lenders

Hi,

Supply chains are still not back to normal, so it might be wise to start ordering your Christmas presents now. In the meantime, here are four big property and finance stories:

– Property buyer breakdown

– Regional scheme goes live

– Home loan landscape changing

– Buyers value energy efficiency

Read more below.

But first…. our monthly survey results 😉

How much can you save by

checking and renegotiating your variable interest rate with your lender?

This result is interesting for a number of reasons:

1. Over $1,000 a year saving is a lot of lattes!

2. If there is money to be saved, then it is important that borrowers who don’t want to pay more than they should to their lender, get cracking! Particularly if they don’t use a broker 😉

3. If they use a broker, it is important for borrowers to make sure their broker is doing this for them – at least once a year. (We have now started this process for our clients so watch your inbox for an email from us if you have a Variable Rate loan we have organised for you over 12 months ago 👍)

4. In the current changing interest rate climate, lenders are making hay – at their borrowers’ expense – as no one can keep up with the constant and rapid interest rate increases.

5. The ACCC’s 2020 report on home loan interest rates suggested that borrowers were paying FAR too much interest compared to the best rates in the market. And, to make matters worse, the longer the borrower had been with a lender, the greater the difference between this ‘best rate’ and the rate they were being charged by their lender. Check out the table below.

So, if you would like us to do our FREE rate review for you (whether we organised your loan or not), just reach out and I will get our team cracking to see what we can save you! Just click the link below to get this moving!

Contact Us

New analysis has found that different buyer groups respond quite differently during downturns – with the current slowdown fitting the historical pattern.

“The main difference between the buyer types over historic downswings is that first home buyer demand for finance has traditionally been more resilient through downswings, with subtler declines in demand, and during some periods, increases,” according to CoreLogic’s head of residential research, Eliza Owen.

“Subsequent home buyers and investors have seen a more distinct decline in demand for housing finance initially through downswing.”

Ms. Owen’s research findings came after studying downturns in 2004, 2008-09, 2010-12, 2015-16 and 2017-19.

Since April (when national home values peaked) and August (the most recent month for which the Australian Bureau of Statistics has data) the value of new home loans fell:

– 9.9% for first home buyers (owner-occupiers)

– 10.8% for subsequent home buyers (owner-occupiers)

– 20.1% for investors

I can help you enter the market, whether you’re a first home buyer, an upgrader or an investor.

The federal government’s first home buyer support package for regional Australians has been launched, as of October 1.

Here are the key details of the Regional First Home Buyer Guarantee:

– The scheme is limited to owner-occupiers

– Eligible buyers can enter the market with just a 5% deposit

– You don’t need to pay lender’s mortgage insurance

– You must buy in a regional area

– You must have been living there, or in an adjacent area, for at least 12 months

– Income limits apply ($125k for singles, $200k for couples)

– Price caps apply (which vary from area to area)

The government has allocated 10,000 places per financial year to this scheme.

“Australians living in regional areas have faced some of the largest drops in housing affordability, making it increasingly hard for locals to save a sufficient deposit,” according to Housing Minister Julie Collins.

“The Regional First Home Buyer Guarantee will help aspiring first home buyers living in regional Australia realise home ownership sooner by overcoming the deposit hurdle.”

Over the past six months, the average person’s borrowing capacity has fallen by about 25%.

That’s because the maximum amount a typical person can borrow falls by about 5% every time the Reserve Bank increases the cash rate by 0.50 percentage points, according to the Reserve Bank’s head of domestic markets, Jonathan Kearns.

Since May, the cash rate has jumped by 2.50 percentage points, which is why borrowing capacities have fallen by about 25%.

As a result, it’s become harder to qualify for larger loans; and harder for some borrowers to qualify for any loans at all.

If you want to buy your dream home, it’s a good idea to consult an expert mortgage broker. Here’s why:

– Your borrowing capacity varies from lender to lender

– Brokers work with a large, diverse panel of lenders

– So they can recommend lenders that want to do business with borrowers like you

– They can present your application in a way that appeals to the lender’s individual criteria

Unfortunately, if you try to manage the application process yourself, you might choose an unsuitable lender or present your application incorrectly – and potentially get rejected.

