Combating Tightening Lending Standards with Alternative Investments

For the last year, almost month after month, the reserve bank has raised the cash rate and this time it was more than anyone predicted. Inflation has forced the Reserve Bank’s hand in the last 12 months with interest rates jumping from the record low of 0.1 to now sitting at a whopping 3.85%, going up all but one month since May 2022. Prior to that, the rate was sitting at 0.10 going back to October 2020, when it dropped from 0.25. 

Mortgage payers have had to suffer blow after blow as rates increased, meaning higher monthly repayments coupled with the rising cost of living across the board. However, there is also a knock on effect, which is bad news for those looking at purchasing property in this coming season. The effect I’m talking about is greater scrutiny when securing a home loan as banks have been tightening their lending standards. 

Around this time last year, ANZ had in fact confirmed that they would only be accepting applications for home loans if the debt to income ratio is less than 7.5. This affects a customer’s borrowing power as the debt to income ratio looks at their monthly debts/expenses and divides that by their monthly income. Other banks have stated that they will go a similar route and place greater scrutiny on home loan applications with higher debt to income ratios. This is why the National Australia Bank cut their DTI from 9 times to eight times but are allowing some wiggle room if the customer has good credit. 

Now, the point I want to make here is that banks tightening lending standards and repayments (increased serviceability) does not have to be an issue, if you make smart choices with your investments. If we move away from the conventional asset types and into alternative assets, you’ll see the potential of improving your cash flow. 

Simply put, the term alternative investments is broad but includes asset classes that don’t fall into the conventional categories such as stocks and cash. These assets include art and antiques, commodities, managed futures and derivatives contracts. Even real estate is often classified as an alternative investment. Due to their diversity, they provide a reduction to overall portfolio risk. 

Narrowing the focus even more, you could consider looking at sustainable projects as an option for alternative investing. Sustainable investments are fantastic opportunities that should be given careful consideration as many businesses and organisations are looking at ways that they can go green. 

The focus is on investing in projects that are environmentally conscious or going to have a positive impact on our planet. As the world is continually trying to make efforts toward a greener future, it makes sense that this industry will grow resulting in large profits. 

Right now it’s a waiting game to see where the interest rates will be in the second half  of 2023, and whether or not they’ll continue to increase. No one is completely certain, the Commonwealth Bank had stated that interest rates could hit 1.35 per cent by the end of last year and 1.6 per cent in early 2023 but now it’s more than doubled past that figure. The Reserve Bank, of course, has to weigh up a few things when deciding whether to increase the interest rate further, including wage growth and the unemployment rate. Whilst there has been some wage growth, it hasn’t been broad enough to affect interest rates like inflation has. 

Instead of waiting though, look at alternative investments as they really will ease the burden of repayment issues by increasing your cash flow and serviceability. There are so many options available, you just need to do your homework. 

Best of luck out there. 

DISCLAIMER: The contents of this newsletter are intended as general advice only. No specific person’s circumstances, financial situation or objectives have been taken into consideration. You should not act on the information provided without seeking personal advice from an appropriately qualified financial planner.