Re-Financing To Consolidate Debts

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Some homeowners opt to re-finance to consolidate their existing debts. With this type of option, the homeowner can consolidate higher interest debts such as credit card debts under a lower interest home loan. The interest rates associated with home loans are traditionally lower than the rates associated with credit cards by a considerable amount. Deciding whether or not to re-finance for the purpose of debt consolidation can be a rather tricky issue. There are a number of complex factors which enter into the equation including the amount of existing debt, the difference in interest rates as well as the difference in loan terms and the current financial situation of the homeowner.

What is Debt Consolidation?

The term debt consolidation can be somewhat confusing because the term itself is somewhat deceptive. When a homeowner re-finances his home for the purpose of debt consolidation, he is not actually consolidating the debt in the true sense of the word. By definition to consolidate means to unite or to combine into one system. However, this is not what actually happens when debts are consolidated. The existing debts are actually repaid by the debt consolidation loan. Although the total amount of debt remains constant the individual debts are repaid by the new loan.

Prior to the debt consolidation the homeowner may have been repaying a monthly debt to one or more credit card companies, an auto lender, a student loan lender or any number of other lenders but now the homeowner is repaying one debt to the mortgage lender who provided the debt consolidation loan. This new loan will be subject to the applicable loan terms including interest rates and repayment period. Any terms associated with the individual loans are no longer valid as each of these loans has been repaid in full.

Are You Paying More in the Long Run?

When considering debt consolidation it is important to determine whether lower monthly payments or an overall increase in savings is being sought. This is an important consideration because while debt consolidation can lead to lower monthly payments when a lower interest mortgage is obtained to repay higher interest debts there is not always an overall cost savings. This is because interest rate alone does not determine the amount which will be paid in interest. The amount of debt and the loan term, or length of the loan, figure prominently into the equation as well.

As an example consider a debt with a relatively short loan term of five years and an interest only slightly higher than the rate associated with the debt consolidation loan. In this case, if the term of the debt consolidation loan, is 30 years the repayment of the original loan would be stretched out over the course of 30 years at an interest rate which is only slightly lower than the original rate. In this case it is clear the homeowner might end up paying more in the long run. However, the monthly payments will probably be drastically reduced. This type of decision forces the homeowner to decide whether an overall savings or lower monthly payments is more important.

Does Re-Financing Improve Your Financial Situation?

Homeowners who are considering re-financing for the purpose of debt consolidation should carefully consider whether or not their financial situation will be improved by re-financing. This is important because some homeowners may opt to re-finance because it increases their monthly cash flow even if it does not result in an overall cost savings. There are many mortgage calculators available on the Internet which can be used for purposes such as determining whether or not monthly cash flow will increase. Using these calculators and consulting with industry experts will help the homeowner to make a well informed decision.

Tips To Improve Your Credit Reference

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Having a good credit reference can mean the difference of thousands of dollars of saved interest expense compared to others with a bad credit. For example, if you have a good credit record that can make huge difference in the interest rate you will pay for a home purchase.

You can check your credit score for free using the national credit reporting bodies (CRBs) listed on the government website: Equifax Australia (formerly known as Veda)

To review the major areas that determine your credit score.

1. Payment history on credit and retail store cards, loans and mortgages.
2. Amount that you owe. Credit agencies look at how many accounts have balances and the proportion of that balance to the credit line.
3. How long is your credit history? The longer the better.
4. New credit accounts. Applying for a bunch of credit cards all at once can hurt your score.
5. Different credit types, such as mortgages, retail loans, credit cards and instalment loans.
6. How many late payments do you have?

Here are the tips  to improve your credit scores:

1. Pay your bills on time. Your payment history is a major factor in determining your credit score. If you pay your bills late, or had an account referred to collections, your credit score will take a major hit.

2. Sign up for online banking and make sure your regular recurring bills are paid automatically. This way you will not forget a payment that will wind up reducing your credit score.

3. Increase your credit limit. Another large factor is the amount of your debt in relation to your credit limit. If you have a card with a $10,000 credit limit and your balance is $9,000, this will not help to improve your score. To make the debt/credit limit ratio look better, you can try to call your credit card company and request an increase in your credit limit. Don’t use the extra credit though! That defeats the whole purpose and puts you further in debt!

4. Don’t apply for many cards at once. This will not improve your credit score because this is a characteristic of high credit risk groups.

5. Don’t ever close an open credit card account. If you pay off a credit card down to a zero balance, leave it open. Remember that a positive factor for your credit score is how much available credit you have at your disposal when compared to your credit balance, in addition to the length of your credit history.