Property buyers are placing increasing importance on energy efficiency, according to research from realestate.com.au.

A survey found 56% of consumers believe energy efficiency is extremely important, compared to 48% for the same survey last year.

The top five reasons people thought energy efficiency was important was so they could:

– Reduce their energy bills 76%

– Do good for the environment 57%

– Reduce their carbon footprint 53%

– Reduce their chance of bill shock 50%

– Live in a better-designed property 44%

And the top five sustainable property features that interested them were:

– Solar power 71%

– Efficient lighting 63%

– Insulation 60%

– Air flow 59%

– The position of the home relative to the sun 58%

Meanwhile, the top five keywords that buyers entered when searching for energy-efficient features on realestate.com.au were:

– Solar power 93.3%

– Energy efficiency 3.6%

– Double-glazed windows 1.2%

– Hydronic heating 0.6%

– Star rating 0.5%

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! 😉

Introduction

Commonwealth legislation requires that for every home, car or personal loan advertised, a comparison rate has to be quoted. But lenders also have to include a warning about the accuracy of the comparison rate.

Comparison rates were originally introduced as part of the Uniform Consumer Credit Code in 1994. The UCCC has since been replaced by the National Credit Protection Act (NCCP) which includes the National Credit Code (NCC) as Schedule 1 to the NCCP. Comparison rates are set out in Part 10 of the NCC. Compliance with the provisions of the NCCP are governed by ASIC (Australian Securities and Investment Commission).

As ASIC says on its own website, ‘The comparison rate includes: the interest rate and most fees and charges’. It goes on to say, ‘A comparison rate does not include all fees and charges. For example, the comparison rate does not include: government fees and charges (such as stamp duty and mortgage registration fees) and charges that are only charged in certain circumstances (such as early repayment fees and redraw fees), for example if you pay off the loan early.’ And in wrapping this explanation up, ASIC says, ‘The comparison rate only allows comparison based on cost, and will not include other factors that may make a loan more attractive, such as access to fee free accounts or flexible repayments arrangements.’

CBA also goes on to say a comparison rate does not include ‘cost savings such as fee waivers or the availability of interest offset arrangements which can influence the cost of a loan.’ And Finder.com.au adds in late payment fees, deferred establishment fees and conveyancing fees.

After reading this, it’s fair to ask:, ‘Is a comparison rate useful?’ That depends on what you want to achieve and how relevant the data is on which the comparison rate is based.

Features of the Required Comparison Rate

– The Government’s comparison rate is based upon a loan amount of $150,000 and a loan term of 25 years.

– The comparison rate takes into account:

> The interest rate includes any ‘revert to’ rate which applies to the loan after a set period.

> Fees and charges including upfront costs like establishment fees and valuation fees, and ongoing costs such as monthly or annual fees.

> Repayment frequency.

– You can calculate your own comparison rate but to do so, you will need the following information and preferably, a comparison rate calculator:

> Loan amount

> Loan term

> Repayment frequency

> Interest rate

> Monthly account fee (if any)

> Annual fee (if any)

> Establishment fee (if any)

> Valuation fee (if any)

> Mortgage documentation fee (if any)

> Settlement fee

Pros of the comparison rate

– It ensures lenders cannot completely hide all ‘hidden fees and charges’. In this sense, it is a good guide for borrowers.

– Because comparison rates take into account fees and charges as set out above, the rate of interest tends to be higher than the quoted interest rate which excludes fees and charges.

Cons of the comparison rate

– It does not reflect the actual comparison rate for your loan – unless of course your loan is for $150K over 25 years.

– It does not reflect the impact on the quoted interest rate provided by most lenders for most home loans as most home loans are well above $150K (the average Australia-wide was approximately $450K in December 2019.)

