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CONTENTS
Defence Service Homes Amendment Bill 1997
Date Introduced: 22 October 1997
House: House of Representatives
Portfolio: Veterans' Affairs
Commencement: On the day on which the Act receives
Royal Assent.
The Bill amends the Defence Service Homes Act 1918 to
provide for:
protection of the compensatory nature of the Defence Service
Homes Loans Scheme (the scheme) through the introduction of a
guaranteed minimum subsidy;
simplification of the scheme's current interest rate
arrangement; and
the making of a new agreement between the Westpac Banking
Corporation and the Commonwealth.
The Defence Service Homes Amendment Act 1918 (the Act),
administered by the Department of Veterans' Affairs, provides home
loans assistance to Defence Force members and certain other
persons.
Prior to 1988 loan assistance was provided to Defence Force
members by the Commonwealth through the Defence Service Homes
Corporation.
Loans were multi-tiered:(1)
- First tier ($0-$12000 @ 3.75% pa)
- Second tier ($12001-$15000 @ 7.25% pa)
- Third tier ($15001-$25000 @ 10% pa).(2)
The Defence Service Homes Amendment Act 1988 amended
the Defence Service Homes Act 1918 to provide for Westpac
Banking Corporation to acquire the right to provide future loans
under the Defence Service Homes (DSH) Loans Scheme.
The Defence Service Homes Amendment Act 1988 provided
for loans under a subsidy scheme funded by Westpac(3), paid to the
Bank by the Commonwealth. The subsidy is paid to the Bank on a
monthly basis 'reflecting the difference between the concessional
interest rates paid by clients on Defence Service Homes loans and
an agreed Benchmark rate'.(4) The Benchmark mortgage rate is based
on the standard bank interest rate for new owner-occupied
housing.(5)
The method of calculation of the subsidy and Benchmark rate are
provided for in Schedule 1, section 11 of the Act.
Loans available following the sale to Westpac in 1988, and under
current provisions, are:
- Initial advances (6.85%)
- Further advances (variable rate according to the rate applied
to the last preceding advance)(6)
- Widow/er advances (3.75%)
- Advances for essential repairs (10%)
- Additional advances(7) (variable from 3.75% to 10% depending on
the structure and interest rate of a current loan).(8)
The Defence Service Homes Amendment Act 1988 reduced
the rate for new borrowers obtaining initial advances to 6.85% pa
which was the approximate effective rate over the life of the
standard three tiered loans.(9) It linked the interest rate on
further advances to the rate of previous advances. The interest
rate for essential repairs was set at 10% pa.
In 1996 the Government introduced the first stage of its
Veterans' Affairs Budget commitments to interest rate reform on
certain new additional advances under the scheme.(10) The
Veterans' Affairs Legislation Amendment (1996-97 Budget
Measures) Act 1997 introduced a reduction in the interest rate
for new additional advances from 10% to 6.85% pa in line with the
initial advance rate.
The Minister states that this Bill completes the interest rate
reform commitment. All advances will now have an interest rate of
6.85% or less.(11) The Bill provides for a 'guaranteed minimum
subsidy' through the application of a reduced Benchmark rate,
calculated according to proposed new section 35AA
which will ensure 'Defence Service Homes borrowers retain an
interest rate advantage of at least 1.5% lower than the Benchmark
rate, regardless of future changes in the market interest
rates'.(12)
Schedule 1-Amendment of the Defence Service Homes
Act 1918
Items 1 to 6 relate to rates of interest on advances that
eligible individuals may seek from the Bank.
Item 1 inserts a requirement that a statement
is issued with certificates of entitlement indicating any effect of
the guaranteed minimum subsidy (see proposed new section
35AA) on the rate of interest payable on an advance.
Item 2 sets out a new rate of interest (6.85%
pa) that must be specified under paragraph 17(3)(d) in relation to
additional advances.
Items 3 and 4 insert qualifications to interest
rate specifications for further advances to accommodate the monthly
variation of the reduced Benchmark rate.
Item 5 provides for new rates of interest
applying from 5 January 1998 to be applied to further advances
linked to previous advances.
Item 6 reduces the interest rate specified in a
certificate of entitlement for an advance for essential repairs
from 10% to 6.85% pa.
Item 7 includes key amendments (sections
35AA-35AD) inserting new sections into the Act relating to the
application of the reduced Benchmark rate.
Guaranteed minimum subsidy
Proposed new subsection 35AA(1) provides forthe
interest rate payable for any month, if in excess of the reduced
Benchmark rate, to be reduced for that month to the interest rate
level of the reduced Benchmark rate.
Proposed new subsections 35AA(2) and
35AA(3) provide for the reduced Benchmark rate,
when applicable, to be calculated in accordance with the agreement
between the Commonwealth and the Bank at a rate 1.5% (rounded up or
down to two decimal places) below the Benchmark rate and to replace
any higher interest rates appearing in current loan
documentation.
Interest rate reductions
Proposed new section 35AB provides for interest
rates, payable on certain existing advances subject to single
interest rate payments that are higher than 6.85%, to be reduced to
6.85% pa. The lower rate negates any higher rate specified in
current loan documentation. It also protects the benefits of the
guaranteed minimum subsidy provided for in proposed new section
35AA and may, where a reduced Benchmark rate applies, result in a
reduced interest rate level of less than 6.85% pa.
Proposed new subsection 35AC(1) provides for
the replacement of multi-tiered interest rates with single rates.