6. Apply for loans within a two-week period. Every time you request a loan and the lender pulls your credit report, it can hurt your score.  If you keep the loan process within a two-week period, all of the credit report lookups are bundled together as one single request!

7. Check for errors on your credit report. Examine your credit report for errors and contact the credit reporting agencies to fix any errors on your credit report.

If you take action and follow these tips, you will be able to give your credit score and immediate boost and gradually increase it even more as time passes. The major keys are to pay your bills on time and reduce your debt amounts when compared to your credit limit. This has a twofold benefit of improving your credit score and reducing your debt.

If you require professional advice, please contact Champion Broker at Kenwick for a consultation.

 

How your shopping habits could hurt your chances of securing a mortgage

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Taking Control Of Your Finance

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Consumers will likely face more expensive loans and more time wasted at banks if the royal commission’s proposed mortgage broker rules go ahead, a top lending expert has warned.

In a landmark report, commissioner Kenneth Hayne found shocking evidence of greed and misconduct in the Australian financial sector at the expense of consumers and businesses.

The former High Court Justice called for widespread change in how mortgage brokers operate, arguing brokers should receive an upfront free from customers, rather than earning upfront commissions from banks, and ‘money for nothing’ trail commissions that they keep receiving for the duration of a mortgage.

On face value, the proposed changes sound like welcome news for consumers, but CoreData head of lending Simon Elwig has predicted unintended consequences that could leave consumers poorer and make the Big Four major banks winners. Mr Elwig said the proposed rules would hit the mortgage broker industry hard. He argued the changes would lead to fewer loans being offered by smaller lenders, leading to a less competitive home loan industry and more expensive loans for customers.  The biggest blow to mortgage brokers would be getting rid of trail commissions, he said. Trail commissions are ongoing payments banks make to brokers over the life of a loan.

In his report, Mr Hayne argued the commissions were like ‘money for nothing’ for brokers.

‘Why should a broker, whose work is complete when the loan is arranged, continue to benefit from the loan for years to come?’ he wrote.

‘It cannot be that they are deferred payment of fees earned earlier when the amount paid as trail depends upon the length of the life of the loan.

‘And it cannot be that they are a fee for providing continuing services given there is no obligation for the broker to do so and no evidence of it being done.’

Mr Elwig told Daily Mail Australia the rules could drive many mortgage brokers out of the industry.

The fees make up about 40 to 45 per cent of their income, he claimed, and brokers settle 59 per cent of mortgages in Australia.

‘That would mean that you’d get a reduction in mortgage brokers, because if your income drops that much, people say, “alright, I’m getting out”,’ Mr Elwig said.

Brokers will say ‘alright, I’m getting out’ … Major banks won’t need to discount as much

‘What that means is you would get less volume to the non-major (lenders).’

Mr Elwig said over the past five years, mortgage brokers have increasingly channeled customers to smaller lenders, creating a more competitive market.

The amount of loans brokered with the major banks by major lender AFG has dropped from 73.6 per cent in 2013 to 57.8 per cent last year, he said.

But the changes would bring the drift to smaller lenders to an end, he argued: ‘Now that will stop, that will reverse.

‘Reduced competition would affect the discounted rates currently being offered by the Big Four banks, meaning more expensive loans for consumers,’ he said.

‘The majors, at the moment (their) rates are very competitive, meaning big discounting is going on,’ Mr Elwig said.

‘The impact will be that if the mortgage brokers reduce in the market, the major banks will not need to discount as much to get their loans.

‘If they’re not discounted loans, at the end of the day the consumer is paying a higher rate than they might otherwise have done.’

And Mr Elwig said there’s another big consequence for consumers.

If there are fewer brokers, customers will likely have to spend more time shopping around for a loan.

‘What it will also mean is if there’s less brokers, a customer would have to go to more than one place.

‘They’d have to go to different banks so therefore the way things are going it’s more difficult to get a loan.

‘So a consumer, rather than go to a broker, might have to go to Westpac and get declined and then go somewhere else and have to do more work themselves.’

Mr Elwig said he did not think customers would come under greater scrutiny for their spending prior to getting a loan, because that is already happening.

There have been widespread reports of borrowers having to divulge their smallest household costs, like Netflix subscriptions and gym memberships, while applying for loans.

‘That’s already happening, that impact has already happened. It’s going to be more of the same,’ he said.

Ratings agency Moody’s Investor Service backed Mr Elwig’s argument in a statement on Monday, warning the new borrower-pays system would affect competition.

‘We expect this change will consolidate the market position and pricing power of the four major banks,’ Moody’s said.

