credits

Before we start….

For further content, please visit https://www.bir.net.au/blog/

And, if you would like a Free Property Report, you can order yours here: https://www.bir.net.au/report-request. You can obtain a report for a particular property, suburb or region in Australia, so you can make informed property decisions. Plus, our suburb reports now provide a comparison report of up to 5 suburbs you want to research.

Any questions, please ring me, Michael Royal 0411 190 474 or email me: michael.royal@bir.net.au. And you can also book a meeting with me: https://calendly.com/michael-royal/chat-re-finance

Now, back to the Article! 😉

In other articles, we have shown that brokers now process more loans than the Big 4 Banks – about 6 out of 10 borrowers now use a broker and 1 in 4 borrowers who are with a Big 4 Bank are looking to change.

When shopping for a loan, here are 6 common issues borrowers need to consider before seeking a particular loan. Of course, if you use a broker, they will (or should) ensure you have considered all of these issues before you proceed with an application for a loan.

1. Low Advertised Interest Rates

Borrowers are often wooed by the advertising of low interest rates. And understandably, they often shop online to find the lowest deal.

What they don’t realise is that the lowest advertised deal is just the same as a car advertisement – the key word is the word immediately prior to the advertised price ‘from…’

And like a car, the cheapest rate is often the ‘no frills’ rate. It doesn’t have as many features as the premium model and like the cheapest car, when you get behind the wheel, it can feel a little cramped and dare I say it, ‘featureless’.

Plus, you soon discover that not many customers (and certainly not all customers) fall within the small group of customers who fit the profile for this ‘featureless loan’ (unlike a car where the customer chooses which car to buy, with a loan the banks decide who fits which loan – you can want the loan but the bank may not want you!).

If you use a broker, they will work with you to ensure you set realistic expectations of the rate you are likely to be able to negotiate.

2. Credit Cards

We all love our credit card! And, we love a high limit so we can ‘always have enough in reserve for those emergencies.

The problem is the lenders like to look at the limit and not the amount you spend each month – even if you pay it off before incurring any interest charges.

To put this into an example, a credit card with a $20,000 limit which is only used up to $4,000 per month and paid off each month end is assessed by the lender as being the equivalent of $20,000 in debt – not $4,000 and certainly not $Nil.

Good brokers review your limits before you start the loan application process as they know what a particular lender is looking for and whether your credit card limits might impact the amount you can borrow.

3. Credit offered by retailers: aka ‘After Pay Lenders

Every time you obtain credit from a shop, guess what happens: the lender who provides the finance for the retailer has a peek at your credit file. And this peak is noted for all other lenders to see – even if you don’t go ahead with the loan.

And, every time a lender has a peek, it adversely affects your credit score. You can have a perfect credit history in terms of zero defaults but these peaks represent a warning to a potential lender. They suggest you are looking to borrow money ‘here, there and everywhere’. Now, this might not seem fair but it is the world of credit we live in.

Sometimes, your broker will suggest you ‘cool your heels for a while’ and get your credit score up before applying for a loan. Or, they will assist you set a realistic expectation before you start so you don’t get a nasty shock later on.

4. Honeymoon or introductory home loan rates

Quite naturally, borrowers are attracted by the interest rate quoted for the first year of a contract.

These facilities normally revert to the “standard variable rate” after the first year. The issue is, is this standard variable rate equal to or worse than the rate you can negotiate up front?

Chances are, once a lender has got you in with their honeymoon rate, the rate you revert to after the honeymoon period is going to be higher than the rate you can negotiate up front – particularly if you are using a broker as brokers know ‘how low you can go’.

5. Fees and Charges

Most, but not all loans will probably have a range of non-negotiable establishment fees for the application process, the lender’s legal costs and the valuation fees.

A broker will be aware of these costs for each lender and will factor them into your funding needs.

Also, there may be exit fees, particularly for fixed rate loans if you want to exit the fixed rate portion before the term for the fixed portion has expired.

