To break or not to break?
• RBA reduced cash rate to record low in February.
• Variable interest rates at a historical low.
• Rates forecast to potentially decrease further.
• Is it worthwhile breaking your fixed term home loan?
Last month the RBA lowered the official cash rate 25 basis points to a record low of 2.25%. Many lenders have passed on this cut to borrowers, dropping their interest rates to their lowest in 40 years. This has left many borrowers on fixed term home loans on a much higher interest rate than the current variable rates. With rates forecast to potentially decrease further, this movement has bought with it many enquiries from people on fixed terms as to whether it is worthwhile breaking their term and switching to a variable rate.
Home loan conditions can change dramatically over relatively short periods of time, which is evident from the 5% drop in the cash rate over the past 7 years. Whilst a fixed rate has its benefits of stability in terms of budgeting and certainty of repayments, many borrowers currently feel that they are missing out on the record low variable rates.
In the current interest rate environment, it can be tempting to break out of fixed term rates and take advantage of the historical low interest rates, “It could be worth terminating your fixed term early whilst variable rates are considerably low” says QuickSelect Director, Simon Campbell. But the question is, is now the best time for you to break your fixed rate, and will it save you money? “You need to make sure that you won’t be paying more in fees than you will be saving in interest” adds Campbell.
Exiting your home loan during a fixed rate period can be expensive and will undoubtedly involve costs and fees charged by the lender, all of which need to be included in your research when calculating whether switching to a variable rate is worthwhile. These will vary between lenders but will usually include a break cost and discharge fee. Before breaking, borrowers should calculate the lower rate plus any costs and fees to determine which option results in a lower overall rate for the remaining period.
A break cost, is the actual cost incurred by the bank, and ensures that the lender does not endure a financial loss. Lenders do not always disclose how the break fees are calculated, but it is determined on a number of factors including:
• The current interest rate.
• The difference between the current interest rate and the rate at the time you took out your home loan.
• The length of time remaining on your fixed term.
• Your mortgage balance.
It can be difficult to determine exactly how much break fees or early repayment costs are, explains QuickSelect mortgage and finance broker Brian Beck, “It’s always worth requesting a quote from your lender for breaking your loan before determining whether refinancing is the right choice for you – it could be hundreds, it could be thousands”. The costs need to be weighed up against the savings you will gain by switching to a lower rate.
John has a fixed rate loan of $500,000 on a 3 year term. He fixed the rate at 4.89% 18 months ago so has 18 months remaining. There are current variable rates available from 3.99%.
Potential savings: $500,000 x 1.5 years x 0.9% = $6,750
Break fee: $6,500
Saving of: $250
At first glance, this example of breaking may seem like a small saving for a large amount of effort. However, Managing Director of QuickSelect, Declan Murphy, points out that the direction of the cash rate should also be considered, “Break costs will actually fluctuate in line with the cash rate”. If rates decrease, the break cost will actually increase meaning that with the current speculation that the rates will decrease further, it could still be worth breaking even if the break cost is more than the money you could save if interest rates remained stable.
“If you’re thinking of breaking you have to decide when to bite the bullet. Will you save more going forward or will rates change again?” adds Murphy. The fact is, no one can predict the future and determining where the rates are headed is simply banking on a crystal ball. The cash rate reached 7.25% in 2008, and whilst the outlook is unlikely at present, the interest rates will inevitably go back up at some point.
There’s also other considerations for breaking your fixed term. For example, if your plans have changed for the fixed rate period. Perhaps you’ve generated a fair amount of equity that you would like to access - a pre-emptive strike to break your fixed rate in order to accommodate plans in the next few months.
The fact is, there is no one size fits all answer, and whether you should break your fixed term or not will depend on your individual circumstances. Before you decide to break your fixed rate, make sure you research whether it is worth the effort. You will also need to consider your loan to value ratio (LVR). Breaking is only worthwhile if your LVR is below 80% in order to avoid having to pay Lenders Mortgage Insurance (LMI) again. Whilst it is usually unwise to break your mortgage early on in the term, with interest rates at their lowest in decades it’s worth doing the math. If you have the funds but breaking isn’t worthwhile for you, maybe it’s simply a case of using the money you would have spent on break fees, to pay down a principal payment and reduce the term of your home loan.
At QuickSelect we can’t predict the future, but we can help you to find the home loan structure that’s best for you.
Is it the best time ever to invest in property?
• Lending institutions have reduced interest rates to a record low.
• Many Gen X Australians sitting on untapped equity in their homes.
• Millennials see renting as more financially feasible than buying in the foreseeable future.
• 2015 could be the best time ever to own a rental property.
The combination of record low interest rates that are predicted to decrease further, with the long-term potential for capital gains and strong rental yields presents an opportunity property investors cannot afford to miss. 2015 may be the best time ever to own a rental property.
What’s more, it could be the ideal time for Gen X property-owning Australians who have built up equity to start investing in property, “If you have the available equity and you’ve been thinking about taking the plunge and building up a portfolio, 2015 is the perfect time to start” says QuickSelect Managing Director, Declan Murphy.
Record low interest rates
The first question a property investor should consider, how much will the investment cost?
At the beginning of the month, the Reserve Bank Australia (RBA) announced a cut in the official cash rate to a new record low of 2.25%. Many lending institutions have matched this reduction leaving interest rates at an all-time low, making the cost of borrowing more affordable than ever.
These low interest rates are set to reduce further in the next few months meaning the cost of investing should become even lower in the foreseeable future.
Increasing equity/property prices
The right type of property in the right location or suburb will usually double in value every property cycle, or approximately every 7 to 10 years. Therefore, most home owners have built up a large amount of available equity due to the increasing value of their owner occupied property, providing a perfect opportunity for home owners to invest.
Many Gen X Australians are sitting on untapped equity which could be used to purchase an investment property and generate wealth. This investment property will also increase in value over time.
Investing in high demand areas is prudent, giving successful long-term results. Buying in areas close to the CBD, where there is always demand, will guarantee good, consistent capital growth and rental incomes.
Pool of renters increasing
Despite the interest rate cuts, the percentage of first home buyers in Australia has fallen dramatically since 2009. Figures released by the ABS show that in February 2009, first home buyers made up 26.9% of total owner occupied housing commitments. In just 5 years, this figure has more than halved, with figures from February 2014 showing that first home buyers only made up 12.5% of all owner occupied purchases.
Property prices are high, especially in state capitals such as Sydney and Melbourne, meaning first home owners are competing with more and more investors. In fact, first home buyer volumes are at the lowest they’ve ever been. The need for a large deposit is making it almost unaffordable for Millennials to enter the property market, and people are starting to see renting as more financially feasible than buying in the foreseeable future. Could this be the decade of the evolution of lifetime renters? Will owner occupiers be wiped out by just two types of people – investors and renters?
The increased demand for rental properties, means units are renting at historically high rates, with the current average rent for a 2 bedroom unit in Sydney setting tenants back $2,816 a month – great news for landlords.
Demand suggests that rental price will increase year on year, and therefore investment will likely generate a consistent income with minimal effort. The money generated from tenants can be used to pay down the mortgage, generating further equity.
Furthermore, the rate of home ownership is decreasing, and the high appreciation of properties will continue to force tenants to rent. These are both solid indicators to suggest rental markets will remain strong and steady beyond 2015.
However, Mortgage and Finance broker Brian Beck points out that investment always comes with risk, “With interest rates at a historic low, they will undoubtedly rise at some point in the future. Our job as a broker is to work with our customers to ensure that if and when this rise does come about, the mortgage is still affordable”.
“It’s about figuring out the potential next interest rate rise and the potential for correction in property prices. Property prices can decline and you need to be willing to keep the investment long-term to ride through this” adds Murphy.
Investing can be time consuming and it is important to account for changes in interest rates, finding and managing tenants, and arranging maintenance work. However, if you invest prudently in the right property over the long-term, you will be able to generate wealth from your equity.
One or more? A question all property investors should consider.
• When building a portfolio of investment properties should you go with one bank, or spread your loans over different lenders?
• When considering convenience, the obvious answer would be to use a single lender to finance your properties.
• Property investors often foresee the potential cost benefits of sticking to a single lender and miss out on the opportunities that multiple lenders could offer.
• Staying in control of your leverage and finance structure is fundamental to growing your property portfolio.
• Lending structures vary between individuals and depend greatly on your current circumstances and strategy.
Costly loan structure mistakes are common amongst property investors. But the question is, when building a portfolio should you go with one bank, or spread your loans over different lenders?
There is often a natural inclination to stay with a lender that you have already secured a loan with due to convenience. However, it is important to consider your options when building a portfolio of properties in order to find the structure that best suits you.
When investing in properties you should not only take into account convenience and cost, but also choice and risk management.
Many investors are swayed towards sticking with their current lender when building up their portfolio.
When considering convenience, the obvious answer would be to use a single lender to finance your properties. Having just one bank and point of contact surely means you can build a long-lasting relationship with the lender. As they get to know your financial circumstances, you might not have to fill out as much paperwork, and approvals may be quicker.