Using the formula and examples in proposed new subsections
35AC(2) (3) and (4), a blended interest
rate from the loan term is calculated to determine the single
interest rate payable. Proposed new subsections
35AC(5) and 35AC(6)) provide that the
single rate, where applicable, negates any rate specified in
current documentation and is subject to the provisions of proposed
section 35AA providing for a guaranteed minimum subsidy which may
further reduce the interest rate payable. Proposed new
subsection 35AC(7) provides that, should the replacement
of a single interest rate increase the rate of interest over the
term of a loan, the new subsection (35AC(1)) will not apply.
Proposed new section 35AD provides that certain
contracts made by purchasers who would not have met the current
definition of an 'eligible purchaser' at the time that they took
out their loan under the Defence Service Homes Act 1918,
are excluded from the new provisions in proposed sections 35AA,
35AB and 35AC.
Item 8 inserts administrative changes. Proposed
new subsection 45(3) provides for a three month
period in which to amend clause 11 of the
agreement between the Bank and the Commonwealth. Proposed
new subsection 45(4) provides for changes within
the three month period, regardless of the date the changes are
made, to have effect from 5 January 1998.
Schedule 2
Item 10 relates to the application of certain
amendments. Changes made by Items 1-6 will apply to certificates of
entitlement issued on or after 5 January 1998 and changes made by
Items 7 and 9 will apply to interest payable on current loans where
the interest is calculated for 5 January 1998 or a later date.
The objective of the Defence Service Homes Loans Scheme is 'to
recognise, and provide financial compensation for, certain defence
service through the provision of housing-related benefits'.(13)
This bill addresses issues of concern about the impact of
fluctuating interest rates on the value of benefits and the complex
interest rate arrangements under tiered loans.(14) It may be argued
however that the 'protection' of compensatory benefits through the
introduction of a 'guaranteed minimum subsidy' goes beyond the mere
provision of 'financial compensation'.
The Bill also raises a question of equity. The DSH scheme has
its origins as repatriation assistance. It applies only to those
who joined the Defence Force on or before 14 May 1985. Since 1991,
the Defence Housing Authority has administered another scheme, the
Australian Defence Force Home Loan Assistance Scheme (ADFHLAS),
available to members of the Defence Force who enlisted before 1985
and had not taken a loan under the DSH scheme, revoking their
eligibility by 1991. Persons (with some exceptions) who enlisted
after 1985 are eligible to qualify for assistance under
ADFHLAS.
Whilst universal access to the DSH scheme for all service
personnel was provided for a period between 1972 and 1985, its
current restricted access may be viewed as supporting repatriation
rather than a general service benefit. If the purpose of the DSH
scheme is a repatriation purpose; to provide housing assistance to
a particular class of service persons recognising special service;
its coverage may not be universal and equitable. The scheme does
not provide assistance for non home buyers renting privately by
choice, for work related, financial or other reasons. They rely on
being eligible for Rent Assistance. Rent Assistance is not
repatriation targeted assistance, being general assistance
available to persons receiving DSS or DVA income support payments
or family payment as a low income family.
- Loans funded before 19 December 1988 (multi-tiered) are known
as 'specified portfolio assets'. See Explanatory Memorandum,
'Veterans' Affairs Legislation Amendment (1996-97 Budget Measures)
Bill 1996': 34.
- Figures taken from Hon B. Scott MP, Minister for Veterans'
Affairs. 'War Service Home Loans: Interest', Answer to Question on
Notice, House of Representatives, 20 October 1997.
- Loans funded on or after 19 December 1988 by Westpac Bank
(usually single tiered) are known as 'subsidised advances'. See
Explanatory Memorandum, 'Veterans' Affairs Legislation Amendment
(1996-97 Budget Measures) Bill 1996': 34.
- Explanatory Memorandum, Defence Service Homes Amendment Bill
1988: 2.
- 1996-97 Budget Paper No. 1. Budget Statements 1996-97, AGPS,
Canberra, 1996: 3-127.
- 'Further advance' refers to a subsidised advance (other than
widow/er advances or advances for essential repairs) for certain
borrowers who are not currently, but have been in the past,
borrowers under the scheme. See subsection 4(1) of the Act.
- 'Additional advance' refers to a subsidised advance for certain
purposes (other than widow/er advances or advances for essential
repairs). See subsection 4(1) of the Act.
- Figures taken from Hon B. Scott MP, Minister for Veterans'
Affairs. 'War Service Home Loans: Interest', Answer to Question on
Notice, House of Representatives, 20 October 1997.
- ibid.
- Portfolio Budget Statements 1996-97. Department of Veterans'
Affairs (Defence Portfolio). Budget Related Paper No. 1.3B, AGPS,
Canberra, 1996: 30.
- Hon B. Scott MP, Minister for Veterans' Affairs. 'Defence
Service Homes Amendment Bill 1997', Second Reading Speech, House of
Representatives, 22 October 1997.
- ibid.
- Annual Reports of the Repatriation Commission, the Department
of Veterans' Affairs and the National Treatment Monitoring
Committee 1996-97, AGPS, Canberra, 1997: 55.
- See Mr L. Ferguson MP. 'Defence Service Homes Amendment Bill
1997', Second Reading Speech, House of Representatives, 29 October
1997.
Anne Pyle
14 November 1997
Bills Digest Service
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ISSN 1328-8091
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Last updated: 17 November 1997
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