans and twenty percent CAP on investment loans.

What you've got a scenario where you've got to say, you know, a couple working and they're planning on going down to one income to have a family.

I mean there DTI might be at the moment, you know, sitting around say four, but if with one person stopping work, they have a family for a year and take a year off, they could easily be tipped into this category.

Absolutely, So what would have to happen is they'd have to go to a lender that one hasn't reached their cap yet.

And then two, when it comes to maternity leave, you have to go to a lender who allows some provision to go on with eternity leave, which means that, yeah, there's rules around that, but that's probably a topic for another day.

Yeah, I mean this is why you work with a mortgage that knows, all right, yes, you're going to fall into this category, right, I know that this lender of this lender, that lender will potentially be exactly to look at your application and consider helping obviously step in and refinancing.

You know this is right.

It's just so important to be ahead of the game and understand it.

Even if it doesn't impact you immediately, it may do further domas track particular, if you want someone not necessarily takes time out to raise a family, but also someone loses their job or decides to take some time off to maybe you know, go back to university or whatever it may be.

I mean, there are going to be lots of different scenarios.

Absolutely, and what I often say to people is, yes, rate is important, but each lender has different policies, right, and so if we come back to this topic, importantly, the rule only applies to authorized to posit taking institutions, I think major banks, anyone that takes it to posit.

It doesn't apply to lenders who aren't authorized to positive taking institutions.

So there are lenders that won't be affected by this rule, right, So there are options out there.

Yeah, so it's not a panic doomsday, but it's definitely just something that needs, you know, proactive strategic planning with professional advice that knows the best way and also the cheapest way to make this happen, because a lot of people I can see are going to be I guess back into a corner where they potentially need to refinance, but they may even need to look at refinancing to go from say an interest only loan if they've got an investment property portfolio, to perhaps principle and interest so that they stay within a safe zone with these DTI rules.

Why do you think this is something you know, the people really need to be paying attention to right now.

And I've got another question to ask you, which you may not be a plans for let's just focus on this, but like, why is this so important right now?

It's important right now if you are intending to take on new lending, right want if you want to do a new lending because and when I mean when I say new lending, that includes property purchases, refinances and also review an extension of interest only periods.

Right, So that's a big one.

That's a huge one listening thing thinking you know, what's fine, I'm not I don't intend in buying a new new property, you know, in the next couple of years, so we don't need to worry.

But if you are on you know, you say an interest only term and your term is due to expire.

For example, Tom and I have an interest only loan on an investment property, which actually I just checked the other day it expires in April.

So we need to, you know, get some advice from you guys as to what to do and you know, whether we should look at changing a loan structure or looking at an extension or whatever, all the differ options that might might be able to come to us.

So that's a huge one.

I mean, everyone who's listening to this right now, jump on your internet banking and have a look at your loan terms and check out that when your your terms actually end, like when they expire, and you know, is this something as simple as contacting the banks today and saying can I renew my interest only term?

Or do they have to get a mortgage broker or their bank to step in and look at a new application.

Almost here's the thing, and this is a lot of people get caught out by this because I proactively have it marked when clients interest only periods are ending, and I reach out, say three months before, and then if the client wants to extend their interest only period, it's effectively an application.

The bank reassesses your position.

So it is the same information and process as if you were refinancing or getting a loan for a new property.

Right.

And the reason is this The people hate people just hate that, right, But again it's the reason is quite logical in that the bank is assessing whether you can afford again an interest only period because extending your interest only period actually increases your total interest bill, and so the bank has to assess whether you can afford that.

So it's yes, people don't like it, but it is a necessary evil and it's there for the protection of people, right, So it is reassessment, right, That's just something that's that's unavoidable.

You just can't call up the back and go, hey, I want to extend my interest on the period.

It just doesn't work like that.

But it'd be in your interest to look at doing this before the first of February, I.

Imagine absolutely, And I would go, like your example, I would even go to if your interest only period day is expiring, say within twelve months, then if you wanted to extend it, I would look at it now.