However, what’s often forgotten is that loans are assessed by the credit team, not the friendly sales person who you speak with. In fact, a mortgage broker is more likely to have a stronger relationship with a variety of different lenders and be able to get you those same deals, quick approval times and even do all your paperwork, without tying you down to the limitations of a single lender.
Using a single institution means you can easily view your entire portfolio and manage all your loans – just one screen, and one statement. Whilst in reality this makes no difference to your overall wealth, this may suit investors that like to have a clear view of their finances.
A single lender will usually cross collateralise your properties, which can allow easier access to more equity, enabling you to make additional investments sooner. “If you have small amounts of equity across a variety of lenders it can be difficult to access it all when looking to make a small additional purchase” says QuickSelect Managing Director Declan Murphy. “In the short term it can be more convenient to have all your equity in the same place”, he adds.
Cost via purchasing power is another benefit that often attracts property investors to a single lender.
A single lender could save you money when it comes to fees. Usually, you’ll only need to pay one annual fee, which could over time, with more investments, be negotiated to a lower fee, or better still, no fee. Moreover, as your portfolio grows and your loan amount increases, you may in fact be able to access unpublished interest rate discounts, essentially saving you thousands.
Whilst these aren’t necessarily misconceptions, there are other ways of saving on your home loan. A mortgage broker may also be able to waive fees and access exclusive rates, and most importantly, they will do all the negotiating on your behalf.
QuickSelect mortgage and finance broker Brian Beck often finds that property investors foresee the potential cost benefits of sticking to a single lender and miss out on the opportunities that multiple lenders could offer, “By shopping around a little and you could get a particularly good introductory or fixed rate elsewhere. Take advantage of special offers”.
What’s often overlooked is that by going with a single lender, you could end up spending the money you save on fees and interest rates, elsewhere.
Another important factor to consider, especially if you are looking to build up an extensive portfolio, is your borrowing power. When lenders assess how much you can borrow, they usually add buffers into the servicing calculation to allow for unknown circumstances, such as a change of income or interest rates.
With one lender your ability to borrow will be reduced as they allow for these additional costs in their lending assessment. Using multiple lenders usually increases your borrowing capacity QuickSelect mortgage broker, Bing Rana explains, “By going to another lender, you are usually able to borrow more as they will take the actual repayment amount you are making to another lender, rather than a higher buffered calculation.”
It’s also important to consider whether the mortgage insurer has a limit - even though a lender may not have a limit, the mortgage insurer might. By using different lenders you use different mortgage insurers, and therefore maximise your borrowing capacity.
By being dogmatic with your lender, you may also miss out on lenders product niches. “When looking for a home loan, it is important to have access to a wide range of choice” says QuickSelect Director, Simon Campbell. Whilst it is often convenient to stay with a single lender, that you know suits your needs, some lenders may have a product that is more suitable for a particular investment.
Furthermore, most investors have properties in different suburbs, cities, and even states. It’s inevitable that these different properties will grow, and unfortunately sometimes decrease in value, at different paces.
Consider property A and B:
Value: 220K (purchased at 300k)
Value: 360K (purchased at 300K)
Equity with a single bank
220K + 360K – 250K*2 = 80K
Using two banks but using equity from Property B only
With just a single lender, if a particular property goes up in value, whilst another goes down, you could find your equity is diluted as your properties will be considered as a whole portfolio. You would lose the ability to access the available equity in the properties that have increased in value.
However, with multiple lenders, if a property is revalued and has increased in value you can use the additional equity again to invest further – a more prudent investment. “It’s worth only borrowing against the property that’s achieved the most capital” explains Murphy.
Good investment is prudent investment. Managing your risk is key to a successful investment portfolio. A common myth amongst investors suggests that there is less risk if you split up your securities over many lenders. However, this does not actually provide you with any extra protection. In fact, all lenders give consideration to your existing properties and loans when determining future borrowings - if a problem arose with one loan, your other properties would still be impacted, regardless of how many lenders you are with.
However, lenders usually assess the risk you pose to them based on the total value of your portfolio. This could result in the lender relinquishing your control of your loan amount and structure. “You don’t want to get to a stage where lenders start to dictate your loan structure or LVR for example” says Murphy.
“Some lenders may cap the total amount they lend one person in order to limit their exposure. For this reason it’s preferable to have a buffer because at some point, you may want to purchase a property in that particular lenders’ niche”, he adds.
Staying in control of your leverage and finance structure is fundamental to growing your property portfolio. Therefore, if you are looking to grow a large portfolio, it is advisable to spread your debt amongst different lenders to reduce concentration risk. Once you’ve built up equity, consider taking it as cash out and use that as a deposit for another property with a different lender. By keeping below the radar you are able to better avoid lender concerns and stay in control of your own finances.
When building a portfolio, there are a number of other factors to take into consideration. It is important not to let the convenience of a single lender blind the opportunities that multiple institutions could offer.
However, there is in fact no rule of thumb as to whether you should use single or multiple lenders when investing. Lending structures vary between individuals and depend greatly on your current circumstances and strategy.
Spreading your exposure across a few different lenders is a prudent risk-management procedure. Investors with larger portfolios, or those looking to grow their portfolio may consider multiple lenders to ensure leverage and control. By having a couple of properties per lender you can benefit from a combination of volume discounts on interest rates and fees, and maximum serviceability across your portfolio.
However, if you’re only really ever going to have your home and one or two investment properties then it might be worth considering sticking with a single lender for convenience.
You should always seek independent financial advice on your individual situation prior to setting up loan structure and portfolio.
At QuickSelect, we don’t rush into a decision, we consider all the options so that you have peace of mind because at QuickSelect, we’ll always see you home.
Why the government should look beyond cash rates when controlling a housing bubble
• Reserve Bank Australia (RBA) need to balance the risk of a slowing economy with the risk of a housing bubble
• Need an alternative to interest rates as the sole lever on the economy
• Shortage of housing and residential construction in Australia
• Are the current First Home Owner (FHO) incentives suitable?
• Australian Prudential Regulation Authority (APRA) need to enforce more prudent lending
Last week we discussed where the cash rate is headed in 2015 and what this could mean for home owners. With the domestic economy at risk of further contraction, and the property market at risk of a housing bubble, there are opposing views as to whether the rates will go up or down after being steady for 16 consecutive months. Currently, the cash rate has been the sole lever on the Australian economy. However, the Australian Government need to consider ways to manage the risk of a housing bubble without altering the cash rate.
Simon Campbell, Director of QuickSelect, “The cash rate is a very blunt instrument to use single-handedly to influence property demand.” This is evident from the potential impact that a small downward movement in cash rate could have. Whilst a cut in the cash rate is likely needed in order to stimulate economic growth, there are fears that this will further increase risk of a housing bubble. “There are in fact, other things driving the demand”, he adds.
There has been a strong growth in the Australia population over the last decade. Recent reports by the Australian Bureau of Statistics (ABS) speculate that if current trends continue, by 2030, the Australian population will grow from 23 million to 30 million.
Despite the rapidly growing population, the most recent figures released by SQM Research show that the housing stock on market is down by 8.1% in the NSW capital compared to November last year. This is proving a common theme across many states, with VIC and ACT showing similar trends.
This suggests that a lack of property listings could in fact be an underlying reason for the rising prices, “The property market is hot because demand is outweighing supply. In a time when we expect the number of residential properties to be increasing, they are actually falling.” says QuickSelect Associate Jack Carter, “We need to increase the supply of housing in order to reduce the pressure on prices” he adds.
However, construction of new homes is not keeping up with the pace of the demand. The ABS building approval figures show that the value of building fell 1.1% in October this year and has fallen for four months.
The government’s failure to meet the demands of a rapidly increasing population has led to an underlying shortage of housing – ironic considering the abundance of land.
According to the Government Department of Employment, the number of skilled labour workers is at a historical low, suggesting an underlying reason for the lack of housing supply.
Occupation shortages appear more prevalent for technicians and trade workers, emphasising the need for more labour, with figures showing that shortages for trades are almost four times more than for professions.
The government should take this as an opportunity to review their migration policy. By providing more visas into Australia for skilled labourers, the government could help to alleviate the imbalance of workers, and consequently boost the number of residential constructions.
Reviewing the migration system will not only increase the number of skilled labour for residential construction, and ultimately reduce the pressure on house prices, but will also provide an opportunity to drive the domestic economy.
Furthermore, an increased population will provoke the injection of money by the government through the commissioning of public works. This will increase purchasing power amongst people and subsequently stimulate demand and investment. “Increased migration into Australia can only be a good thing– eventually more and more money will be pumped into the economy” Campbell says.
Despite recent claims, housing affordability is not actually the issue. Whilst the average price of a dwelling has increased, the average wage has increased at approximately the same rate. It is in fact the incentives and concessions that are available to First Home Owners (FHOs) that should be reviewed.