And the Federal government has sounded a note of caution about the mortgage broker rules.

Treasurer Josh Frydenberg said moving to a customer-pays model would benefit the big banks.

‘In effect you would be putting the mortgage brokers out of business and giving that business to the big banks.

‘We don’t want to give the big banks a free kick.’

The government has not publicly supported the recommendation to phase out upfront commissions. It has, however, said it will ‘take action’ on all 76 of the commission’s recommendations.

A blow to farmers as well?

The royal commission has called for measures to make it easier for farmers to handle debts owed to banks while land is affected by drought or natural disaster.

The commission called on the banks to amend their code so they don’t charge default interest on agricultural land loans during times of drought or natural disasters.

The commission recommended banks only call in receivers or administrators for a distressed loan as a last resort. And it advocated for a national scheme of farm debt mediation.

But Mr Elwig warned of possible unintended consequences from the new rules in that banks could become more cautious about doing business with farmers.

‘They (the commission) is trying to protect the farmers. It might have an unintended consequence.

‘Banks are also, when they try and do commercial deals, they’re always risk averse.

‘So it might have the opposite effect’.

WHAT ARE TRAIL COMMISSIONS?

Trail commissions are ongoing payments banks make to brokers over the life of a loan. Brokers received a bigger commission for bigger loans.

In his report Royal Commissioner Kenneth Hayne slammed the commissions as, ‘to put it bluntly … money for nothing’.

Mortgage brokers are ‘extremely disappointed’ trail commissions have been singled out by the commission.

Peter White, CEO of the Finance Brokers Association, was quoted telling the Australian Financial Review that they are really a ‘deferred upfront fee.

‘The impact will be upfront commissions and interest rates going up,’ Mr White said.

In his report, Mr Hayne wrote of the commissions: ‘Why should a broker, whose work is complete when the loan is arranged, continue to benefit from the loan for years to come?’

In this turbulent economy climate, to find money to invest for your future, you need to make sure that your outgoing expenses are less than the income that you are receiving. You need to develop an excess that you can have free to invest.

Now before you start to think….”well I don’t have any excess left…if I was earning more money….then I would have some free”. Let me dispel this myth…and tell you that it is a known and excepted fact that the amount of money that people earn has little if any bearing on whether or not they have an excess left to invest. The only way to create an excess it to spend less than you earn, instead of spending all that you earn.

Even doctors and lawyers, who earn well over $100,000.00 per year, often end up at retirement with little more Net Worth than factory or office workers.

Net Worth is calculated by deducting the value of all the liabilities or loans you have from the income-producing assets owned to give you the net value of your income-producing assets.

Why aren’t high-income earners retiring wealthy? Why don’t they end up with a greater Net Worth than someone on a low income? It is quite simple. Human nature seems to dictate that whatever anyone earns….they spend….some even spend more than they earn and charge it on their credit card.

The higher your income grows…the more you spend and the only way to get out of this cycle is to realise that it is happening, and make a concerted effort to reverse this habit….and to begin reducing your expenditures so that you can free up money to invest.

The best way to do this, is to try the 10/90 plan. This plan simply means that as soon as you receive your pay….you put aside 10% of it for investment….and then use the other 90% to live off of. Put aside the 10%, and then pay all the bills and do the grocery shopping….and then after that whatever is left over you can spend.

Most people do it the wrong way around…they pay the bills, do the shopping and spend what is left over, never leaving any left to save or invest. By taking the investment money out first you will alleviate the temptation to spend it.

The road to wealth is not determined by how much you earn, but by how you utilise the income you have and how much you save and invest.

You need to take control of your finances. One of the best ways to start having more control over your money is to find out where it has all been going, and then amend your spending habits to allow you to live within the 10/90 plan.

If you write down a list of your monthly net income, then in another column write down a list of the essential items that you have to spend money on. You should be able to work out an average for telephone, gas, electricity, insurances and rates, from your previous bills. Work out an average of how much is spent on grocery shopping and petrol. If there are any other necessary utilities include them as well. Then deduct the second column from the first – and this will give you the maximum potential savings for each month.

It can be quite startling how high this figure can be and make you wonder where all the extra money went.

Another good learning experience is to simply write down for a fortnight every dollar spent and write next to it what it was for. You will soon find that there are a lot of unnecessary expenses, often caused by impulse buying, where you have spent money on items that you neither needed or really wanted, and could easily have gone without.

When you can begin to recognise these areas, and start to consider whether or not you are spending your money wisely, before you hand it over, then you will be beginning to take control over your money and are well on the way to embarking on your investment journey, which will enable you to have a financially secure future for you and your children.