Because the other thing is, yeah, there's rate creep, right, so you know there's probably better rates available anyway at the moment, so it's probably a good time.

To look at it.

The other critical piece here is that if you can't or don't want to extend your interest only period, naturally your repayments role to principle and interest repayments automatically on.

That which is a significant increase.

Like the other night when you know it was Monday night this was released or Monday day at dinner time, Tom and I quickly looked at the numbers.

Is to switch alone for this investment property from interest only to principal and interest and it was significant increase in our cash flow, you know, and I was quite I mean, I think people really need to look at these numbers to understand are they prepared if they don't do their paperwork now and get on the phone and the front foot with the bank or the mortgage broker to understand what the consequences of having to spitch to a you know, principal and interest loan.

You know what it really looks like.

So I mean, I can't stress enough to everyone listening to please check your loan conditions and the finer details.

The next point here is that you need to also understand what your it's called a role to rate, So what will be your role to principal.

And interest rate?

And again, if you're let's just say, had a five year interest only period, that loan was done five years ago, and in your loan contract, your role to principal interest rate that was negotiated five years ago just maybe totally out of the market.

So it actually can be a double hit.

Not only will you potentially not only will you go to principal interest repayments, but then you may go to a rate that is way out of the market, so it's a double hit on cash flow and that then.

Means refinancing to a whole another lender.

Yes, yeah, Okay, Now the question I wanted to ask you, and I appreciate that you may not be able to answer this, but I'm going to ask you anyway.

You know this new limit of twenty percent for the banks, let's call it, what do you think it currently is?

Do you think it is you know, for APPRA to have to come forward and say right there, this new cap of twenty percent, Do you think it's significantly high at than twenty percent at the moment?

No?

Are there only a lot of people involved in this, like the fall into this scary pole.

So what they've said, what APRA has said is that they've noticed a significant increase all be it coming off at low base right.

They haven't put the numbers around what significant increase means, but where it's come from and where it's going to two separate things.

Regardless of where the banks have been that it's from first to February or new loans.

New loans don't have this cap right, sort of what's happened in the past.

It doesn't really have a bearing if bank a come twenty eighth of February, twenty percent of their new loans are above six DTI.

That's it, the reach of the cap.

How does this then impact you know, first homeowners.

Look, the rule applies regardless of the type of borrowers.

It's more that the carve outs and exclusions are type of loan.

Like I said, it doesn't apply to bridging loans, doesn't apply to any new construction.

Okay, so it can affect any borrower.

Now, first home buyers usually their loan amounts are generally lower and their DTIs are generally under six.

But again, you know, you could get a scenario of you know, a couple who want to buy their first property, the real keen to get into the market, and you know they want to push above six.

Well you know that they potentially get included, you know, in the app as well.

All right, okay, so everyone listening right now?

What do they need to do where?

Exactly what do they need to be checking as they open up their internet banking?

Can you talk us through the key things here?

Okay, So I'll split it into two.

If you've got a pre approval and you haven't bought a property yet, and that pre approval is set to expire after the first of February.

You may want to check well before that that if you have to extend that pre approval, that your borrowing capacity won't be potentially affected by this new rule.

Right, because if you don't find a property then you try and negotiate a property after the first of February, you need to understand whether you can still go in at the loan amount that you were negotiating at before because if you can't, well, then you have to reset your expectations.

Okay, So that's critical, right.

So that's for purchases of property right with existing loans.

You need to understand are you potentially caught by this rule then if you're going to do any form of new lending right on your existing loan.

So it could that's including a refinance, it could be an upgrade, it could be renovations.

They're recycling.

If you look at.

Recycling anything anything, right, you need to check.

You need to act now.

If you want to do any new lending and you think you may be affected by this rule, you need to act now.

So manage your loans by yourself.

You may need to take a day off and not go to the beach the stummer and check things or give it to me and I'll do.

It whilst you're at the beach.

So really, people's the choice is yours.

And there's just several that knows there's no there's no charge, there's no fee, there's no You're not going to get a bill, you know, for John's time here.