Ironically, the First Home Owner Grant (FHOG) could in fact be pushing up property prices for FHOs. With the grant only eligible for newly built properties, there has been a recent increase in demand for new builds, which is in fact taking its toll on the prices of these properties. There may actually be better value in negotiating hard for a good price on an existing build than utilising the FHOG.
Moreover, whilst the FHOG provides buyers with a lump sum of cash, it doesn’t necessarily solve the longer term servicing issues that first time buyers face, further provoking suggestions that changes to FHO incentives may be beneficial. A longer term, more meaningful incentive for FHOs would be to allow them a tax deduction of their mortgage interest for the first five years they hold a loan. Making home loans more affordable could be a step to getting home owners onto the property ladder sooner.
Due to a combination of low interest rates, high household debt, and a strong rise in the proportion of investors the housing market is at risk. With the cash rate at a historic low, banks are currently lending generously. At the moment people can afford to borrow more, but this won’t always be the case.
The Australian Prudential Regulation Authority (APRA) is currently undertaking incremental changes in an effort to become more prudent in its legislations for lending and residential mortgages. APRA is now targeting higher risk lending, including loans with high Loan to Value Ratio (LVR) and interest-only loans.
However, further tightening is needed. The use of macroprudential tools need to be put in place to rethink the prudential policy and reduce the emerging pressures in the housing market.
This could mean restricting the amount that banks are able to lend, and consequently the amount customers are able to borrow. Whilst initially a mortgage lending cap may strike fear amongst FHOs that housing will be even less affordable, reducing the amount of debt borrowers can take on should help to alleviate the housing bubble, and over time, increase property affordability. “First home buyers who are prepared to make the necessary sacrifices should have no problem getting onto the property market. It’s all about finding a way to build up some equity” says Campbell.
Earlier this year, the Bank of England introduced new limits on mortgage lending in order to reduce the risk of a housing boom in the UK – perhaps the RBA should take a leaf out of their book.
Restricting the amount people can lend discourages people from borrowing as much, and therefore the properties they are able to purchase.
The risk of a housing bubble is due to a combination of low interest rates, a housing shortage, FHO incentives and lenient lending legislations. The government need to work alongside APRA in order to alleviate the already hot property market through the use of various instruments and macroprudential tools.
At QuickSelect we don’t see problems, we see solutions to ensure that we’ll always see you home.
Will the cash rate heat up this summer?
• For the first time in 10 years, the cash rate has been steady for a full calendar year
• Near certainty just over a month ago that the cash rate would increase in 2015
• Recent unexpected predictions that rates may in fact fall
• Should home owners fix their home loan? When is the best time to buy?
Last week, in its 15th consecutive meeting, the Reserve Bank of Australia (RBA) announced that the cash rate would remain at 2.5%. This means, that for the first time in 10 years, the cash rate has been steady for a full calendar year. But what’s in store for 2015?
Despite the near certainty just over a month ago that the cash rate would increase in 2015, there are now unexpected predictions that the next cash rate movement may in fact leave the Australian dollar weaker.
Up until November, recent concerns that a housing bubble may be forming, particularly in Sydney and Melbourne, set the general consensus amongst economists that the cash rate would increase in 2015. With property markets already hot due to the degree of investor activity, predictions suggested that a rise in the cash rate would be needed to cool the rapidly overheating property market, and reduce the risk of creating a housing bubble.
Raj Ladher, a top QuickSelect mortgage and finance broker, predicts that the cash rate will go up within the next 6 months, “The rates have no reason to move right now but with property prices already heating up, the RBA will be compelled to move the rates up in the latter half of 2015 in order to avoid the risk of a housing bubble.”
However, whilst increasing the cash rate may steady the property market, it could jeopardise the economy on a much larger scale.
Some economists are now placing a greater priority on the slowing Australian economy. Despite the thriving property market, which is just one of the many drivers of consumer spending, mining and investment markets are subsiding, therefore leaving the domestic economy weak, and perhaps at risk.
Figures released by the Australian Bureau of Statistics show that the Australian economy grew just 0.3% this quarter. The price of iron ore, Australia’s largest export, has fallen almost 50 percent since the beginning of the year, alongside falling prices in other commodities including coal and gold. The slowdown in demand, particularly in China, has impacted the crashing commodity prices, whilst an increase in imports, particularly oil, has created a further dent in the economy. Increasing the cash rate will only make Australia less competitive in the global economy.
Experienced QuickSelect mortgage broker, Brian Beck, believes that the cash rate needs to be cut in 2015, “Australia has a population of just 23 million of 7 billion in the world. If the cash rate goes up, the Australian economy runs the risk of becoming uncompetitive, further slowing our economic growth. The housing bubble is simply a 1 dimension scenario, but in fact, we cannot afford to slow the economy in other markets. A small rise in the cash rate could run even us a viscous cycle of recession.”
The low global growth may force the RBA to rethink on the direction of Australian monetary policy, and in fact cut the cash rate in order to stimulate economic activity. Cutting the cash rate, and therefore interest rates, may encourage spending and therefore drive the economic growth figures.
Dropping the cash rate should not only encourage consumers to borrow more, but should also encourage investors towards shares or property, and therefore boost the domestic economy. A weaker dollar will only be good news for exporters, again, stimulating the economic activity.
The mixed opinions of where the cash rate is headed in 2015 leaves borrowers in a predicament as to whether they should fix their home loans or not. Right now, rates have potential to fall or rise, meaning that home owners should think carefully before fixing. With interest rates at a historical low, it could be a good time to fix. However, when looking at where the cash rate sits globally, there is plenty of scope for a downwards movement – England has been sitting on a cash rate of 0.5% since 2009. This means that whilst variable interest rates are around 4.84%, they could in fact potentially drop 200 basis points, and fall to only 2.84%.
Furthermore, purchasers need to decide when the best time to buy is. Whether property prices go up or down is dependent on the market demand which is heavily influenced by the direction of the cash rate movement.
Whilst a cut in the cash rate may boost the economic growth, there are still fears that this will further heat the already hot property market, causing a housing bubble. The RBA and the government’s pursuit to avoid further contraction of the Australian economy needs to be balanced against the risk of housing bubble.
Next week we will look at some innovative ways to manage the housing bubble without changing interest rates.
At QuickSelect we can’t always predict the future, but we will always see you home.
Can debt consolidation cure your financial woes?
• Current market is filled with debt consolidation offers
• Why you should always structure repayments over the minimum
• QuickSelect brokers working with borrowers on an ongoing basis to carefully manage debt consolidation
• Good structure and financial discipline is imperative to debt consolidation
The current market is filled with debt consolidation offers, promising to ‘cut your debts in half’ or provide you with the ‘lowest rates’, or even become ‘debt free in just 3 years’. There’s a common misconception that the only strategy to get out of debt is to consolidate it. However, it’s important to understand that it can only work well in the right hands.
Getting into debt can be stressful. It’s easy to get caught in a viscous cycle, where quick-fix solutions become tempting. At QuickSelect, we look at your financial situation both now and in the future, and look for solutions that really work.
QuickSelect brokers, Nermalee Bowe and Raj Ladher, have recently been working closely with some of their customers in order to monitor the process and structure of debt consolidation step by step, in order to rebuild their customers’ credit ratings, and set them on a pathway to financial success.
A question we often get asked is ‘how does debt consolidation work?’
When debt gets the better of you, which it can, debt consolidation, in the right hands, can be the solution. Instead of having multiple different debts – home loan, personal loan, car loan, credit cards – all with different terms and interest rates, you have a single loan. Debt consolidation usually combines your various loans into your home loan, so that you only need to make a single monthly repayment. A good debt consolidation loan should lower the overall cost of your monthly repayments by combining loans with higher interest rates, into one loan that has a lower interest rate, and therefore lower repayments.
‘Great, so I consolidate my debts, and my monthly repayments are lower. Sorted.’
Not quite. When it sounds too good to be true, it usually is.
Upon first glance, debt consolidation seems to reduce monthly repayments, and therefore save you money. However, it’s simply that your required minimum monthly repayments are reduced. This is because by consolidating debts with higher interest rates, you will have gained a lower overall rate, and also extended some loan terms. The fact is, the longer you hold a loan, the more interest you will accrue.
‘So I need to pay above the minimum repayments?’
Yes. Whilst consolidating debt reduces the monthly minimum repayment dramatically, this does not mean that you should not pay over the minimum.
By only making the minimum repayments, compounding of interest can actually increase the overall repayments in the long-term. This is because debts that would usually only be spread over a 1 or 3 year term (such as credit cards or car loans), are now being paid off over a 30 year term.
Consider a $30,000 car loan in the following scenarios:
• Before debt consolidation: $30,000 charged at 9.5% over 3 years.
Total repayment of $35,872 (incl. $5,872 interest)
• Consolidated: $30,000 charged at 6% paying minimum repayment over 30 year term.
•Total repayment of $65,384 (incl. $35,384 interest)
• Consolidated: $30,000 charged at 6% and paying over 3 year term.
