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61/1998 DSH Interest Rates
Defence Service Homes
National Office Instruction
amending DSH General Orders (1993 edition)
Instruction No. 61
Date of Effect: 5 January 1998
DSH Interest Rates
The purpose of this Instruction is to explain the effects of the amending legislation covering the changes to the Defence Service Homes interest rates which came into effect on 5 January 1998. The instruction also explains related changes to the Agreement between the Commonwealth and Westpac which were endorsed on 26 February 1998, including clauses which are aimed at achieving better customer service and administrative efficiencies.
Over the past twelve months there has been considerable reduction in housing market interest rates following five consecutive cuts in official interest rates. This has impacted on the Benchmark Rate and the level of subsidy paid in respect of the previously fixed rate DSH loans. In a sense, this situation had eroded the comparative value of the DSH loan as an important element of the Government's compensation package for the veteran community.
The former sub-clause 11.14 of the Agreement provided for a review of the situation if the Benchmark Rate fell below the 6.85%pa fixed rate.
After consideration of the issues, the Minister announced on 3 September 1997 that, effective from 5 January 1998, the interest rates on most DSH loans would drop as a result of a guaranteed minimum subsidy of 1.5 percentage points below the Benchmark Rate. This concept represents a major change from the fixed rate regime which had applied since the Scheme's inception in 1919.
The opportunity was also taken to replace the former tiered loans with single rate loans based on the combined tiered amounts and rates and rounded to either 3.75%pa, 4.5%pa or 6.85%pa.
Policy to be applied
Basically, the changes are:
- The maximum DSH rate is now capped at 6.85%pa irrespective of future market fluctuations.
- In addition, while the market rates are below 8.35%pa as they are at the moment, the previous DSH fixed rates switch to a variable rate 1.5%pa below the Benchmark Rate. This means that at the current Benchmark Rate of 6.74%pa, the DSH rate for this month is 5.24%pa.
- Each loan will have one interest rate. The old tiered loans have been collapsed and capped at their equivalent effective rates of either:
3.75%pa - the DSH Base Rate,
4.5%pa - the DSH Intermediate Rate, or
6.85%pa - the DSH Standard Rate,
depending upon the structure of those tiered loans. Those rates are capped as maximum rates which will apply.
- While market rates are low, rates will vary each month at 1.5 percentage points below the Benchmark rate if that calculated rate is lower than the capped rate.
- At a market rate of 6.74%pa, the maximum DSH rate will be 5.24%pa for that month.
- The 4.5%pa and 3.75%pa rates will not vary unless the Benchmark Rate fell below 6%pa and 5.25%pa respectively.
- The amending legislation provides for a guarantee that nobody will be worse off from these changes.
- Additional Advances and Advances for Essential Repairs are also capped at 6.85%pa and variable with a 1.5%pa subsidy guarantee as described above.
The amending legislation received Royal Assent on 27 November 1997 and provided for a period of three months within which the necessary changes to Clause 11 of the Agreement were to be made. Clause 11 governs the calculation and payment of subsidy and required changing in order to pay the guaranteed 1.5%pa rate of subsidy. The effect being to reduce the rate paid by borrowers.
The references to interest rates in the General Orders have been amended to reflect the change from fixed rates to variable where appropriate. The following revised and new GOs are issued accordingly.
Chapter 2 DSH Legislation. The amending legislation has been inserted into Chapter 2. This includes amended or new Sections 31, 33, 34, 35, 35AA, 35AB, 35AC and 35AD. It also includes a new definition of 'Limit' in Schedule 1.
GOs 3.3.1 and 3.4.5 have been amended to include references to variable rates if the Benchmark Rate is below 8.35%pa.
GO 3.4.7 has been inserted to make reference to a 'top-up' facility if the interest rate and term of a new Additional Advance is compatible with an existing advance. This is aimed at achieving administrative efficiencies, better customer service and could also have a fees impact for borrowers.
GO 3.5.3 has been amended to include a note regarding the continuation of subsidy for up to six months after the sale of a home where the borrower intends to acquire another home with DSH assistance within six months of the sale. This will overcome the need to apply for a certificate of entitlement in these circumstances. This is also aimed at achieving administrative efficiencies, better customer service and could also have a fees impact for borrowers.
GO 3.5.4 has been amended to include the revised definition of 'limit' in the Agreement. This is necessary to allow capitilisation of fees to the limit.
GO 3.5.5 has been amended to clarify the interest rates applicable to further advances, particularly where the previous advance was an old tiered loan.
Chapter 5 Legislation re Relief Schemes has been amended to include the amended Section 35.
GO 7.4.2 has been amended to include a reference to a variable rate if the Benchmark Rate is below 8.35%pa.
A new GO 7.4.4 has been inserted referring to the availability of a 'top-up' facility if the interest rate and term of a new Advance for Essential Repairs or Widow Advance is compatible with an existing advance.
GO 10.17 has been amended slightly in view of the abolition of tiered loans.
Appendix A Widows Table has been amended to reflect the changes to interest rates where applicable.
Appendix C which illustrated the former arrangements for Additional Advance interest rates has been deleted from the GO's. It is no longer applicable.
An amended Index has also been prepared.
Because of the extent of these changes, the entire Entitlement General Orders have been reprinted. Please replace the existing Entitlement GOs with the revised version.
Effect on previously issued NOIs
This instruction replaces the instruction regarding Additional Advance interest rates in NOI 54 (i.e. delete the passages regarding Measure 3) and modifies the instruction re widows' entitlements in NOI 29.
Housing and Aged Care
31 March 1998