It's John is remunerated by the bank, so you don't need to worry about that.

You're literally doing all the heavy lifting life admin, you know, for your clients.

All right, so what else do we need to be doing here, because I mean even I'm panicking about this.

Well, well, then the first thing is don't panic again, have a general understanding of your DTI.

But also again, you know people usually leave.

I get a lot of people, you know, come January February New Year.

You know they want to they want to look at their situation again.

Well, bring it forward and and again.

Even if you know in your head your rough calculation, your DTI is is well under six, doesn't matter.

You look at what the look at what the calculation is saying, and look at what APPA is saying.

Right.

One of the other reasons they are doing this is because you know, they're always concerned about the high indebtedness of Australian households.

So do a sense check, a health check on.

Your debts now again, you know, my big bugbear is people who have five credit cards that don't use them and they've got these credit card limits that are unnecessary.

Close some bring it down, you know, chop them up, things like hex hex is include it in the debt calculation.

Is it time to pay it?

You know now that the government has given you the twenty percent discount, right, or there are lenders who actually if you are going to pay your heck, if your hex is going to pay itself naturally within the next year, they're actually whine included in your DTI calculation and in your buyering capacity.

Right.

So these are all the things that you need to check regardless of this rule.

Right.

But importantly, if you believe you are affected by this rule, and I can help calculate that, and if you want to do something, act now.

And on that note of acting now, I mean I was chatting with Adam the other day and you know, he was explaining to me that there is such a huge backlog with these banks processing applications.

You know, obviously there's an influx of people looking to get into the property market.

You know, the it's taking a long time to get loans approved and to get them finalized, you know, not just new loans, even refinancing, even setting up debt recycling strategies.

You know, you cannot expect to just turn up and see a mortgage work or see your bank and expect the whole to be fixed within forty eight hours.

You know, this is it is a lengthy process.

Obviously, you guys do all of the hard work, but it's not something people can expect to have fixed overnight.

Which is why, particularly with this backlog and the extensions and the delays, you need to get onto this.

Literally the moment this podcast ends, you need to be picking up the phone asking the questions to checking the expiry dates on those loans.

Yeah.

Look, it's a great point and it's it's self fulfilling really, meaning that if you are if your DTI is above six, general rule is your scenario is probably not standard.

There's probably some complexity in there, and that's where the backlog comes in.

Is that the higher the complexity, you know, some lenders, Yeah, they may look at it in two three days a week.

But then they may have more questions.

And if your DTI is above six, I'll guarantee you they'll have more questions.

Okay.

And so it's that circular process of assessment which creates the backlog and length of time.

And it's something that you know, we work as you know, we work.

We work pretty quickly.

Right, We're not the problem.

We're not the issue.

The issue is sometimes the lenders with their process, especially of a Christmas they're not as quick as they perhaps caught or should.

But yeah, and it's a very important point that you raise.

You know, if you do have a DT I have six or higher, your situation is most likely complex.

There's a bit of a backstory as to you know, you know what you're doing, your goals, your strategy, you know the way that you're you know, perhaps you're self employed.

There are lots of parts to your financial story.

And this is why having an experienced mortgage broker like yourself, like Joe, like Adam from Blue Land, and it goes in for you on your behalf and explains you know, this is Peter Peter.

You know, he runs his own business.

He's got ten employees.

You know he's got a business loan here, but he's got an investment property portfolio here and a debt recycling strategy on a family home.

You go in and do this so that it's not a matter of you know, computer says no, you know you've been declined or you've been knocked back, or yes, you have to switch to principle and interest.

Now you've got someone that actually you can have a human conversation with.

They can go in and then talk to someone at your bank, on your behalf that can have this important conversation so that you can then figure out what is the best course of action, you know, obviously for your your clients and obviously the person at heart here.

So you know, I can't stress be just the power of having experienced mortgage broker if your situation is even remotely complicated.

Now all right, you know, John, thank you so much.