Total repayment of $33,670 (incl. $3670 interest)
It is important to always pay above the minimum repayment. Even if the interest rate is reduced through consolidation, it’s important to pay off as much of the loan as you can afford to, in order to avoid accruing unnecessary interest. If you consolidate short term debts, you should aim to repay these in the same time frame in order to save money on interest. This is why it is important to have a focused and disciplined approach to money when consolidating debt.
‘How do I know whether debt consolidation will work for me?’
By following a plan, structuring repayments well above the minimum repayment, and sticking to the original terms of the individual loans, you will reduce your overall debt load. In the right circumstances, debt consolidation can improve your cash flow and streamline your payments, so that over time you are able to rebuild your credit rating.
Nermalee Bowe, “John came to me with a defaulted credit history and a large amount of debt. We’ve worked together to consolidate the debt with a manageable monthly repayment that will help him to get back on track. By this time next year, the lender will reduce the interest rate, meaning a little more principal can be chipped away at each month, and once their credit file is updated, we should be able to get the loan refinanced to get an even lower rate.”
Raj Ladher, “I work closely with my clients on an ongoing basis to ensure debt consolidation works for them. I explain the importance of paying down their loan as quickly as they can. It’s silly to pay extra interest just by not paying down an affordable portion of the loan each month.”
In order to avoid getting deeper into debt, a good structure and financial discipline is imperative to debt consolidation. Whilst consolidating debt can free up your cash flow, if, after the consolidation of the loan, more loans or credit cards are charged up, and subsequently your overall level of debt increases, the solution will reverse itself and consequently worsen the situation. Unfortunately, it’s not as simple as consolidating your debts so that you have more money left over at the end of the month. It’s about freeing up cash flow in the short-term to get you back on track.
If you’re struggling with your loan repayments, we can help you find a solution. Consolidating debt is only successful for people that will end up paying less in interest in the long-term.
At QuickSelect we don’t promise a quick solution, we promise a solution that works for you. We are committed to providing you with worry-free finance, to ensure that we'll always see you home.
N.B. Customer name has been changed for privacy reasons.
The Interest Only Home Loan Debate
• Fixed rates at historical lows
• Speculation mounts that 2015 will see interest rates rise
• QuickSelect brokers working with borrowers to manage the risk of increased rates
• Interest Only option proving to be a popular solution for owner-occupiers
At QuickSelect after a busy week we look forward to a wind down and a social chat on a Friday afternoon. All that can quickly go out the window with one controversial comment. Last week Senior QuickSelect Broker, Brian Beck, was arguing the benefits and flexibility of an interest only facility. Also weighing in on the debate was QuickSelect Director Simon Campbell and brokers, Nermalee Bowe, Rajesh Ladher and Bing Rana.
Brian Beck “What many people don’t realise is that with an interest only facility you can still make extra repayments. You minimise the risks while still having the flexibility to pay principal and interest if you wish. The interest only payment is the minimum payment required each month to cover the accrued interest, not a definitive amount.”
RajLadher “Most investors structure their loans to be interest only in order to not only claim tax benefits. This also allows them to focus on reducing any pre-existing owner-occupied debt. That’s all very well, but for an owner occupier it is far better to pay down their loan as quickly as they can. It’s silly to be exposed to potentially large interest rate rises indefinitely, just by not paying down the loan. We are currently in a very low interest rate environment – if borrowers can’t pay towards their principal now they will become massively exposed later after their interest only period expires particularly with the expectation that cash and interest rates will head north in 2015.”
Nermalee Bowe “It’s definitely a problem for those on fixed rates who select an interest only facility, I always work with my clients to ensure if that is the structure they are looking for, that they consider the amount of extra repayments that can be made and where necessary add a variable component to ensure the loan is being reduced. This highlights the importance of fully understanding the term interest only and ruling out the myth that ‘interest only means you can pay only interest'.
Brian Beck “For any owner occupied property it’s usually preferable to pay off the capital, but that is not always possible, hence why the flexibility offered by interest only can be so useful.”
Bing Rana “You also need to consider what stage on life the borrower is at - Is this their first property? Do they anticipate that it may become an investment property at a later date?”
Simon Campbell “Or even though they live in it, does the borrower still see it as their biggest investment, and are they leveraging the option of interest only to create increased capital growth? – Is it better to have a $400,000 interest only loan on a property worth $440,000, or a $300,000 principal and interest loan on a property worth $340,000, both of which could double in price in the next 10 years?”
Raj Ladher “The interest only feature does have a finite life, yes it can be extended over an initial 5 year period but at some point someone has to pay the ferryman, and it’s far easier to pay the capital over a 30 year period than an enforced 15 or 20 years as the borrower nears retirement.”
Nermalee Bowe “I see far too many borrowers who are locked with inflexible lenders because they are on interest only plans with a loan value over 80% of the property value- they can’t refinance because the costs of LMI are too much, but equally don’t want to be where they are because the rates have moved since they took the loan out, and they now find themselves stuck.”
Brian Beck “But that is our job, we obviously need to ensure that the loan the borrower has suits their circumstance, but more importantly we need to guide borrowers to ensure that they are getting the benefit of all the loans features without taking undue risk.”
Raj Ladher “In the right hands interest only is great, but you need to work with your clients on an ongoing basis to make sure it’s being used the way it should be – I will always provide the principal and interest payment as a reference point for all of my clients.”
Bing Rana “I do the same, and in fact every year when I speak with my clients I will always check what their balance is against where it needs to be. I don’t use the extra repayments as much, but do place a lot of emphasis on the importance of building up a buffer in the offset account. With good financial discipline, an interest only home loan combined with an offset account can work not only on investment loans but also on owner occupied loans.”
Nermalee “Absolutely, particularly if the client believes the property may become an investment in the future.”
This week we are only allowed speak about plans for the Christmas party…surely that won’t cause any controversy?
At QuickSelect, we don’t always agree on everything, but one thing we do agree on is that we’ll always see you home.
If you want to live here, buy a place there.
• Investor loans have outstripped owner occupied home loans for the first time ever
• Many first home owners are finding it difficult to purchase their first home
• By thinking differently QuickSelect is providing pathways to first home owners to buy the home of their dreams
• With the support of families many first home owners are finding better ways of saving for deposits and saving on costs
The most recent figures released by the Australian Bureau of Statistics show that for the first time in Australian history, loans for investment properties have outstripped loans for owner occupied housing. A number of commentators have suggested that the demand for investment property is pushing housing prices up and making it increasingly difficult for first time buyers to buy a property, some articles have even had a thinly disguised xenophobia pointing at the increased investment from China as disenfranchising first home buyers, particularly in Sydney and Melbourne.
QuickSelect Director Simon Campbell says, “First home buyers typically average around 20% of the total loan approvals market each month but right now investors are responding more strongly than owner occupied to the current low interest rates. Attractive rental returns and low interest rates have brought investors back to residential property.”
The solid growth in investor finance has created a clear imbalance in the housing market between first home buyers and investors. Brian Beck, mortgage broker of QuickSelect suggests that the government should introduce indexation of stamp duty rates. Beck says ‘house prices have risen dramatically over the last 20 years, but no clear measures of indexing stamp duty have been put into place’.
The reality, however, is that in the last ten years housing affordability is not necessarily the major problem. Whilst the average cost of a house in Sydney has increased some 40% since 2004, the average wages have increased by approximately the same. What has changed however is lenders’ willingness to provide loans to first time buyers, and the incentives available from the government.
In 2004 a first time buyer could secure a loan of up to 105% of the property value and supplement those funds with the $7,000 first home owners grant regardless of property type. First time buyers in 2004 did not need to place a deposit on a loan, and with the ability to borrow up to 105% all other costs such as conveyancing and stamp duty could be covered. This allowed them to buy houses with zero savings.
However, today, increased property prices puts an average home in Sydney at $700k. Now that banks have also tightened their lending criteria, a first time buyer in 2014 generally needs to show a 5% deposit and pay stamp duty. This amounts to a whopping total of $62,000, or more than one year’s salary for the average buyer in NSW.
This now puts First Home Owners at a decided disadvantage to First Home Owners ten years ago who didn’t need any savings to purchase their first home. Moreover, those who have owned property for ten years will have built up equity in their home that they can now use to leverage purchases of investment properties.
QuickSelect Client Services Director, Simon Campbell-Avenell says “Whilst the tightening of lending criteria and reduced incentives are making it more difficult for first time buyers to purchase their first home, we are currently working with a number of clients on longer-term strategies to get them into their dream home. Sometimes this means their first purchase is an investment property (in more affordable, though regional areas), and they use that to build equity so that their second or third purchase is the house they would like to live in. Whilst not the instant result that was possible in early 2000’s, it does mean that these same borrowers are ending up well advanced after a few years, as they are both multiple property owners with added income streams whilst they have generated significant equity.”