Your broker should ensure you have considered this issue and made sure you have considered what is best for you in terms of the mix of variable and fixed loan amounts.

6. Fixed Rates

These days, many borrowers consider putting a portion of their loan in a fixed rate loan so they get some certainty as to the repayments. Whilst this is a good idea to consider this option, it is not without its own risks and issues.

Apart from exit fees for an early exit of a fixed rate loan, fixed rate loans can be more restrictive in terms of some loan features such as interest offset accounts, extra repayments and redraw facilities.

Your broker can explain to you what restrictions will apply to your fixed rate loan with a particular lender before you dive in to ‘lock in a good rate’.

Would you like more information? You can ring us now 1300 989 878 or email us at moreinfoplease@bir.net.au

Before we start….

For further content, please visit https://www.bir.net.au/blog/

Now, back to the Article! 😉

Author: Michael Royal

Finance Specialist

M: 0411 190 474

E: michael.royal@bir.net.au

The finance markets are always changing. Lenders are regularly updating their products and providing new points of difference to help them compete and gain market share.

Plus, the number of lenders has never been more diverse. Whilst the High Street lenders (the Big 4 plus a few regional players) dominate the lending landscape, there are now so many more lenders to choose from; lenders who are offering products that fit niches which the major lenders do not cater for. Plus, their rates are often as sharp or sharper than the major lenders.

And, as with many consumer-based products where there are a few large suppliers, existing customers don’t always get the same deal which is being offered to new clients – unless they ask for it.

This is confirmed by the Reserve Bank of Australia. Since 2018, new customers have, on average, been getting a much better variable rate than existing customers.

Here are the 8 reasons you should consider refinancing:

#1. Rates for existing customers may not keep up with rates for new loans.

With regular movements in interest rates, you need to regularly confirm your lender (and more importantly, your lender’s product) is keeping up with any downward trend.

#2. Lenders are not obliged to give you their cheapest rate product.

As a broker, I am not interested in what is best for the lender – I want what is most suitable for you!

#3. Lock in lower rates with a fixed interest rate package.

Fixed rates are often available over a 1-to-5-year term. Whilst many borrowers have only used variable interest rate products, you can put some or all of your loan into a fixed rate package and keep some of it at variable rates and take advantage of some very low fixed rates to reduce any future potential adverse interest rate movements.

#4. Reduce your loan costs.

Some packages offer better costs or features which provide the opportunity for incurring lower costs.

#5. Get a loan with better features.

Which is more suitable for you and lower your costs. For example, if you don’t have an offset account, your surplus cash flow is earning less interest in your savings or cheque account than what you are paying on your loan. As a result, you could well be paying more interest than you need to. (Note: There may be some costs involving an offset account so some analysis needs to be done but for many borrowers, it saves them significantly more than it costs.)

#6. You can consolidate your debts.

Have you built up some personal debt or personal loans (and even vehicle loans) and are paying higher unsecured/credit card or non-property interest rates? Refinancing and consolidating your debts and paying the current property-backed interest rates can lower your cash repayments immediately. (However, it is important to also set up a plan to pay off these debts so you don’t continue paying for the ‘consolidated debt’ over the full term of your home loan!)

#7. You can pay off your tax debt!

As many business owners know, you can get into ‘cashflow strife’ when you do not pay on time the amounts you owe to the ATO (e.g., GST, PAYG deductions or employee super). Plus, unpaid overdue tax debt can impact your ability to get finance when you want or need it down the track. Not all lenders offer this feature but we have quite a few lenders on our panel who can assist you.

#8. Use your equity in your current property for other purposes e.g. investment or renovations.

Your equity increases when the value of your home increases and/or you have been paying down your borrowings through a Principal and Interest (P&I) facility or by using an Offset account. Together with your financial planner, you may decide to build your wealth through the purchase of an investment property or shares. Or, you may decide to do some renovations and perhaps use the Government’s scheme for owner occupiers (up to $25K for renovations up to $150K – conditions apply). Or, just take a well-earned holiday!