There are many worthy ways to spend your time and energy. Our society is in desperate need of people who will care about people and things other than themselves. There are many ways that adults can help leave a positive legacy for the generations behind them. One of the best ways that we as adults can care for the world we live in is to invest in the young people all around us.

Some of you are probably thinking that you are parents and that isn’t that enough of a contribution to make to the next generation? Being a parent is one of the most obvious and perhaps best ways to invest in children, but it is not the only way. All adults, parents or not, have the ability and the responsibility to make life better for children and young people. I believe we have this incredible job to do, that we have the task of spending our lives on things that make life better for others.

Taking time to invest in others requires just that time. You cannot get very far in any relationship without putting time into it. If you are parent, take the time to parent well. Take time to get into the lives and hearts and minds of your kids. Learn about the things they care about, listen to the things they are scared of or excited about. Take your kids to their favourite park or read a great book with them before bed each night. Time is one of the best ways you can invest into children. If you are not a parent, find ways to interact with children. Offer to take the kids of your friends or neighbour for an evening. Take time to play games, go for walks, eat dessert or read books with kids. Invest yourself into the future of our country.

Learning to invest in young people requires that you offer yourself. By offering yourself I mean you allow children to learn from your life. Share stories from your past, lessons you’ve learned, and things you’ve failed at. Young people love to learn how adults have done life. Invest into them by being open and honest about the way you’ve lived, the decisions you’ve made and the things you would do differently if you could start again. You might be amazed at how much kids respond to adults that are offering themselves.

Few things are as valuable as taking time and energy to invest into children and young people. Think about ways that you could share what you’ve learned about life with others.

LOCAL MORTGAGE BROKER

KENWICH REAL ESTATE AGENT

 

Aussie Homeowners Trapped In ‘Mortgage Prison’

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Australia’s weaker-than-expected economic performance during the third quarter of 2018 has triggered many rate-cut predictions — however, one expert said that many economists and market watchers are just crying wolf.

In an analysis on Realestate.com.au, economist Nerida Conisbee said there was not enough justification for the Reserve Bank of Australia (RBA) to cut the official cash rate, even with the 1.9% inflation rate due to Australia’s lacklustre economic growth.

“The inflation rate’s fall below 2% is one of the reasons some commentators have speculated that the RBA may soon cut the interest rate. But when the inflation rate drops below 2%, it isn’t an automatic response from the RBA to cut the rate; they also look at the outlook as to where inflation will head without their intervention,” she said.

Despite the muted GDP result and restrained consumer sentiment, unemployment rate remains low. The current market situation will be unlikely to influence the RBA in making its monetary policy decision, Conisbee said.

However, Conisbee believes that a continued uptick in short-term money market interest rates will hugely affect the RBA’s decision.

Australian banks currently face expensive access to overseas funds, affecting their home-loan profit margins. Around 20% of the big four banks’ money is sourced from short-term money markets. To counter the effects of high funding costs, banks are starting to increase their mortgage rates.

This, in turn, could dampen consumer spending and affect the RBA’s inflation target.

AMP Capital chief economist Shane Oliver told Realestate.com.au that this scenario would likely compel the central bank to cut rates.

“The Reserve Bank might say, ‘Well, we don’t want mortgage rates to go up, because that will affect the economy, therefore we will cut the cash rate with the aim of bringing down the debt rate and offsetting the increase in funding cost that the banks have experienced,’” he said.

But the main threat seems to be the negative wealth effect brought about by the housing downturn. Oliver said when house prices fall, people tend to spend less because of their perception that their wealth has declined.

“And that leads to weaker consumer spending, which has the impact of keeping price inflation lower for longer. [Conversely], when property prices were rising in the past, people were happy to spend more and save less, despite lower wages,” he said.

Whether or not to re-finance is a question homeowner may ask themselves many times while they are living in their home. Re-financing is essentially taking out one home loan to repay an existing home loan. This may sound odd at first but it is important to realise when this is done properly it can result in a significant cost savings for the homeowner over the course of the loan. When there is the potential for an overall savings it might be time to consider re-financing. There are certain situations which make re-financing worthwhile. These situations may include when the credit scores of the homeowners improve, when the financial situation of the homeowners improves and when national interest rates drop. This article will examine each of these scenarios and discuss why they may warrant a re-finance.