Nermalee Bowe, one of QuickSelect's most experienced brokers believes “There was a window in the late 1990’s and early 2000’s when borrowers could purchase without a deposit. This was unusual yet still set an expectation. The impact of such cavalier lending is what in part led to the Global Financial Crisis and collapse of many financial institutions. It’s important that borrowers do focus on saving and start to plan one or two years before they buy; “Many of my clients when they first come to me have a little deposit and have no real idea how to purchase a house. By working with them over an extended period, we can provide them a pathway to getting an affordable loan and ensure they are on the right track to purchase a house. In many instances, with the support of their families we can come up with innovative ways of getting them into their home sooner”. A family member can act as a guarantor by using the equity in their home as security on your home loan. This helps first home owners to get onto the property ladder, enabling them to borrow up to 100% of the property value.
We understand the struggle of getting onto the property ladder, but at QuickSelect we think differently to make sure that we’ll always see you home.
Interest or Comparison Rate – which one should I be looking at?
You may have noticed a home loan rate war happening recently, but be aware that the lowest interest rate doesn’t necessarily make it the best value or choice.
Typically, most people look at the interest rate of the loan when comparing rates. However, it is more beneficial to consider the comparison rate to understand how much the loan will cost you in the long term. By law, since 2003, lenders have been obliged to include a comparison rate when advertising an interest rate.
But why is a comparison rate so important?
A comparison rate is essentially a tool that takes into account the following features, in order to help identify the true cost of a loan:
- Size of loan
- Term of loan
- Frequency of repayments
- Interest rate
- Fees and charges associated with the loan (incl. establishment, approval, ongoing and upfront fees)
It combines these figures to create a single percentage which provides you with an overall value of the loan. All lenders use the same formula, making it easy for you to compare. If the loan offers an introductory interest rate, the comparison rate also takes into account the interest rate the loan will revert to after the introductory period is over.
It is important to realise that the comparison rate of a loan will depend on the loan size and term, and therefore the comparison rate advertised by the lender may be different to the comparison rate you will receive. When looking at comparison rates, try to look at the loan size and terms closest to the size and term of your loan requirements.
Looking at the comparison rate is a good place to start when comparing many different loans. However, it is important to not only rates, but also other features of the loan, including its structure and flexibility.
Choosing the right loan for you is an important decision, and it is best to seek advice from home loan experts. To speak to an expert QuickSelect broker, call 1300 874 871.
Sydney Sales Heat Up this Spring
Sydney saw yet another high clearance rate this weekend, with a 75.5% clearance rate on its 530 auctions, proving it is becoming a strong and consistent market. In comparison, Melbourne only sold 397 of the 738 properties on auction, leaving it with a 69.7% clearance rate, and Brisbane had a mere 35.3% clearance rate.
This property boom that Sydney appears to be experiencing is likely to be the primary reason property prices soaring. Data released by the Australian Bureau of Statistics on Tuesday revealed moderate to strong price increases, with Sydney property prices driving the average, having increased the most since June 2013.
If stock volumes remain as high as anticipated, Sydney will be the market to keep an eye on this spring.
According to Domain Group Senior Economist, Dr Andrew Wilson, Sydney’s fastest growing suburbs in the last 12 months include Parramatta, Marsfield, Eastwood and Croydon:
Broker vs. Bank
Choosing a home loan is one of the biggest decisions you’ll ever make, so who do you go to for help? Broker or bank?
The results from QBE’s fourth annual report into mortgage and property market sentiment found the main reason people choose to use a mortgage broker is convenience, followed by the fact that the research is done for them, and the personalised service they receive.
We believe that at QuickSelect we exceed these expectations in the services we provide:
Buying property without a broker can be a rather daunting experience, especially if it’s your first home, or often a complicated and time consuming process if refinancing or purchasing a new home or investment property. QuickSelect will see you through every step of the way, processing and managing the application on your behalf, letting you focus on the important things. We understand today’s hectic environment, and for that reason we provide you with the convenience of being contactable outside of the usual office hours. Our assistance does not end once you have settlement – we will see you through the entire process, keeping you informed and tailoring your repayments to suit you.
We do your research
The biggest advantage we offer as a broker is choice. Unlike your bank who only has access to their own products, we have access to over 42 lenders, providing over 1000s of different products. This depth and breadth of investigation provides a uniquely unbiased approach as we unearth and negotiate the best 3 lending choices from across the big 4 banks, 2nd tier institutions and non-bank lenders. We will recommend our preferred option and why. We take pride in the fact that we can always help find the best choice home loan tailored to your needs. We take into account your financial background, current situation and future objectives so we can do the research for you. We have access to some lenders which as a direct consumer you won’t. We provide lateral group thinking to give you solutions to your problems, meaning we are much more likely to come back to you with ‘yes’ when big banks may be saying ‘no’. We know how to get deals done - we work the system from the inside out and know how to stretch it for the best outcome.
Our personalised service
Unlike big banks, we specialise in home loans and are committed to our customers. A home loan is a long term proposition. Having a mortgage expert that can guide you both today and in the future is invaluable. We will have many conversations over the life of your loan as we look to understand your needs and help you clarify your position. We always listen first, before asking questions to determine what is most relevant and important to you.
Our brokers look at structures and portability over the long term to ensure that your home is yours quicker, faster and cheaper. They offer the best choices of loans suited to you, based on your needs and what you are looking at doing both now, and in the future.
We are genuinely passionate about working with you to get the best out of the system and fine tune when required, to get the best outcome for you. Circumstances change and nothing is ever constant. At QuickSelect we see the opportunities not the obstacles -we use our knowledge to always get you a positive result. If there is a way it can be done then it will be found. We work with you every step of the way to ensure you have a comprehensive understanding. If hiccups arise from the lender, we ensure they are dealt with efficiently and effectively as quickly as possible.
We are passionate and driven in our relentless commitment to one simple fact– to see you through your entire journey, from start to finish.
Call 1300 874 871 to speak to one of our expert brokers today.
Time to Fix Your Loan?
The announcement made by the Reserve Bank of Australia (RBA) on Tuesday confirmed that the cash rate is remaining at its record low, 2.5 percent. Having remained stable for 13 consecutive months, the cash rate has been predicted further stability until at least 2015.
As a result, there appears to have been a spectacular drop in fixed interest rates on home loans, creating huge competition especially between the “Big 4” lenders. Commonwealth Bank was the first to reduce its 5 year term fixed rate loan to 4.99%, with many other banks and lenders following suit. The current competition between mortgage lenders is on fire.
Whether you already own a home or are thinking of getting on the property ladder, this could be a perfect opportunity to lock into an affordable fixed home loan whilst they are at an all-time low, should you feel your circumstances are relatively stable in the foreseeable future. The competition between banks and other lenders provides you with a huge range of choice to get yourself a competitive fixed loan rate that suits you.
3 reasons why you should get yourself a fixed rate loan now:
1.Although the cash rate has been predicted to remain stable for the rest of 2014, when it does eventually change, it will most probably be increasing. Fixing your home loan now, whilst the rates are at their lowest, will benefit you when this change does eventually happen. “Oh, but I plenty of time before I have to worry”, I hear you say. Economists predict that fixed rate loans are likely to increase later this year, to reflect the expected future movement in cash rates. With only 4 months left in 2014, now is the time to grab the deals.
2.For this very reason, fixed rate loans are much more desirable than variable rate loans right now. Whilst there is not a huge difference between variable and fixed rates now, the predicted movement of the cash rate in 2015 will soon change this. Variable rates will rocket when we finally see a rise in the cash rate from the RBA. In fact, banks and lenders are aware of economists’ predictions of a rise, and will soon adjust their fixed rates accordingly. You can lock in a fixed rate loan for as long or as short as you like, with most lenders providing a choice of 1,2,3,4 and 5 year terms.
3.Fixing your home loan also has other benefits, regardless of the interest rate. Fixed rate loans provide security and regularity, making budgeting easier. During the fixed rate term, the interest rate on your home loan will remain the same, meaning your repayments will be exactly the same every month, helping you to manage your finances.
Still unsure? We understand that choosing the right home loan for you is an important decision that you shouldn’t rush in to. Pick up the phone, dial 1300 874 871 and speak to one of our expert QuickSelect mortgage brokers to discuss what options are available to you, whether you are buying your first home, an investment property, or simply looking to refinance. QuickSelect will help you so you can be sure that you are making the right decision.
How Much Money Can I Borrow for a Home Loan
When people start comparing home loans, the question we are asked most is, ‘how much can I borrow’?We outline below how the lenders will calculate how much you can borrow but we think the question everyone should be asking is, ‘How much should I borrow’?
How do lenders calculate the amount they will lend someone for a home loan?
Lenders apply a pretty common sense formula – they look at how much you earn and your expenses.From that they figure out how much money you have left over each month and use that to calculate the size of home loan you could afford if the repayment equalled this ‘excess income’.It all seems so simple but different lenders will accept different income types and allow different expenses, knowing who does what is a critical element in knowing which lender can best meet your requirements.