– As most fees and charges are fixed in nature, at the loan value of $150K, the impact on the interest rate would be significantly higher compared to, say, a $750K loan. On a straight comparative basis, the impact on the interest rate for the $750K loan would be one fifth of that calculated on the $150K comparative rate loan.

– If your home loan is not for 25 years, the comparison may become less relevant.

Our take

– Comparison rates are useful indicators but should not be used in isolation for all the reasons identified above.

– Do your own research before you proceed to ensure you understand all the costs a lender will charge you.

– Use a broker to do the hard work for you! Brokers have software which can show you the total cost of a loan over the life of the loan and also over shorter periods (eg the first five years of a loan). This can be very useful as you might be contemplating refinancing or moving well before your loan term expires.

[1] ASIC

[2] Commonwealth Bank of Australia (CBA)

[3] CBA – ibid

[4] CBA – ibid

[5] Finder.com.au

[6] Canstar quoting from data prepared by the Australian Bureau of Statistics (ABS) which was analysed by Commsec

Introduction

When you apply for a loan, you will often have to choose between Principal & Interest (Principal & Interest) payments and Interest Only repayments. As the name suggests, with Principal & Interest payments, you are paying your lender the interest cost for the month plus a portion of the principal you have borrowed. Over time, your loan balance will reduce. With Interest Only payments, you are only paying your lender the interest cost for the month so your loan balance will not reduce.

The type of payment you choose (between Principal & Interest and Interest Only) is likely to impact the interest rate you are charged. In the data below, sourced from the RBA’s most recent set of statistical tables (current as at October 2020), you can see that there is a 0.7% pa premium to have an Interest Only facility compared to a Principal & Interest facility.

Further, depending upon a lender’s perception of the current market risk as well as your personal risk, they might not be willing to offer you an Interest Only option, preferring you to take up a Principal & Interest facility.

Lenders typically favour Principal & Interest as it reduces your loan and therefore their exposure over time. It also fits in nicely with their expected end goal: that your loan is repaid. Whilst you can repay your loan by selling your property or refinancing with another lender, repayment of the loan in a steady repayment stream over the life of the loan is often seen as preferable by lenders.

Principal and Interest Payments

Features

– The monthly repayment is based on the current interest rate, the loan term and the balance required at the end of the loan term. For a Variable Rate loan over a typical 25 loan term, the balance at the end of the loan term is normally set at nil. If, however, you had an Interest Only facility for the first three years of your loan, the Principal & Interest monthly payment amount for the remainder of your 25-year loan would be higher than if you opted for a Principal & Interest facility from Day 1 as there will be three years fewer in which to repay the principal amount.

– As can be seen below, the amount of the Principal & Interest repayment devoted to repayment of the principal increases over time as the interest is calculated on the principal balance remaining at the end of each month.

Note: This analysis excludes fees and charges.

– The higher the interest rate at the time you take out the loan, the higher the overall repayment and the greater the proportion of the repayment which will be devoted to paying the interest (and proportionally less will be devoted to the repayment of the principal).

Note: This analysis excludes fees and charges.

Pros of Principal & Interest Payments

– As noted from the RBA data, you may receive a lower interest rate so more of your repayment can be allocated to a reduction in principal. For example, over a year, for a $500,000 loan, if the Principal & Interest rate is 0.5% pa interest rate lower than the Interest Only interest rate, then this difference can be used to repay a further $2,500 in principal.

– Because Principal & Interest payments are considered more prudent by lenders, a loan with a Principal & Interest facility is often easier to obtain.

– Every time you make a reduction in the principal owing, there is a compound effect on the amount of future interest you have to pay as with Principal & Interest, the interest you pay is based on the balance of the loan outstanding at the beginning of the month. (This is why making additional or slightly higher payments each month is recommended as the benefit of the principal reduction has a compounding effect for the balance of the loan period).

– There is an inherent reduction in stress levels when you are reducing the principal owing – sometimes the satisfaction of seeing the balance reducing can give you a nice internal smile at the end of a day!

Cons of Principal & Interest Payments

– Your cash payment is higher each month as you are paying your interest plus a portion of the principal you borrowed.