When Credit Scores Improve

There are currently so many home loan options available, that even those with poor credit are likely to find a lender who can assist them in realising their dream of purchasing a home. However, those with poor credit are likely to be offered unfavourable loan terms such as high interest rates or variable interest rates instead of fixed rates. This is because the lender considers these homeowners to be higher risk than others because of their poor credit.

Fortunately for those with poor credit, many credit mistakes can be repaired over time. Some financial blemishes such as bankruptcies simply disappear after a number of years while other blemishes such as frequent late payments can be minimised by maintaining a more favourable record of repaying debts and demonstrating an ability to repay existing debts.

When a homeowner’s credit score improves considerable, the homeowner should inquire about the possibility of re-financing their current mortgage. All citizens are entitled to a free annual credit report from each of the three major credit reporting bureaus. Homeowners should take advantage of these three reports to check their credit each year and determine whether or not their credit has increased significantly. When they notice a significant increase, they should consider contacting lenders to determine the rates and terms they may be willing to offer.

When Financial Situations Change

A change in the homeowner’s financial situation can also warrant investigation into the process of re-financing. A homeowner may find himself making considerably more money due to a change in jobs or considerably less money due to a lay off or a change in careers. In either case the homeowner should investigate the possibility of re-financing. The homeowner may find an increase in pay may allow them to obtain a lower interest rate.

Alternately a homeowner who loses their job or takes a pay cut as a result of a change in careers may hope to refinance and consolidate their debt. This may result in the homeowner paying more because some debts are drawn out over a longer period of time but it can result in a lower monthly payment for the homeowner which may be advantageous at this juncture of his life.

When Interest Rates Drop

Interest rates dropping is the one signal that sends many homeowners rushing to their lenders to discuss the possibility of re-financing their home. Lower interest rates are certainly appealing because they can result in an overall savings over the course of the loan but homeowners should also realize that every time the interest rates drop, a re-finance of the home is not warranted. The caveat to re-financing to take advantage of lower interest rates is that the homeowner should carefully evaluate the situation to ensure the closing costs associated with re-financing do not exceed the overall savings benefit gained from obtaining a lower interest rate. This is significant because if the cost of re-financing is higher than the savings in interest, the homeowner does not benefit from re-financing and may actually lose money in the process.

The mathematics associated with determining whether or not there is an actual savings is not overly complicated but there is the possibility that the homeowner will make mistakes in these types of calculations. Fortunately there are a number of calculators available on the Internet which can help homeowners to determine whether or not re-financing is worthwhile.

Unfortunately, thousands of Australians are stuck in a “mortgage prison” with new lending criteria leaving them unable to refinance their loans to get a better rate.

Changes in bank rules around living expenses calculations have effectively wiped huge amounts off the maximum a bank will allow you to borrow.

Many people are now finding they originally borrowed more than a bank would lend them under current conditions, meaning they haven’t got the option of shopping around to get a better interest rate — no bank will lend them the amount they need.

Lending criteria has been tightened in the past year. The ongoing Financial Services Royal Commission is likely to tighten the criteria even further — meaning people will be able to borrow even less than they once did.

With homeowners unable to shop around, they can be stuck paying a high interest rate, which will leave them potentially paying tens of thousands, even hundreds of thousands more over the life of a loan.

Recently the Bank of Queensland and Auswide Bank announced they will raise variable mortgage rates as their borrowing costs grow. This follows a warning last month from Credit Suisse that out-of-cycle rate rises were on the table.

Precise numbers of Australia’s mortgage prisoners are hard to come by, but Mozo investment and lending expert Steve Jovcevski told news.com.au that he expected most of them are those who have borrowed and bought in the last five years.

He said the changes in how mortgage eligibility are calculated have made a huge difference for many recent borrowers, particularly as banks start to raise rates.

Before lending criteria was changed, a flat rate for living expenses was applied, resulting in many hopeful homebuyers borrowing much more than they now could.

Mr Jovcevski gave an example of a couple earning $120,000 between them, who bought a home in 2013, borrowing a total of $800,000 at 5% per annum, and who would be paying $4295 a month on their loan, leaving $3680 for monthly expenses.

Even with a pay raise between them bringing their income up to $129,000 the couple now faces a change in rules around living expenses that raises the bar for any borrower.

Previously banks estimated these expenses, with a buffer of 1.5 per cent to safeguard against rate rises. Now they are looking closer at people’s monthly expenditure, and have increased the buffer to 2 per cent.

Under this new criteria, the couple would only be able to borrow $680,000, even though their income hasn’t changed.

And because their mortgage is still more than $680,000, they won’t be able to find another bank to make up the difference — meaning they’re stuck with their original loan paying a high interest rate.