If refinancing looks like it could be of interest to you, here are some things you might also need to consider:

✔️ If you are currently in a fixed rate package, there may be a break cost if you are looking to refinance.

✔️ If you don’t have enough surplus equity, then refinancing might not be the most suitable option for you. Typically, I would suggest you consider refinancing when your current Loan to Value Ratio (LVR) is less than 80% (and preferably much lower).

✔️ If you are struggling with your current repayments, seeking to refinance may not be in your best interests right now. Instead, you might need to focus on your income and expenditure. There are some excellent services and products in this area of budget and spending control to assist you.

Would you like more information? You can ring us now 1300 989 878 or email us at moreinfoplease@bir.net.au

Before we start….

For further content, please visit https://www.bir.net.au/blog/

Now, back to the Article! 😉

As a broker, we have seen it all. So, let’s open your eyes up to some things which you probably know but may not have thought about too deeply. (I mean, when it comes to borrowing, it can be hard to get enthusiastic).

Whilst we love the big banks when they offer our customers the most suitable loan product, we are also wary of accepting all that we see and read from them at face value.

In reality, the big banks are no different to the big telcos., and the big insurers. They spend a fortune on advertising to try and convince you ‘they are best for you’. But this doesn’t mean they are.

However, for a borrower faced with a myriad of advertising messages and a history of having banked at the one bank all their lives, considering another lender other than ‘their bank’, can be daunting – and time consuming – and stressful.

Now, whilst we have a vested interest in recommending a broker (because, let’s face it, we love being a broker!) There are lots of good reasons why you too should consider whether walking into a high street bank is a good idea for you.

Here is our 14-point hit list of things you should know.

1. The big banks often offer their new customers better deals than their existing customers. And if you are swayed by their pitch, you will be an existing customer soon enough….

2. Big banks rely upon the principle of ‘the lethargy to change’. Because when you are on your own, it is hard work to change lenders. Lenders know this and they also know that a customer will be likely to stay put and only consider another loan product and lender if they are moving house.

3. Shopping for a loan at a high street bank is like shopping for clothes at a single brand retail outlet. You have no chance to compare with other suppliers and you have to buy from the suite of products they offer you.

4. When you only shop at one bank, you either fit – at a rate they are willing to offer you; or, you don’t fit – which means starting all over again somewhere else.

5. No one at your local high street branch will suggest you ‘go down the road’ to their competitor.

6. No bank is required to offer you their cheapest product.

7. The big banks have a ‘carded rate’ – which is similar to the rack rate for a hotel. They discount this rate from time to time to win business. And, if you negotiate a discount, it doesn’t mean you are paying their lowest rate.

8. No bank is required to keep you at their best rate. In fact, having a higher card rate allows a big bank to engage in ‘rate slippage’, whereby over time, your rate gradually becomes less competitive (and more profitable for the bank).

9. Banks don’t review your loan product to make sure it is still suitable. Until of course you try, and leave.

10. Big banks don’t give you a relationship manager. Just a 1300 number.

11. 7 out of 10 borrowers use a broker. That means only 3 out of 10 borrowers walk into their local branch.

12. Brokers may recommend one or more of the big banks. But they are required by law to only recommend them if they offer you a loan product which is suitable for you.

13. Around 60% of the loan products recommended by brokers are those provided by the big 4. That means just under half of their customers are being recommended loan products with other lenders and which the broker believes are more suitable for the borrower.

14. Banks don’t have a statutory best interest duty or responsible lending obligation. Brokers do.

Would you like more information? You can ring us now 1300 989 878 or email us at moreinfoplease@bir.net.au

Before we start….

For further content, please visit https://www.bir.net.au/blog/

Now, back to the Article! 😉

1. All borrowers’ circumstances are not the same

In today’s fluid world, nearly all borrowers have different histories of work, credit experience, income, households, expenses – and the list goes on.