– For Investors, part of your cash flow is tied up on non-tax deductible repayments (i.e. the repayment of the principal). Please seek independent tax advice before considering this issue.

Interest Only Payments

Features

– Each month, you only pay the lender the interest you owe.

– At the end of the month, the same amount is owing to the lender as was owing at the start of the month – and this does not change during the term of the Interest Only loan.

Pros of Interest Only Payments

– You do not need as much cash flow available each month to make the monthly payments.

– There may be tax deductible benefits for Investors. For this, please seek independent tax advice.

Cons of Interest Only Payments

– As noted in the RBA data, your interest rate may be higher than if you had selected a Principal & Interest product.

– It can be harder to obtain than a Principal & Interest product as many lenders have a natural bias in favour of Principal & Interest products.

– Your loan balance does not reduce.

– In times of tough economic conditions, if housing prices suffer a fall in value, you may find it harder to obtain refinance as your loan to value ratio (LVR) may have increased more than if you were paying Principal & Interest payments.

– When it comes time to revert to a Principal & Interest repayment, your payments will be higher than you would have paid at the beginning of your loan. Based on the above examples, at an interest rate of 3.0% pa, on a $750,000 loan over 25 years, the Principal & Interest payment is $3,556 per month. If you had a 5-year Interest Only product and then reverted to Principal & Interest at the end of the 5-year period, your Principal & Interest payment for the remaining 20 years would be $4,159 – an increase of $603 per month.

– An Interest Only facility can be more stressful for some borrowers who like to see some gains for all the money they pay out in interest as the amount they owe their lender does not decrease.

Our take

– This is the same as our view for variable and fixed rates.

– While lower repayments for an Interest Only facility can seem intuitively better as you reduce the impact on your monthly cashflow, you are also delaying the repayment of the principal and so you are paying more in interest. For some borrowers, this trade-off is worth it as it allows them to enter the housing market and get started; or, it allows them to maximise the benefit of potential tax advantages if they are an Investor (again, seek independent tax advice on this issue).

– As with our comments on variable and fixed rates, it is important to note that everyone is different and everyone’s appetite for risk is different so there is no ‘one answer is correct’ advice. And, when you are dealing with joint applicants, you need to take into account the risk profile of each applicant. Just because one applicant might be comfortable with a higher level of perceived risk, the other applicant might be a little bit more conservative; so you need to balance the attitudes of both applicants.

– As part of our due diligence when we assist you in identifying a suitable loan, we undertake a Needs Analysis for each person applying. We ask you what your level of concern is about rising interest rates. We also ask you if you would like to consider a fixed rate loan, either in part or in full, and we go through with you all the features, pros and cons.

– We always ask ’Who is on your team?’. What we want to know is, have you got a great team of advisors to assist you in making important decisions? Because when you are dealing with loans of hundreds of thousands of dollars, you need knowledgeable, ethical professionals advising you of your risks.

Before we start….

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

Now, back to the Article! 😉

Interest – what is it?

Interest rates reflect the price of money. The interest rate ‘price’ factors in a large number of variables including the lenders’ competitive environment and their need to be profitable.

Unlike most transactions with a supplier, your financial umbilical cord with a lender lasts a very long time – often up to 30 years. This element of time differentiates a lending product from most other consumer products. When you borrow money from a lender, there is an expectation by the lender that you will pay them back in full on the terms you have agreed and that you will also pay them ‘the price’ – or interest charges – for borrowing their money over the term of the loan.

Whilst it is arguable the ‘time risk’ reduces as years go by as property prices tend to increase and loan balances tend to decrease, there is an inherent risk, particularly in the early years of a loan. Lenders protect themselves from the potential risk of handing over large quantities of money by adding a margin on the interest rate they charge. Some won’t lend to particular types of borrowers because of the perceived risk.

What we know about interest

1. The longer the term of your loan, the more you will pay in interest. Interest rates matter, but so does the term of your loan. That is why when you consolidate your debts from higher interest credit cards into your lower interest home loan, it is important to pay off the debt you consolidated into your home loan as quickly as possible. If you pay it off over the full term of your home loan, you may well end up paying more in interest than if you paid it off over a much shorter period at higher interest rates.