How much you earn
For someone employed in a full time PAYG role on a fixed salary this is reasonably straight forward – it’s on your payslip!However lenders will also take into account commission payments (provided there is an established history – and yes you guessed it the definition of ‘established history varies by lender), many lenders will take into account bonus payments, but again if there is an established history and depending on the qualification criteria.Many employees receive additional allowances and their incomes are structured by enterprise agreements or awards and in this instance there may well be additional income that can be taken into account.
For a person who is self-employed it gets more complex.Lenders will want to know what the profit of the business is and how much of that is actual cash?In some cases the profit may be increased to reflect the fact that a business may cover costs ordinarily paid by a PAYG employee (for example motor vehicles) or it may be reduced for income not yet received.Lenders will seek to validate these numbers through both reviewing your annual accounts but also looking at your tax returns and assessments.Sounds strange but the only time you may want to pay some more tax is when you are looking for a home loan!
Finally lenders will consider other income sources such as any dividends you may receive, though again it depends on how regular these are and if the stock has a proven history of payment, any annuities, guaranteed payments and rental income.If you are buying an investment properties lenders will even take into account the forecast rental income even if the property is not yet tenanted.
What are your expenses?
Lenders will consider your individual circumstances and make an estimate of your expenses.They work out what your net income is (the amount you earn after tax) and then make some deductions.
First off they look at your status – if you are single with no dependants they allow one figure, this then increases based on if you have a partner or have dependants.
Lenders will also seek to identify if you have any discretionary expenses such as private school fees or child care costs.
Next lenders will look at your ongoing obligations for example life insurance and income protection and the associated premiums.
From this the lenders can work out how much money you have to pay off your financial obligations.
The lender then deducts any costs for other loans such as the monthly amount you may pay on your car loan, personal loans or credit card balances.
The number that is left will then be used to determine how much you can borrow.
And of course every lender has a different calculation for this too but as a general rule the lender takes the current interest rate adds a buffer (around 2.0% to 2.5%) and works backwards from the monthly amount you have available to the amount you can borrow.
So that’s it then?Income less expenses is disposable income and that is what I can use to pay for my loan – right?
Before any lender will provide a loan to you they will need to know that you have some form of deposit.So even if you work out how much you can borrow and its half a million dollars if you don’t have a deposit or alternative security the lender won’t lend you a cent!
So how do I get a deposit – well that’s a story in itself, but as a rough guide:
(1)If you don’t have any savings you have two options, firstly you may have a family member that is willing to be a security guarantee, in essence they will offer part of their property as security or secondly if you are lucky you may have access to a one off sum – at a minimum this will need to be at least 10% of the property.
(2)If you are relying on savings you must have at least 5% accumulated over a minimum of three months.Some lenders take into account that you may have been paying rent as ‘quasi’ savings but even then you need a minimum of 5% of the purchase price from an alternative source.
Okay got it! Income less expenses is disposable income and provided I have a deposit I’m home and hosed – right
A word of caution, lenders make money by lending you money – the more they lend the more the make (provided it gets paid back).It is in their interests to lend you as much as possible and if this means that dinner is two minute noodles and your annual holiday is a trip to the local park so be it – they are lenders not socialites!And hence we always say think about how much you should borrow.So rather than worry about what a lender will lend you try this calculation:
Take your net pay - how much do you receive on a weekly, fortnightly or monthly basis. Work out your expenses – allow for everyday items and any other loans but also allow for your lifestyle, entertainment, nights out, dinner and of course holidays.And then using as honest an appraisal as you can, you are left with a number that is what you can afford to pay each month.Then ask your mortgage broker how much you could borrow based on that amount as a repayment and that is probably pretty close to ‘how much you should borrow!’
Okay maybe a little more with some belt tightening ….
Fixed Rate Home Loans or Variable Rate Home Loans
It’s never easy deciding whether you should have a fixed rate home loan or variable rate home Loan.In this article we look at the pros and cons of both and how you can best decide which type of home loan interest rate is best for you.
What is a Fixed Rate Home Loan or a Variable Rate Home Loan?
Fixed Rate Home Loans mean that when you first take out a home loan the interest rate you pay is locked and will not change.The fixed rate applies for a period at the start of the loan not the full term of the loan.Generally you can get a fixed rate home loan for between one year and five years.The standard home loan term is now thirty years so if you choose a fixed rate home loan then at the end of that period you will need to consider what you do next.
Variable Rate Home Loans means that when you take out your home loan the lender can change your interest rate.Some borrowers believe that if the Reserve Bank of Australia (RBA) reduces its interest rates the lenders must pass this reduction onto the borrower.This is not the case.The lender chooses if it will increase or decrease rates regardless of the RBA.Historically the rates have moved in the same direction as the RBA though more recently when rates increased lenders increased their variable rate by more than the RBA and as rates decreased, lenders did not pass on the full rate cut.
What are the benefits of a fixed rate home loan?
The biggest benefit of a fixed rate home loan is the certainty of knowing how much you need to pay.This helps you manage your risk – you know in advance how much you will pay and how much you can afford.
Currently fixed rates are lower than variable rates.This does not necessarily mean that they are cheaper – only that they are cheaper today.If interest rates continue to fall then the same fixed rate may end up more expensive.
A key consideration is to assess the likelihood of future interest rate drops and to what extent this may impact not only the variable rates but also if it would have an impact on the fixed rates.
Simply fixed rate home loans are about the certainty of knowing how much you will pay.
What are the benefits of a variable rate home loan?
The main reason to get a variable rate home loan is that if rates go down your interest rate will generally go down and you pay less.Whilst there is no guarantee that rates will fall if the RBA reduce their interest rates, historically it has been the case, even if they have not passed on the full interest rate reductions.
Are there any risks with a Fixed Rate home loan that do not exist with a Variable Rate home loan?
Fixed rate home loans do have some restrictions.
The first is that with a fixed rate home loan you cannot pay back as much as you like when you like.Hence if you like to make additional repayments or are expecting a lump sum in the near future you may not be able to pay this against your home loan.Most lenders will allow you to make between $6,000 and $15,000 in extra repayments each year.If you are considering making additional repayments over and above this amount it is essential to speak with your mortgage broker to ensure your loan structure allows for this.
The second issue is that the majority of fixed rate home loans do not allow for an offset account so if you do maintain a package deal with an offset account you won’t get the befit of reducing your daily balance.
The third key factor with a fixed rate home loan is that if you choose to pay out the loan you may incur significant costs.The lender refers to these as ‘the economic costs’ of breaking a fixed period.All lenders calculate this differently but it can run into thousands of dollars.To illustrate if you had a $300,000 home loan with a 5 years fixed rate of 7% and then six months later you wanted to sell your house a lender would look at the remaining period (30 months) and the difference between your fixed rate and current variable rates (say 5%) and then work out the cost on that basis – in this instance it is likely the minimum cost would be in excess of $7,000.
Hence it is very important that if you think you will pay out the loan, either by a refinance or because you are selling the property, you consider the risks and potential costs associated.
Finally, consider what happens at the end of the fixed rate term.Most lenders will place borrowers onto their standard variable home loan interest rate – which is far higher than most borrowers should pay.As your fixed period approaches expiry contact your mortgage broker to ensure that you are placed on a better variable rate and reassess if you want to go onto another fixed rate or not.Ideally you will be able to stay with your existing lender but depending on what you want and the rates available your mortgage broker can guide you on ensuring you are constantly getting a better rate.
Are there any alternatives?
Many borrowers now choose a split rate home loan where they put part of their loan on a fixed rate to reduce risk and minimise their immediate payments whilst keeping the balance on a variable rate which means they can make the additional repayments they want, properly utilise their offset account and if rates go down yield the benefit of falling rates.
So what should I do?
Different borrowers will choose different strategies.
For many borrowers who have an investment loan they like to fix the rate and that way they know how much they are paying out and how much they are receiving as rental income.
If you are currently on a variable rate home loan or about to take a variable rate home loan consider the repayment amount.If this is comfortable for you, one option is to maintain a variable rate home loan but if interest rates begin to move up you can then move to a fixed period.Provided your mortgage broker has structured your loan correctly you will be able to do this at a minimal or nil cost.
Ultimately whether you choose a fixed rate home loan or a variable rate home loan it is based on the risk you are comfortable with.Don’t try an out guess a lender but do try to set up a structure that meets your needs – not just for now but in the years to come.
Why Refinance With QuickSelect?
So what are the benefits to refinancing with us?
- The most obvious reason is to save money. We will negotiate with our lender panel to get you a better deal, unfortunately your existing lender won’t speak with us about your existing loan, they hold the view that you are their customer and it’s not for us to act on your behalf. One of the things you can do is speak with your existing lender first and find out what they will do for you.