For this reason, the advertised ‘low rates’ being advertised by a lender might only apply to a small percentage of the borrower market: for example, those borrowers in a steady job which they have held for more than 3 years with a steady income and low expenses and no unnecessary credit debt (and definitely no Buy Now Pay Later loans!)

Example: Self employed are often not targeted by online lenders – they are just not ‘vanilla’ enough to be able to be processed by bots.

2. You don’t necessarily qualify for all lenders

The criteria applied by lenders when considering a loan application can vary enormously.

These days, with over 60+ lenders lending to home buyers, there is a huge range of variations in what lenders consider when assessing whether to lend money to an applicant.

The issue for most borrowers is they don’t know the details and the ins and outs of each lender’s policies.

Plus, lender’s policies are changed regularly by lenders as the macro-economic landscape changes and as their appetite for a particular market segment changes.

Example: We had a client who worked for a major bank but didn’t qualify for a loan with his employer – but we obtained a loan 50% higher with another lender.

3. You just can’t change loan products!

Yes, you heard it here first! The biggest failing for many borrowers is not understanding that even what appears to be small changes to their loan product can be seen by their lender as a completely different loan product. And with a new loan product, the lender will charge you all their upfront fees all over again. Plus, you will have to redo all the due diligence you did the first time around to make sure you ‘qualify’ for their current deal.

4. Wooed by the Cashback

They sound good and can be a nice way of starting your relationship with your lender. But, they come with their own catches – including a rate which might creep up faster than you were imagining.

Remember, nothing is for free and the major lenders make their money by borrowers looking for immediate gains and then forgetting to keep on top of the on-going costs of their loan.

5. Falling in love with the honeymoon or introductory home loan rates

These lower introductory rates can be appealing. And, borrowers can be expected to be attracted by the interest rate quoted for the first year of a contract. However, once the honeymoon period expires, the fine print will often say the rate will revert back to the lender’s standard variable rate – which can be quite a lot higher for the major lenders (their standard carded rates can be breathtakingly high).

Plus, honeymoon packages can attract early exit costs as well as monthly accounting keeping fees – all of which are ways for the lender to make back the money they are giving you on your lower initial rate.

In recent times, these honeymoon packages have been phased out in favour of cashbacks but that doesn’t mean they are gone for good. The marketing gurus at the major lenders will no doubt resurrect these offers as soon as they feel it will help boost their market share.

6. Not Checking Exit Costs

The average life of a loan is around 7 years – even though the loan term might be 30 years.

And, no surprises, there will often be exit costs when paying out a loan. Plus, lenders charge legal and preparation fees for the discharge of your mortgage and some will sneak in a service fee.

Whilst not exorbitant, these costs can be an irritant when you are looking to move on because you want to ‘save some money’. And, they can vary significantly between lenders and between loan products.

7. Not checking upfront costs

Make sure you check all the fees for getting a loan. Establishment fees, valuation fees, legal fees, the list goes on.

The important thing to note is that these fees can vary enormously from lender to lender.

8. Choosing a Fixed Rate loan product

2021 was the year of the fixed rate loan. However, the heady days of low fixed rate loans are over for a while and when the fixed rate period expires, you will be back to paying the currently available variable rate loan.

Fixed rates have less flexibility and fewer options (e.g. limited redraw and generally no offsets accounts) – so you need to make sure they are suitable for you and your cash flow. When a client wants to ‘fix’ a loan, we will ask them if they ever have any surplus cash and if so, a split loan (fixed and variable) might be a good idea so they can park their excess cash in a variable rate split with an offset facility.

Plus, fixed rate loans will have a break cost if you need to exit early (or if you wish to change loan products). The amount of this break cost will be a formula set by the lender.

9. Going Interest Only to reduce on payments (Vs Principal & Interest payments)

Interest Only is good when your cash flow is tight as the payments can be significantly lower than a Principal and Interest payment.

However, the Interest Only rates tend to be a little bit higher than P&I rates so make sure you run your numbers on both options if you are thinking of taking out an Interest Only loan product.