For example, a credit card/personal loan debt of $100K incurring interest charges of 18% pa, will incur an interest expense of $18K over 12 months. The same debt, paid off over 25 years as part of your home loan at 3.0% pa, would cost $42K in interest . Even allowing for the ‘time cost of money’ (i.e. a dollar today is worth more than a dollar in the future), this is a large difference.

It is also why paying additional amounts or slightly higher amounts each month than you are contractually obligated to pay is recommended. You will reduce your principal more quickly and thus pay less total interest.

For example, a $750K loan paid off over 25 years on a P&I basis at 3.0% pa interest, will incur $317K in interest charges. If the loan term is 20 years, with the same interest rate, the interest charges will be $228K – $89K less.

2. Interest is the main expense charged by a lender. But it is not the only one. Whilst other costs such as monthly fees and charges, annual establishment fees etc might appear minor, they still have to be paid.

3. Interest rates change over time. Even fixed rates are only for a limited time (generally up to a maximum of five years). When you enter into a loan agreement with a lender, make sure you can afford the loan and allow for any increases in the interest rate. Our interest rates are at historical lows but less than 10 years ago rates for home loans were in the high single digits. And, for those old enough to remember ‘the recession we had to have’ in the early 1990s, you will recall rates of well over 15% pa with the highest rates an eye-watering 20%+!.

Hi,

We’ve made it to spring! As the season changes, so does the property and lending landscape. Here are four stories making headlines right now:

– Rentals being snapped up

– Houses v units

– Prices surge for new land

– Savings rates above 3% p.a.

Read more below.

But first….

The results of our recent survey

What is the most important quality of a

mortgage broker?

Our thoughts on this survey

Objectivity – 48%

Objectivity is so important. And, our policy of always being totally transparent allows us to demonstrate our objectivity.

To achieve transparency, we use a filtering process – which we share with you every step of the way:

1. We identify who will lend to you in your circumstances (these days, everyone’s circumstances are different).

2. We then clarify a lender’s willingness and capacity to lend to you with their humans – just to make sure.

3. Only then do we check the rates for those who can and will lend to you.

4. From this rate review, we will give you the short list of these ‘willing and able’ lenders – to get your input via a discussion with us.

5. And only then do we finalise our recommendation.

Communication – 31%

Whilst transparency is key, so is communication.

With your loan, we communicate with you in a number of ways.

1. To save you time and to avoid errors and duplications, we use technology to gather information about you as well as receiving your documents which lenders will need to see.

2. We will regularly ring you, SMS you and email you (and sometimes a combo as we all know how emails, voice mails and even SMSs can be missed or overlooked when we are busy!).

We also follow a 3-day follow-up process – which you can of course vary at any stage (faster or slower). Every 3 days we will reach out to you to make sure you don’t need any help or time to get the next bit done.

Simple to use processes – 14%

Our processes have been designed to be easy to use. However, where you need us to vary our processes to suit you, we will do so! After all, we are here to serve you!

Speed – 7%

Speed is important but speed without Objectivity, Communication and Ease of use is not worth a lot to you. And, dare we say, we know of some brokers who are ‘fast to lodge’ but then have to backtrack when the lender they have chosen says ‘no’.

We see our role as avoiding (or at least minimising) the risk of you receiving a lender No.

And, a quick sample of our free services for you!

Rate Checker

Every year (as a minimum), for our clients with a Variable Rate loan, we will do a rate check for you (if you have a settled loan with us, you will get an email to get this started). We will do the following:

1. Check your rate with your current lender’s best rate for the same product you have.

2. Find a comparative rate for a similar lender with a similar product.

3. Write to your lender or use their online broker portal to request a rate review.

4. And hopefully, we can come back to you with some good news regarding a sharper rate! 😉

It’s a simple process and all you need to do is send us your most recent bank statement and any subsequent rate change advice from your lender.