- Ensure that you will save money in the future. A major factor in clients using our service is that every year we review their loan. This ensures that what is selected today remains suitable every year going forward. Ideally the solution will be suitable for many years to come but if not our systems identify that and we make the refinancing very simple
- Establish a structure for future plans. Many applicants will refinance to consolidate debt, fund renovations or repairs, access funds for investment (property or otherwise) or address a one off expense. This is particularly relevant as your mortgage reduces and your property value increases, thus generating equity. You may not have any immediate plans to use this equity but by putting a correct solution in place the facility can be made available for a future time when it is required or when one of the circumstance above become more tangible. Too often we find people wait until they need the facility but then their circumstances have changed or banks policies have changed and the opportunity is no longer available.
- Maximise the features of the loan products and packages available. Whilst there are many similarities in products there are also subtle differences from the offset account, through non recurring fees & credit card options to other available products and discounts
- Poor service from an existing lender Many of our clients come to us frustrated that their existing lender has a better solution but is unwilling to pro-actively provide this to them. Invariably if you are comfortable continually following up your bank to get better service or an improved rates then this isn’t an issue but if you belief that customer service is a proactive skill then utilising a third party works for you.
What is the downside?
- It’s a hassle. Actually this is more perception than reality. A refinance can take less than an hour of your time. We apply a simple process
- Undertake a preliminary discussion (the more information available the better)
- Formally engage QuickSelect, this means signing a broker agreement (an ASIC compliance requirement)
- We then prepare an analysis for you providing you three options , once you make your selection we prepare the application for your review and the discharge form to notify your existing lender
- We will then manage the process from application to approval and ensure the loan documents are delivered to you for signing.
In terms of the time required, providing us supporting documentation and the signing of forms will in total take less than an hour. The major time requirement is through discussion with our accredited brokers, we don’t put a time limit on this we simply say take as much time as you need to get comfortable
- It costs too much. Exit fees have been prohibited under government regulation so the costs are minimal.. There remain some small charges ($220 generally for discharge). However we see no point in refinancing someone where we can’t materially improve their position. As part of our analysis we show you what you save each year. In many cases our clients receive a rebate form lenders that more than covers these costs
- It may be a better deal today but what about next year or the year after that. We don’t have a crystal ball so we can’t guarantee how any lender what any lender will do in the future. What we can guarantee though is that we only use established and credible lenders who have a long history of ethical behaviour. Moreover if you are unhappy in the future we will refinance you at no cost to you.
- I’m just not sure! This is probably the biggest reason that borrowers don’t refinance. The real question is why did you start looking at a refinance in the first place? The answer sometimes gets lost when you consider the large amounts involved but it shouldn’t, the fact is borrowers look to refinance because their existing lender is not helping them as best they can. With QuickSelect our accredited and experienced brokers undertake a detailed and thorough assessment to ensure that the solution you get improves your position
Where to from here?
The first question you need to answer is do you actually want to refinance? Do the benefits outlined above appeal? Do you want a better mortgage which costs less? Have you got a couple of half hours available to send in the required supporting documents.
If the answer is no then there is no point in investing your valuable time identifying what is available, at the end of the day you will stay where you are.
However if the answer is yes, set a timeframe get the paperwork together and get moving – the time to refinance is when you don’t have to do it not when you do! Try not to provide the paperwork in parts, lenders like to see all information as recent and the payslips you provide now may expire if we need to wait six weeks for statements. Make us do the hard work and your refinance can happen within 10 days of you deciding you want it to happen!
Pay off your mortgage in 10 years – Creative saving
From the sublime to the ridiculous, there are many ways to reduce your mortgage
There are distinct advantages of taking a longer term mortgage (e.g. 25-year or 30-year), the most significant being a reduction in monthly repayments. Lower installments mean you have more cash at your disposal to meet the many other inevitable cash-hungry needs (food, school fees, fuel, utilities (water/gas/electricity) and entertainment) that are part of daily living.
Forget theories. Let’s illustrate this using raw, hard numbers. If you take a $300,000 mortgage with a 30-year term at 5.5% interest p.a., you will be looking at roughly $1,700 per month in loan repayments. Compare that with the same loan but on a 10 year term where your repayments would be about $3,300 monthly.
But longer term mortgages have major drawbacks too. First is the higher amount you pay overall as a result of interest. Going back to our example, the total interest paid for the 30-year mortgage would be $314,000. Yet the total interest on the loan if it was for just 10 years would be $91,000. The difference is a whopping $233,000! Think about what you can with such cash. Ok, you can stop drooling now.
The second drawback is the risk of losing your home in the event of drastic changes in market conditions or other unexpected event (e.g. loss of employment). You may have diligently serviced the 25-year mortgage for 20 years – but that will not prevent the bank from foreclosing on your property if you do default.
If you have taken a 20-, 25- or 30-year mortgage, there must have been a reason for it. The idea of in creasing your loan repayments by $1,600 a month and repaying the loan in 10 years may (unsurprisingly) seem unpalatable an increase iof just $100 per fortnight will reduce the loan term by five years. 2012 report by ASIC showed that 54 percent of Australians surveyed know precisely where their household/personal expenditure goes. Look closely enough and you will could find that opportunities to save more are all around you.
Here are a few tips , from the long term strategy to the short term crazy!
· Don’t lower your monthly repayment if interest rates fall during the life of the mortgage. Keep the total payment the same and the balance will fall quicker
· Over the term of the mortgage you are likely to receive an increase in your salary. Put as much of the increase as you can on the lan balance.
· Open a mortgage offset deposit account – As opposed to your salary simply sitting in your bank account, keeping your cash in a mortgage offset account reduces the amount of interest you eventually pay on the mortgage.
· Resist the temptation to redraw unless it is absolutely necessary or your money is in a mortgage offset account.
· Refinance whenever interest rates are favorable as this can mean paying less without altering the loan’s tenure.
· Increase your repayment frequency – Loan interest is computed daily. If you pay off your mortgage fortnightly as opposed to monthly, you cut the interest paid substantially. If ou get paid weekly, make your mortgage repayment weekly.
· Apply sudden, unexpected or one-off windfalls (bonus, tax refund or inheritance) to the mortgage.
· Sell off items you do not need and push the proceeds toward mortgage repayment – Have you visited your garage of late to see what treasures could be lurking in there? Organize a garage sale or post some items to eBay. What may be so obviously useless to you may be pretty useful for the next person.
· Thinking about buying a new laptop? Before you reach for your wallet, think about that old discarded laptop in your garage. It may cost very little to repair and may just serve the intended purpose.
· For couples, can your family live entirely off either you or your spouse’s salary? If yes, consider using one salary to pay off the loan (assuming it is well above the required monthly repayment).
· Review all insurance policies you are currently signed up to e.g. car insurance. You may well be able get a better deal and allocate the savings against your mortgage
· Consider bundling your mobile, broadband internet, landline and Pay TV subscription with a single service provider. Not only does it reduce the number of service providers you have to deal with, you may save on costs by taking advantage of bundle offers.
· Critically evaluate your current credit card account and compare the cost with that of competitors in the market. Shift to providers with lower fees, penalties and interest.
· When is the last time you switched off your microwave or television? Not just turning the screen off (for the TV) but switching these gadgets off at the socket. The little power they consume contributes substantially to your electricity bill. Its also environmentally friendly!
· When and where do you fuel your car? Petrol may be cheaper on specific days of the week. On the same breath, it may be time to drop that 5000cc guzzler and opt for a more economical car.
· Cancel your magazine subscriptions leaving only those you really need. Think about the number of subscriptions you’ve chalked up over the years and how many you no longer need.
· Plan your household shopping carefully and only do the shopping once fortnightly or monthly. Steer clear of the temptation to make sporadic, impulsive purchases within the fortnight/month.
· Carry a packed lunch to work.
Property market confidence on the up
A recent survey has shown that around three quarters of Australians believe that the combination of falling interest rates and flat housing market prices have made it the ideal time to buy property.
The Commonwealth Bank – Mortgage and Finance Association of Australia (MFAA) home finance index was released this week and revealed that 75.8 per cent of Australians believe that home prices will increase or remain stable between now and the end of 2012.
In an additional sign of recovering household confidence, 77.9 per cent of the 1423 people surveyed believed that now is a good time to buy a home.
“The property market is all about confidence and the survey confirms that good times are ahead, especially as interest rates continue to fall,” said MFAA chief Phil Naylor in response to the findings.
The report also suggests that borrowers are feeling some relief as a result of RBA interest rate cuts over the year to date. The majority of mortgage-holders surveyed are currently finding it easier to make their mortgage repayments than they were six months ago. Following the Reserve Bank’s decision to cut interest rates by 25 basis points in October, the majority of economists are predicting one more rate cut before the end of the year.
The survey also found that 63 per cent of first home buyers believe that now is a good time to buy.
“Many first homebuyers now realise that it is cheaper to buy than rent a property in some suburbs and this augurs well for growth in the bottom end of the market,” said Commonwealth Bank executive general manager of third party and mobile banking Kathy Cummings.
Portable LMI would make switching a cinch
The government is facing calls from the finance brokerage industry to introduce legislation allowing for portable Lender’s Mortgage Insurance on home loan products.