The difference between a 5 per cent home loan and a 3.8 per cent home loan amounts to $149,272 over the life of the loan.

“When a customer is essentially tied to a provider, they are at the mercy of whatever rate rise or conditions the bank chooses to impose. Given the current situation, banks have the power to hold some of their customers prisoners,” Mr Jovcevski said.

“The sad reality is borrowers who need competitive mortgage rates to stay financially afloat are most likely to be mortgage prisoners.”

First Home Buyers Australia director Taj Singh said he was very much aware of the crackdown on borrowing limits and living expenses for borrowers.

The mortgage broker said this was putting many borrowers in a position where they can no longer refinance to get a better rate.

He said given many loans were refinanced every four to six years, this issue would continue to be felt for recent first home buyers.

But Grattan Institute fellow Brendan Coates told news.com.au that the impact of any tighter lending conditions would be largely confined to a small section of borrowers as rising house prices had given borrowing room to homeowners who had been in the market for several years.

He predicted the impact would largely be felt in those who’d borrowed more than 90 per cent of the value of their house, a number which had fallen in recent years from 14 per cent in 2014 to 7 per cent in 2018.

But he did say that if house prices in Sydney and Melbourne continue their fall then the pain could spread to more borrowers.

PROFESSIONAL MORTGAGE BROKER

PERTH’S TRUSTED REAL ESTATE AGENT

Home Mortgage Financing

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Ideally, traditional mortgage lenders want new home buyers to have a 20% down payment when purchasing a new home. Thus, if purchasing a $200,000 home, you should be prepared to have $40,000 as a down payment.

Unfortunately, many people do not have this kind of money lying around. For this matter, Mortgage insurance (MI), known as Lenders Mortgage Insurance ( LMI) was created as a way for mortgage companies to recoup their money if a homeowner defaults on the loan. There are various loans available to assist people with down payments. In some instances, homeowners can obtain 100% financing, and avoid LMI.

What is LENDERS MORTGAGE INSURANCE?

Because Australians are earning less money, and home prices are steadily increasing, the majority of the population is unable to save the recommended down payment of 20%. In order to make owning a home possible, mortgage companies created a particular mortgage insurance, (LMI), for people with less than 20% to put down on a home. This insurance protects the lender if you default on the mortgage.

How to Avoid Paying Lenders Mortgage Insurance?

On average, LMI may increase your mortgage payment by $100 – sometimes less, sometimes more. However, there are ways to avoid paying this additional insurance. The obvious involves having at least 20% as a down payment. If this is not an option, homeowner may agree to a higher interest rate. Another tactic entails getting approved for 100% financing.

How Does 100% Mortgage Financing Work?

100% mortgage financing makes it possible to buy a home with no money down. Also referred to as a piggyback loan or 80/20 mortgage loan, 100% mortgage financing involves obtaining a first mortgage for 80% of the home cost, and a second mortgage, or home equity loan, for 20% of the home cost. Together, the first and second mortgage allows a home purchase with no money down, and no lender mortgage insurance.

A recent report from the International Monetary Fund (IMF) warns of world-wide economic downturn ­– but the Government and two leading property experts weigh in on what waits ahead for the Australian property market – and it seems we may not face the brunt as prices are expected to take a steady ride up.

Whilst widespread debt, trade wars and economic dips in parts of Europe are listed as major factors at play for the IMF diminishing economic growth forecasts, locally felt struggles in Australia have come about from the drought, housing market decline and credit crackdown.

However, the IMF report and national shadows have not shaken the Federal Government, encapsulated in a speech delivered by Treasurer Josh Frydenberg, which assured Aussies they will not bear the brunt.

“Our economic plan with its focus on growth, productivity, and aspiration and budget repair, takes on an even greater significance as we navigate the currents ahead,” the Treasurer said, also stressing that if the Australian economy was to continue in strength, confidence had to be returned to the housing market.

But where do such hopes leave the housing market amidst dropping property values and tightened lending laws? Despite growing concerns, industry experts say it’s going to be on the up.

‘After a tumultuous 12 months for Australia’s property markets, 2019 looks likely to be a year of greater stability,’ says Domain economist Trent Wiltshire in a recent report – in which he reveals the market will continue to experience a softened dip over the next six months, before gearing up again ‘into another moderate growth phase’.

‘Solid population growth, low unemployment and low interest rates will underpin Australian property price growth in the medium term. More restrictive lending conditions will continue to weigh on prices in the immediate future. But eventually, borrowers will begin to adjust to this new normal,’ the Domain economist says.