I mean, I even myself, I feel so much more relaxed, even though I am obviously concerned, and I've already I've already made that phone call to Adam to get him to check, you know, our situation, to make sure we're okay and if we do need to make a change, which I suspect we will that we do it, you know, in advance, but someone like yourself, can you explain to the listeners, you know, how how the process involved, how you can help and what you'll be looking out for and how you know, other people can really navigate these new rules.

Because my concern is that this is you know, this feels like it's come out of the blue, but is this going to get worse?

Are they going to get stricter?

Potentially?

Okay, So when it comes I'll answer the navigation part and how the process works, so navigating it, and so the process with me is you know, initial conversation, understanding of the understanding of the scenario.

Then you know, if we need to go to assessment, then providing the required documents and information to allow me to do the assessment.

And again you know, it's pretty efficient these days.

We have we have individual portals for people.

They just upload information.

It's not as big an impact on your life admin as people think, right, because then and then the work is with me.

Then I go away and you know, crunch crunch the numbers and then can guide people as to strategies, options, you know, et cetera.

Okay, So so that's that's how you know that that navigation you know it works?

Right?

Sorry?

What was the second part of the question, how do.

You help you?

When that was?

I think it was something like do you see.

This getting do we see getting worse?

Yes?

Do getting worse?

Okay, it's great, I'll.

Just say this.

You could say, maybe to start with, to answer your question, do I see this potentially getting worse because it has come out of the blue?

You know, something like that, Okay, to.

Answer your question around you know, could this get worse?

Well, the answer is yes, So this this came out of the blue, right, no one.

You know, if you'd ask me at the start of the year you know what new things could possibly come in?

I would not have picked this one, okay.

And it will be the numbers.

If that cap gets reached quickly, then appraa may get even tighter.

Right.

And also if they're seeing that that high indebtedness you know, still there.

And then importantly rates aren't going to drop because that now I've heard one bank with their forecart saying that they flipped from potential rate cut next year to perhaps the rate increase in November.

Right, so there's no rate cuts.

That's going to help people.

And this continues, well, then APRO you know, APRA could act again.

It could be you know another rule, particularly if.

We have interest rate rises and we start to see more mortgage stress, you know, kick off and it is you know, it can have a domino effect, the flow on effect.

You know, this could be really I don't want to be doomsday and negative, but for a Monday morning that there is so much danger with this, you know, the potential trend of where this could could keep going.

Yeah, that's right.

So what I would speculate what APRA scene is that people have re entered the buying market with these infrastrate cuts that we've had this year, right, and so then people have been emboldened and are bullish and listening to the commentary around all there could be even more rate cuts, right.

So therefore that's why they have gone for these high DT eyed loans because they're thinking, okay, well rates will continue dropping, I'll be fine, right.

I think APRA has gone, okay, well we're going to do something here just in case rates don't drop, right and people's expectations are incorrect, and then they're stuck with these high DT eyed loans, right, so I would speculate that's probably the thinking that's gone into this from opera, because it's pretty quick that they've come and it came out of the blue.

Yeah, it's it's a very firm figure like it's you know, only a maximum of twenty percent across the major banks.

You know, it's not a huge amount of people.

They are going to be allowed to stay and it's allowed to have a detail of six more.

John, thank you so much for sharing everything with us, helping break this down, helping calm my nerves, but also way more importantly, making our listeners aware of this so that they don't get a rude shock, they don't get placed in a position where they have to switch their loans to principal and interest, or they are in a position where they have to potentially sell and you know, undo their hard work before it's even worked for them.

So anyone listening promised me the moment this podcast ends, which isn't about one minute, you are jumping onto your internet banking and then once you've worked out your total debt and where your DETI is sitting, you give John a call or your bank or your mortgage broker.

But you get this looked at sooner rather than later, keeping in mind the backlog currently with the banks in restructuring, refinancing.

Of course those new home loans.

As I said, will pop your notes and your details in the podcast notes for everyone.

I can't thank you enough for your time that was so incredibly helpful.

Thank you so much, Thanks Kenna, thank you for the opportunity