In a recent letter to the Senate Economics References Committee, Finance Brokers Association of Australia (FBAA) president Peter White argues that the existing LMI fee structures imposed by most lenders make it difficult for borrowers to shop around for a better deal. Despite the government’s abolishment of home loan exit fees, Mr. White believes that borrowers looking to switch will still face significant barriers until LMI can be transferred between lending institutions.
He suggests that LMI should be portable in certain cases, providing that the size of the debt and the repayments remains unchanged.
“One should be able to move the cover across between lenders. This being said any deviation from the original debt being refinanced will vary the insurer’s position and therefore need a formal and separate review,” Mr. White said.
“If a variation is accepted by the insurer, the consumer should only incur the cost of the difference between the reviewed premium on the original debt being refinanced less the premium already paid.
“There are issues, of course, that varies the risk to the lender and insurer in portability of LMI, but it should be allowed under the right circumstances,” he said.
His comments come in the wake of a recent report by the Australian Securities and Investments Commission (ASIC) which examines the structure of early termination fees amongst Australian lending institutions. ASIC found that some of the lenders who had received a rebated mortgage insurance premium had failed to pass that refund on to the borrower. In these instances, the banks are essentially keeping additional money that should be going back to their customers.
For many mortgage holders, the current structure of LMI arrangements is a major hurdle that prevents them from shopping around for a better deal. Making LMI portable is not a simple proposition, but it is a necessary change that would make it easier for borrowers to switch to better and more cost effective home loan products.
New First Homebuyers Construction Grant scheme in QLD
With the announcement of the new First Home Owner’s Construction Grant in Queensland, first-time homebuyers are now set to receive $15000 when purchasing a newly constructed or off-the-plan property. The new scheme has been delivered as part of the Newman government’s first state budget and has been designed to replace the existing First Home Owner’s Grant (FHOG) of $7000 which is to be abolished in October.
Premier Campbell Newman is hoping that the grant will not only offer some assistance to prospective homebuyers looking to enter the property market, but also provide some much needed stimulus to the struggling residential construction industry.
New homebuyers in QLD are eligible for the grant immediately on new builds only. Alternatively, buyers have until October to take advantage of the existing $7000 grant on existing dwellings. When FHOG changes were implemented in Victoria earlier in the year, housing sales data showed a significant spike in purchases in the weeks preceding the policy change. A similar ‘last minute rush’ can be expected in QLD leading up to October as people scramble to take advantage of the current FHOG before it is scrapped.
Industry veteran Paul Gollan of Brokerloans told Australian Broker Online that he is not convinced that the new scheme will have the desired impact. He lays the blame squarely on lenders and their stringent savings requirements. Lump sum payments are often deemed to be ‘non-genuine savings’, so in many cases the $15000 grant money will not count towards a prospective buyer’s deposit. He believes that this restriction will severely limit the stimulatory effect of the new scheme because borrowers will still face the same challenges in securing a home loan.
On the other hand, Warwick Temby, the Housing Institute of Australia’s executive director for Queensland, believes that the new grant will provide a serious incentive for people who have been considering building their own home.
"Combined with the current relatively low interest rates and strong competition among builders, the grant will add further to the great building opportunities available in the market," he commented.
"The measures that the government has now introduced including the grant and the restoration of the stamp duty concession for owner occupied homes, is a balanced package that will lift the housing market," Mr Temby added.
Rates on hold despite slowing growth
The Reserve Bank has continued its ‘wait and see’ approach, electing to leave the cash rate unchanged at 3.5 per cent for the third month running.
In a brief statement following the decision, RBA Governor Glenn Stevens noted that the major economic indicators all suggested that growth was running close to trend. Unemployment has remained under control, inflation is at the lower end of the target range, and consumption spending is at a moderate level. He also observed that, as a result of earlier cuts, interest rates for borrowers were still below their medium-term averages.
“While a further rate cut would be a welcome development for the industry, the RBA would be conscious of not overstimulating the housing market. In fact, stable home values are probably exactly what they are hoping for with the current interest rate setting,” said RP Data national research director Tim Lawless.
Clearly the RBA has been unmoved by the spate of recent headlines foretelling the demise of the mining boom. BHP Billiton is abandoning their planned Olympic Dam and Port Hedland projects and Fortescue is cutting 25 per cent from a major investment project. However, the decision to leave rates unchanged this month is consistent with earlier statements by the RBA suggesting that cuts in May and June were made mainly as an insurance policy against future economic instability.
With today's release of lower than expected GDP figures, that instability may not be too far off. Mr. Stevens did acknowledge that the current international outlook was "more subdued" than it had been earlier in the year, referring to continued economic woes in Europe, China, and the USA. The majority of economists are predicting that the RBA will cut interest rates again before the end of the year. Then it will simply be a matter of keeping our fingers crossed and hoping that the banks manage to pass on the savings to their mortgage customers.
Mortgage lending pie grows; big banks get smaller slice
In a sign of renewed confidence amongst home buyers, the number of new owner-occupier home loans increased by 1.3 per cent over June. But as the overall amount of home loan lending grows, the Australian Prudential Regulation Authority (APRA) has released data that shows the big banks’ share of this growth is actually getting smaller.
The increase in dwelling commitment finance in June can be attributed to two major factors that have boosted demand for home loans in recent months.
Firstly, the RBA’s recent interest rate cuts have resulted in lenders passing on an average of 52 of a possible 75 basis points worth of cuts to their variable rate home loan customers since May. This lowered cost of borrowing has made finance more affordable for people looking to get a toehold in the housing market.
Secondly, the June lending figures may have been skewed because of a last-minute rush in Victoria to take advantage of the first home bonus before it expired at the end of the month. The proportion of total housing lending accounted for by first home buyers increased for the third consecutive month to reach its highest level since January. 18.3 per cent of the total number of owner occupied housing loans in June were made to first home buyers.
“The fundamentals for the housing sector certainly remain sound. It is clear that the attractiveness of property as a long-term investment continues to garner interest,” CommSec economist Savanth Sebastian told Australian Property Investor.
These results will be encouraging for lenders and borrowers alike, but according to APRA figures it is the non-bank lending sector that has enjoyed significant market gains over the first half of 2012. Over the six months to June, new lending by traditional banks shrank by around 2 per cent, whereas wholesale lenders increased their lending by $69 million or 27 per cent. These results come in the wake of a Deloitte report commissioned by Abacus – the industry body representing credit unions and building societies – calling for a full-scale inquiry into competition in the banking sector.
The slump in new lending by the big banks reflects a sharp increase in the number of customers refinancing their home loans with different lenders. Fairfax Media reports that a record 35 per cent of all home loans in 2011-12 were made for the purpose of refinancing existing mortgages. Customers are taking full advantage of the government’s measures to abolish exit fees and shopping around for better deals.
“Great to see our banking reforms improving competition for Aussie mortgage holders,” tweeted Treasurer Wayne Swan this morning in response to the APRA findings.
In light of the recommendations made in the Deloitte report earlier this week, the timing of this news is certainly no accident. It’s almost enough to make a cynical observer wonder whether APRA might have a vested interest in avoiding another Wallis-style inquiry into the state of the Australian banking sector.
No surprises as RBA leaves rates steady
The Reserve Bank of Australia has elected to leave the cash rate unchanged at 3.5 per cent for the second consecutive month. The statement issued by the Board suggested that further cuts were not justified given that most domestic economic indicators are tracking close to their long-term trend levels. Unemployment is low and inflation is sitting only slightly below the target band at 1.9 per cent.
The Board also acknowledged the housing market in their decision, noting that dwelling prices have “firmed” over the last couple of months. Recent figures released by property market observers RP Data have shown that house prices across Australian capital cities increased by an average of 1 per cent in June and 0.6 per cent in July. These positive growth results are supported by the RBA’s own data which has shown a 0.5 per cent increase in capital city housing prices over the June quarter.
According to Tim Lawless, research director at RP Data, the RBA will factor these signs of a housing market recovery into their future interest rate decisions for the remainder of 2012.
“The Bank is likely to be increasingly vigilant not to overstimulate the housing market which is likely to be one of their reasons for keeping interests rates on hold. Most of the housing market indicators are now pointing in a positive direction,” he said.
The Housing Industry Association (HIA) has also noted a recent increase in the number of home loan applications, attributing this growth to the effects of the 75 basis points cuts over May and June. Combined with rising house prices in capitals cities, this positive data indicates growing confidence amongst homebuyers. Consumer confidence is showing signs of life throughout the economy as a whole, and this is starting to be reflected by renewed demand in the housing market.
The statement by the RBA, as well as the broader economic conditions, suggests that the Board will want to keep their powder dry for now. Further rate cuts are unlikely over the next couple of months unless circumstances deteriorate internationally. Despite the lack of movement from the RBA, borrowers are still reaping the benefits of the rate cuts in May and June. On average, lenders have passed on 52 of a possible 75 basis points worth of cuts to their variable rate home loan customers. And for those borrowers hankering for further cuts, now may be the perfect time to investigate your refinancing options.