A norm that sees Aussies adjusting to, and better understanding how much they are entitled to borrow and the length of time it can take to get a loan, both of which Wiltshire believes will lead to an increase in borrowing  – also ‘at a modest pace’.

When broken down in Wiltshire’s report, combined Australian house prices, which sat at an estimated -6% in 2018, are predicted to climb to 1% this year, before reaching 4% in 2020.

Even more growth is expected to occur with unit prices across the country, forecast to climb from -3% to 2%, then 3% in 2020. Property prices have been on a decline since 2017, and although having snowballed, stricter lending laws should be accounted for but a fraction of the cause.

‘Falling sentiment has a reinforcing effect on prices: as prices fall, buyers become more hesitant, further pushing down prices … Another factor at play is that lots of new housing hit the market after a high rate of new construction in the previous couple of years,’ Wiltshire says.

He also invites us to reflect on the upcoming Federal election, which could harm property prices, especially if the Labor party is to be voted into power. Wiltshire expresses concern over the party reducing the capital gains tax discount from 50% to 25% if they pull through, likely to be enforced by 2020 – leading to fewer investors being inclined to put their capitals into the property playfield. A leading real estate CEO weighs in on similar sentiments.

“Uncertainty about changes in policy, such as Labor’s proposal to limit negative gearing tax breaks to new investments, and halve the capital gains tax, will cause an extended period of stagnation,” says CEO of Starr Partners Douglas Driscoll in his market forecast for the year ahead.

In referring to the Federal Government’s challenges to adhere to the banking royal commission’s recommendations as a “balancing act” – for Government still also needs to “ensure that people are able to easily access credit” –  Driscoll warns that careful attention needs to be paid to the banks for their potential to “low ball buyers on valuations”.

“Anyone who is struggling to secure lending should contest the valuation. It is possible to request a second opinion, or alternatively, provide extensive comparative evidence for similar properties that have sold in the area,” he advises. Driscoll also delivers good news to property owners.

Those paying down mortgages should take advantage of Australia’s record low interest rates, which Driscoll says will continue to remain low into the first part of this year, and thus be of advantage to mortgage holders in the long run especially if they are willing to dig into their disposable incomes.

“It is advisable that homeowners pay down as much debt as they can while we have this advantageous environment,” Driscoll says. “Paying an additional $150 a month on a $600,000 loan could save a homeowner more than $10,000.”

Auctions have never been an Aussie’s favourite thing to do on a weekend, and according to Driscoll, many will be “too embarrassed” to put their properties under the hammer, largely due to auction clearance rates sitting at around the 50% mark. But he has faith, reminding sellers they “need to trust the auction process and know that several properties also sell before and after the actual auction day”.

Getting a house of your own is a lifetime achievement and a home mortgage helps you in achieving this milestone much earlier than it would otherwise have been possible. In fact, the first home mortgage is also filled with a lot of emotion. A home mortgage is really something that makes dreams come true.

So let us start with understanding what a home mortgage actually is?

A home mortgage is something that allows you to buy a house even if you do not have enough money to pay for it right away. This is made possible by borrowing money from someone and paying it back in monthly instalments. The person who lends you money is called the home mortgage lender. The home mortgage lender lends you money for a specific period (up to 30 years) during which you are expected to pay back the money in monthly instalments. There are certain terms and conditions associated with the home mortgage agreement and these terms and conditions govern the home mortgage throughout its tenure. Among others, the most important thing is the interest rate that the home mortgage lender charges you. Interest charges are the means through which the mortgage lenders earns on this financial transaction called home mortgage. Most home mortgage lenders offer various home mortgage schemes/options. The most important variation in these schemes is in terms of the interest rate and the calculations related to it. In fact, most home mortgage options are named after the type of interest rate used for that option. Broadly speaking, there are two types of home mortgage interest rates – FRM (fixed rate mortgage) and ARM (adjustable rate mortgage). For FRM, the interest rate is fixed for the entire tenure of the home mortgage loan. For ARM, as the name suggests the home mortgage rate changes or adjusts throughout the tenure of the home mortgage. This change or adjustment of mortgage rates is based on a pre-selected financial index like treasury security (and on the terms and conditions agreed between you and the mortgage lender). That is how mortgage works.

No matter what type of home mortgage you go for, you always need to pay back the entire home mortgage loan (with interest) to the mortgage lender. Failing to pay back the mortgage lender can result in foreclosure on your home and the mortgage lender can even auction it off to recover the remaining debt.

Therefore, home mortgage is a wonderful means of getting into your dream home much earlier in your life. Without this concept, you would have to wait for a long time for getting into that dream home. Really, a home mortgage is one of the best concepts from the world of finance.

