properties

Hi,

Christmas is just around the corner, so if you haven’t done your shopping it might be wise to start now. In the meantime, here are four stories I think you’ll like:

– Borrowers pass their ‘rate buffer’

– Govt tackles housing affordability

– Australian property earns praise

– ABS releases good economic news

Read more below.

And for the business owners amongst you,

we have snuck in the results of our most recent survey (towards the end 😉)

This month’s survey question:

If you were borrowing money for your business, would you…..

use your transaction bank

a specialist lender

a broker

(Scroll to the end to see the results – and our commentary!)

Plus…..

Updated Regional Property Reports

Here are the last 3 months’ updates of these detailed regional reports (including the property clock: Buy / Hold / Sell).

There are 30+ regions analysed and they are updated regularly.

Request FREE Report

The mortgage market has entered interesting territory, thanks to the Reserve Bank’s decision to hike the cash rate by another 0.25 percentage points in November.

That increased the rate rises that have occurred since May from a cumulative 2.50 percentage points to 2.75 percentage points.

The reason that’s significant is because when lenders assess home loan applications, they have to make sure the borrower could repay the loan if interest rates were to rise.

Until October 2021, lenders had to add a buffer of at least 2.50 percentage points – so the November rate rise pushed many borrowers beyond their buffer.

Since October 2021, that buffer has increased to at least 3.00 percentage points

But despite the series of rate rises, CoreLogic isn’t seeing any signs of panicked selling or forced sales in its listings data.

“In fact, the flow of new listings remains substantially below what they would usually be for this time of the year,” executive research director Tim Lawless said.

Reach out if you’d like to discuss refinancing. I can explain the pros and cons, and potentially help you refinance to a comparable loan with a lower interest rate.

One of the highest-profile elements of the Albanese government’s first budget was a target to “build one million new well-located homes over five years from 2024”.

Only 2% of these one million new builds will be funded by the federal, state and territory governments; the other 98% will come from the market, with governments “playing a key role in enabling and kick-starting investment”.

CoreLogic’s head of residential research, Eliza Owen, noted that some have said the target lacks ambition, given that 974,732 homes were constructed in the five years to June 2022, and an average of 1,010,723 have been completed on a five-year basis since 2017.

One of the highest-profile elements of the Albanese government’s first budget was a target to “build one million new well-located homes over five years from 2024”.

“However, the past five years have been conducive to high levels of construction (notwithstanding immense bottlenecks for the construction industry in the past two years) and there’s no guarantee activity levels will remain at the same level for the next five years,” she said.

“As interest rates rise, home prices fall and supply-side constraints persist, the delivery of a million homes is not guaranteed and may be more ambitious than what was achieved in the past five years.”

Australia’s population is set to grow strongly over the next decade, which is likely to lead to higher demand for rental accommodation.

Global real estate giant CBRE said population growth is one of the main reasons why “Australian real estate represents a compelling investment”.

CBRE said Australia’s population was expected to grow by 14% between 2021-2030, which would be the highest rate among developed economies.

That strong population growth is partly due to migration, with the federal government recently increasing its annual permanent migration intake from 160,000 people to a record 195,000.

More competition for rental accommodation would put upward pressure on rents, in an environment that’s already strongly favouring landlords. As CBRE noted, there is “less than 1% vacancy in select markets”, which is leading to “robust rent growth”.

CBRE forecasts that from 2022-26, rents will increase by an average of at least 5% per annum in Sydney, Melbourne, Brisbane, Perth and Adelaide.

Australia’s economy has posted its best growth numbers in a decade, according to the most recent data from the Australian Bureau of Statistics.

The economy grew 3.6% in the 2021-22 financial year – the best result since it grew 3.9% in 2011-12.

That strong economic growth has helped drive down the unemployment rate to below 4%, which is very low. As a result, the vast majority of workers have jobs, which is the key to being financially secure.

The ABS also reported that households saved 13% of their income in the 2021-22 financial year, which is high by historical standards.

That means many people put money aside for a rainy day – a smart move given the subsequent increase in prices and interest rates.

The Reserve Bank said earlier this month that it “expects to increase interest rates further over the period ahead”, so if you have a home loan, it would be wise to budget accordingly.

Two possible ways to save money are to ask your bank for a rate cut (you’d be surprised how often they agree to this) or to refinance to a comparable loan with a lower interest rate.

This month’s survey results are in!

If you were borrowing money for your business, would you…..

The interesting thing here is that whilst 70% of borrowers consider using a broker for their residential property loan, business owners still prefer to use their bank.

This is interesting for a few reasons:

– Transaction banks are not always the best solution for business finance. That is why there has been a proliferation in the growth of non-bank lender finance for businesses.

– Using property security for business purposes may work when there is an asset being acquired and the asset is the property which is being used as security.

– However, for other business purposes e.g. working capital finance, cashflow finance, ‘urgent cash’ finance and debt consolidation finance, other types of security might work better – particularly in terms of turnaround time and flexibility of the amount able to be borrowed.

– There are now non-bank lenders offering not just invoice finance (commonly referred to as debtor finance or factoring) but also trade finance where the supplier’s invoices are financed so the supplier remains happy as they are being paid on time. This can be particularly relevant for purchases from overseas suppliers who don’t like to ship their stock if they haven’t guaranteed payment is going to be received.