Property Reports

Via our Free Property Report link www.bir.net.au, investors and homeowners can:

– Order a free property report for a particular property.

– Order a suburb report or a comparison of up to 5 suburbs.

– Access detailed regional reports (over 30 including the capital cities) which include a Property Clock (is it time to buy, hold or sell?).

In September, we updated reports for: Canberra [ACT] < > Launceston [TAS} < > Melbourne [VIC] < > Mackay [QLD] < > Wollongong [NSW] < > Darwin [NT].

Property investors are enjoying strong demand for their rental properties right now, with that demand expected to further increase.

The number of homes available to rent has been trending lower since the pandemic began, with listings in July 2022 31% lower than March 2020, according to realestate.com.au.

As a result, tenants are being forced to compete harder, which is leading to rising rents and lower days on market.

“Australia-wide properties are renting faster than ever, and the number of days it took a rental property to be leased after it was listed on realestate.com.au in July hit a historic low 19 days,” according to the portal.

REA Group senior economist Eleanor Creagh said a “surge” in international student arrivals would add further pressure to tight capital-city rental markets.

“In fact, overseas searches to rent have also skyrocketed in recent months, in the last six months compared to the six months prior overseas rental search volumes are up 59% with the borders having reopened,” she said.

Houses have significantly outperformed units over the past three decades, according to CoreLogic.

During the 30 years to July 2022, median prices increased 453% for houses compared to 307%.

That outperformance occurred in every capital city market:

– Sydney 507% v 340% (houses v units)

– Melbourne 519% v 354%

– Brisbane 390% v 170%

– Perth 325% v 194%

– Adelaide 370% v 289%

– Hobart 423% v 296%

– ACT 431% v 261%

– Darwin 98% v 96%

CoreLogic said the faster rate of growth for house prices was “likely a reflection of the scarcity value of land driving a faster rate of appreciation”.

During the same 30-year period, capital cities (409%) recorded significantly more growth than regional markets (294%).

“The higher growth rate across the capital cities probably reflects a combination of higher demand and greater scarcity of supply compared with regional markets, along with more diversified economic conditions within the capital cities,” according to CoreLogic.

New research by the Housing Industry Association and CoreLogic has found that the supply of new residential land is failing to keep up with demand.

Median lot prices in the March quarter were 19.7% higher than the year before, based on an analysis of 51 housing markets across Australia.

HIA senior economist Nick Ward said this was the strongest annual growth rate since 2004.

“An unusually sharp rise in the price of residential land indicates the supply of land is not keeping up with new demand that has emerged during the pandemic,” he said.

“Constrained supply of land will limit housing activity in greenfield areas from mid-2023 onwards.”

CoreLogic economist Kaytlin Ezzy said the increase in land prices was connected to a reduction in the number of lots sold.

“While increasing interest rates, rising construction costs and increased uncertainty, particularly across the building industry, has likely smothered some land demand, the surge in land prices suggests that those that want to build are finding it difficult to secure lots,” she said.

“With land often taking more than a decade to move through the development pipeline, it’s unlikely we’ll see any material change in land supply for some time.”

Rising interest rates are bad news if you’ve got a home loan. But they’re a blessing if you use savings accounts.

Six banks are now offering ongoing savings rates above 3% p.a., according to a RateCity analysis of the market.

Research director Sally Tindall said if your savings rate is below the cash rate [currently 2.35% p.a.], you’re being taken for a ride.

“There is competition in the market, you just have to get up and look for it. In this environment, a good rate is around 3% p.a., potentially even more,” she said.

How to get an even higher interest rate

If you have a home loan, there’s a way you can earn an even higher interest rate – by depositing money in your offset account.

The money in your offset account reduces the interest-bearing portion of your home loan by the same amount. For example, if you have $500,000 outstanding on your loan and $40,000 in your offset account, you’ll be charged interest on only $460,000 (i.e. $500k minus $40k).

As a result, the return you get on offset deposits is equivalent to your mortgage rate, which will almost certainly be higher than the rate paid by a conventional savings account.