Interest Only is often regarded as being more attractive for Investors as principal payments are not tax deductible so it allows the investor’s principal to be utilised in other perhaps more productive alternatives. However, the logic still needs to be applied as it may be that the best short term use of an investor’s funds is to free up equity in their investment portfolio.

A nice to know: when interest rates are low, the greater the proportion of your monthly payment is allocated to your principal repayment. So, when rates are low, you are trading off reducing your principal quickly Vs lower overall payments.

10. To have or not to have: Offsets and Redraws

An offset account is where the funds in your savings account are ‘offset’ against the balance you owe on your loan account; reducing the interest you are being charged whilst those funds are in your offset account. This is a great facility when you have variable cash flows with surpluses available from time to time as the offset account is a ’come and go’ account – as you need the funds, you withdraw them.

However, there are often annual fees associated with these facilities (around $300 is a typical figure) so you need to factor in these costs when doing your maths.

The reason why an offset is attractive is that the surplus funds, if held in a normal savings account, will earn you less interest than what you can save if the funds were held in an offset account. Plus, the interest you earn in a savings account is subject to tax whereas the savings in interest from an offset account does not impact the tax you have to pay.

A redraw facility operates similarly to an offset account but you have to physically ‘withdraw’ the funds you need and place them in your savings account in order to be able to use them. For some types of payment transactions this might be acceptable but it does not have the flexibility of an offset account ‘come and go’ benefit.

11. The cost of a Professional Package

The major lenders offer “Professional Packages which can provide better rates than their ‘normal’ customers might be paying and might include things like credit cards with rewards etc. It sounds good and it is nice to know you are regarded as a ‘professional’. But, such packages come at a cost – often an annual fee.

So, it is worth comparing these packages with an ‘everyday’ low rate offered by other lenders.

12. Loyalty sucks

Sorry to put on a dampener but that is the reality. Once you have a loan with a lender you are now just a source of recurring income. A lender makes their money from their existing customers who do nothing other than pay their loan. The upfront costs to win the customer are amortised over the ‘life’ of the loan. And whilst your loan term is probably 30 years, the average life of a borrower’s loan is often less than 7 years as most borrowers either sell then rebuy or change lenders (so your current lender has to make their money on you quickly!).

13. Not planning for your future

Every loan is created upon your circumstances ‘now’. They don’t take into account an unknown future.

However, if you know you are going to move or you know you are going to need to do a reno or knock-down and rebuild, you need to factor in these costs and the likelihood that you will need additional funds at some point in time. If you know how much you might need and when, you can save yourself a lot of heartache and stress if you plan for this upfront.

14. I can do this myself (aka not seeking an independent professional voice)

I am leaving the best to last!

When you are thinking about a loan, you should understand the time it takes and the difficulties with making sure you have done all the research you need to do so you make the right choice for you. This is where an experienced broker can help you. They have access to databases and algorithms which allow them to crunch the data from a huge panel of lenders. And, they keep themselves up to date with research on lenders and lender policies so they understand which lenders will be a good fit for you.

Before you even submit an application they will have sorted out those lenders who will lend to you and importantly, those lenders who will not lend to you. And, they will involve you in the final selection so you feel comfortable with who is going to lend you their money. (The good brokers also run your scenario by your chosen lender ‘just to make sure’ you fit).

But there is more. Great brokers check your rates regularly against your lender’s current ‘best rates’ and they offer you lots of things which are good to know on your property (e.g. free property reports) and about finance so you can make informed decisions. The list is actually much longer but you get the drift – brokers.

Would you like more information? You can ring us now 1300 989 878 or email us at moreinfoplease@bir.net.au

Before we start….

For further content, please visit https://www.bir.net.au/blog/

Now, back to the Article! 😉

Author: Michael Royal, Finance Specialist, BIR Solutions www.bir.net.au

March 2022

How do you turn a large fortune into a small fortune? Get a reno! 🤣🤣🤣

So, you have run out of space or you just need to spruce things up. You have a chat with your architect and you see the estimated cost and your heart sinks….