– Sometimes (e.g. for a property acquisition), the business owner is using the business entity to hold the asset. However, the assets can be held in other entities which might be more appropriate eg a super fund, or a trust. Typically, we see good tax accountants assist business owners make this assessment.

We can help you work out the best way to fund the cash your business needs in order to grow. And, as a broker, we can introduce you to the lender which will best suit the needs of your business.

At its simplest level, there are 2 types of interest rate products available for the housing loan market in Australia – Variable Interest Rate products Vs Fixed Interest Rate products.

But this is just the start! Many lenders, for example, offer Fixed Rate products with different terms ranging from 1 year all the way through to 5 years.

And, there are 2 ways you can pay back the amount you borrow – gradually over time (referred to as Principal and Interest repayments) or in a lump sum (referred to as Interest Only repayments). Within the home loan lending environment, Interest Only products don’t tend to get repaid but rather, they revert to a Principal & Interest product after the Interest Only term expires. Interest Only terms are typically somewhere between 1 to 5 years while the remaining Principal & Interest term might be a further 25+ years on a 30-year term loan.

And if you take out a 30 year loan with a 5 year Interest Only option, your Principal repayments for the remaining 25 years and which kick in after the expiry of your 5 year interest only period will be proportionately higher than if you started off repaying your Principal at the commencement of your 30 year loan.

Plus, there are some lenders who offer a Variable Rate Line of Credit and there are some who allow you to prepay your interest a year in advance (which can be handy when you have a higher taxable income in a year which you can offset with the prepayment of interest when the interest is tax deductible).

All home loan products essentially take into account a mix of these 4 options. Each option combination has a different risk profile for the lender and is likely to have a different interest rate (or price) being charged to the borrower. There are no ‘set rules’ or even ‘rule of thumbs’ you can use to assess the perceived risk as risk profiles can change over time and lenders are continually updating their risk profiles. Below are some current risk profiles as identified in recent RBA data (as at October 2020).

There are a number of additional reasons the interest rate charged by a lender might vary in addition to the mix of products selected by the borrower – plus some of these factors might even result in particular lenders saying ‘no’ to providing finance:

– The borrower’s profile (including income, expenses, assets, liabilities, credit history, profession).

– The purpose for borrowing (typically either home (owner occupier (OO) Vs investment (IN); or established Vs off the plan Vs land & construction).

– The borrower’s identity (a natural person (like you and me!), company, trust, partnership or super fund).

– The amount being required to be borrowed (the total amount as well as the amount compared to the borrower’s income).

– The loan to value ratio (LVR) and whether the LVR is above the lender’s LVR limit resulting in the lender requiring the borrower to pay lenders mortgage insurance (LMI).

And finally, here are some other things to be aware of:

– Additional features provided by a lender may result in a higher interest rate as compensation for the lender for providing these features. For example, a loan without an interest offset account and redraw facility may have a cheaper interest rate. Additional features like an offset account can be very useful as they can reduce your total interest cost – and they may even be useful to have ‘in reserve’ in case you do need them – but as with all things, make sure you have thought this through otherwise you might be paying for something you never were likely to use.

– Interest rates vary between lenders as well as between a lender’s products. So, it is wise to do your homework and review the market. Nevertheless, not all lenders are going to be on ‘Page 1 of Google’. That is why it is prudent to consider using a great broker. Great brokers know far more lenders and lending options than could ever fit on Google’s page 1.

– No matter how attractive a lender’s interest rates appear in the marketing and advertising blurb, not all lenders’ products are available for all borrowers. As noted above, some lenders have quite tight restrictions on the criteria they use when considering whether to offer an applicant funding – and so you might not qualify for their ‘low rate’ product. Unwary borrowers can waste a lot of time preparing loan applications for loans they were never going to get or at a rate they were not going to be offered because they were not made aware of all the lender’s restrictions. Again, this is why applicants should consider using a great broker – because great brokers know more about each lender’s products than consumers and they know who and what to ask if there is a potential issue with a particular assessment criteria used by a particular lender.

– Beware ‘limited time’ offers with low interest rates – or honeymoon rates as they are often called. These rates expire and at the end of that time, your loan will revert to the lender’s then current interest rate.

– Fees and charges can vary for each loan. When considering fees and charges, Choice 1 suggests you need to take these into account under the heading ‘Watch the fees.’ Choice lists the following fees for consideration (I have regrouped them so it is easier to read:

– Upfront charges: LMI

– Ongoing fees: monthly or annual fees.

– Discharge fees & Break costs

I agree. However, be careful of not over-estimating the impact of fees and charges. For example, on a $500K loan, an interest rate differential of 0.1% pa equates to $500 pa. At present, most annual fees charged by lenders are less than $500 pa – so an interest differential saving of 0.1% pa when paying an annual fee of (say), $400 pa would mean you are ‘ahead’ by $100 pa. And even then, when we are looking at the overall cost of interest, this is not a great deal and in many cases, would not be considered material to your decision.

[1] Choice: https://www.choice.com.au/money/credit-cards-and-loans/home-loans/buying-guides/how-to-choose-the-right-home-loan

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%

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.