It seems like even the smallest renovation will cost you more these days. Prices for building supplies have gone up and timeframes have blown out as stock sits ‘on the wharf’ – or worse, at the supplier’s wharf!

At least one thing is solved – funding your renovation. These days, you have a LOT of options so let’s run through some of the main ones you should consider:

1. Use your ‘cash at the bank’ which is sitting in either your savings, term deposit or offset account.

2. Sell down your existing assets and use the cash generated.

3. Increase your home and/or investment loan with your current lender with an equity (‘cash out’) loan.

4. Refinance your home loan and increase it with an equity loan with a new lender.

5. Obtain a personal loan.

BONUS ways:

– Your parents 😊

– Your business (if you have one and it has spare cash). PS Talk to your tax accountant to avoid/minimise Div. 7A loan issues.

Now for the details….

But first, some abbreviations used below:

> LVR: Loan to Value Ratio – the value of your loan to the value of your property (as estimated by your lender. For most borrowers, the ‘magic’ LVR maximum is 80%. Below 80% and there are no additional costs. If your LVR is above 80% you either need to be in a special class or borrower (eg medico/medical, accountant/lawyer) or you may be charged LMI by your lender.

> LMI: Lenders Mortgage Insurance – an insurance policy you pay to an insurance underwriter to protect the lender in the event of you defaulting. It is often applied when the LVR is greater than 80%.

> Equity loan (or cash out a loan): when you receive cash as well as the loan to be financed to either purchase the property or refinance the current loan.

> CCR: Comprehensive Credit Report. A report was prepared by a credit agency (Equifax, Illion, and Experion).

> DTI: Debt to Income Ratio. The ratio of your total interest-bearing debts to your ‘assessable income’.

> Security: the asset used by the borrower to secure the loan from the lender. For renovations it is property. Only personal loans may look at vehicles as security.

Notes:

– You can obtain Cash out with an LVR over 80% with certain lenders and under specific circumstances. Typically, LMI will be charged and other restrictions might apply.

– Depending upon the lender, the documentation required can vary from the usual documents required to get a loan plus a statement of intent or with some lenders, signed contracts.

Other observations:

– For people who generate surplus cash, offset accounts are a good way to save on interest.

– Selling investment assets (property, shares, artworks, etc.,) is a little bit like ‘robbing Peter to pay Paul’. Check with your financial advisor before proceeding.

– The amount you borrow in excess of your current home loan balance would be seen as an equity or cash-out loan by your lender (or a new lender). Some lenders require a lot more detail on the purpose of the cash out than others. Some lenders require, for example, signed contracts for the expenditure whilst others only need a declaration of intent.

– Lenders have 4 main criteria when assessing a loan – and some lenders look at some more than others:

> Your ‘after-loan’ LVR.

> Your ability to service the new loan balance.

> Your resulting DTI. DTIs above 6 times start to reduce the number of available lenders but some major lenders will go as high as 9 times and there are some lenders who don’t use DTI.

> Your creditworthiness. Your CCR Score.:

1. A credit score of more than 700 is good and less than 500 is bad – and in between requires an explanation.

2. Defaults or judgments are not liked by many lenders.

3. Late payments of your current loans are not liked by many lenders.

– Personal loans typically don’t require security over your properties and for renovations, most would be unsecured.

– Personal loans have limited terms (typically 3 to 5 years) whilst an increase in a home loan that is refinanced is typically ‘reset’ for a 30-year term.

To summarise:

– To be able to fund your next renovation, there are lots of ways to obtain a renovation loan.

– You need to take into account the various issues impacting your situation and work through which option is most suitable for you.

– Like all loans, the longer you take to repay them, the more you will end up paying in interest.

Would you like more information? You can ring us now 1300 989 878 or email us at moreinfoplease@bir.net.au