If there is anything that can prove the impact of stricter lending rules by lenders in Australia, it would be the latest data on home-loan rejections.

According to Digital Finance Analytics (DFA), 40% of home-loan applications were rejected in December due to non-compliance with existing lending standards.

While this is a drop from the previous month’s 48% rejection rate, it is still significantly higher than last year’s 8%. It is important to note that the volume of applications across all segments leading up to the holiday season has decreased and that many households have filed multiple home-loan applications.

“The fall in investor applications is significant, as appetite for investment property eases. The relative volume of refinance applications remained quite high, as people are seeking to reduce their monthly repayments,” DFA principal Martin North said.

Compared to authorised deposit-taking institutions (ADIs), non-banks recorded lower rejection rates at 20%.

North expects the number of rejections to remain prominent this month as the number of loan applications continues to grow.

For investors, he suggested watching the availability of credit, as moderation of loan offerings could result in a price decline of up to 30%.

“As credit drives home prices higher, so the reduced availability of credit drives prices lower. Our own view is a fall of 20%-30% peak-to-trough over the next two to three years,” North said, adding that the fall could worsen if global uncertainties are factored in.

Finance can be the most important thing for anyone with dreams to fly in his eyes. Today our world runs on finance. The forms may be different but the purpose is the same, to cater to our needs. When we fail to cater our needs due to lack of enough funds within our resources, we look outside for them in form of loans. One such way of funding our desires is secured home loans.

A secured home loan is secured by your home as security. These loan are like any secured loan and can be used for any of you personal purpose. The advantages of such loans are following:

• Interest rate is low as the loan amount is secured.
• Repayment is spread over a longer periods resulting in smaller monthly payments.
• Flexible terms and conditions for loans.
• Higher rate of approval of loans ensure you that you will be getting the loan approved easily.
• Online option is there to choose and apply easily
• Reduced paper work
• Faster approval once your property is valued.
• Multipurpose loans (can be used for debt consolidation, medical expenses, education, buying a car, boat, vacation, home improvement etc)
• People with bad credit history can also apply.
• You can borrow up to 125% of your collateral value.

Secured home loans come in various flavors to choose from:

• Fixed loans – the interest rate will remain fixed under this for the whole repayment term.
• Variable loans – rate of interest will fluctuate according to interest rates in the market.
• Capped loans – a limit is set up to which your interest rate can rise with rise in interest rate in the market.

You can decide among these according to which rate suits you the best.

A secured home loan allows you to borrow amount ranging between $30,000 to $100,000 on the basis of equity in your home. Equity is the market value of your home less any debts taken against it.

Shopping for a right loan lender is one thing which every borrower must do before applying. There are lot many lenders in the market with different rates and terms.

It happens may time that you came to know about a low rate package after you have already applied for the loan. So to avoid this do proper research, visit lenders offices and study their quotes. Your hard work can help you find out the best secured loan out of the rest.

 

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Finding Re-Finance Information

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Homeowners who are considering re-financing but are not knowledgeable about the subject have a number of options available to them for finding more accurate information regarding the types of re-financing options available as well as the ways to obtain the best available rates and tips for finding a reputable lender. This information can be obtained through a number of resources including published books, Internet websites and conversations with experts in the financial industry who specialize in the area of re-financing. All of these sources can be very helpful but there are also precautions homeowners must take when using each information source. Taking these precautions will help to ensure the homeowner is receiving accurate information.

Using Books for Research

Published books are often considered to be one of the most reliable resources for researching re-financing options. However, not all books on the subject are created useful. Readers may find some books provide a great deal of useful, current information while others books are filled with outdated information and information which is not 100% accurate.

The best way to select a book or books when researching the subject of re-financing is to start the search with books that were only recently published. This is important because the financial industry is continually evolving and as a result books which were published only a few years ago may already be considered out of date.

Homeowners should also seek out independent reviews when considering books on the subject of re-financing. This is important because books which consistently receive solid reviews from consumers are likely to be worthwhile. Conversely books which consistently receive negative reviews are likely to not be worthwhile. Homeowners should seek out highly recommended books while avoiding those that are not highly recommended. This may prevent the homeowner from wasting time reading books which are not informative and may even be inaccurate.

Using the Internet for Research

The Internet is another resource which can be very valuable for homeowners who are considering re-financing their home. The Internet is filled with valuable information but there is also a great deal of misinformation floating around on the Internet. Homeowners who are completely uninformed about the re-financing process may not be able to distinguish between the useful information and the misinformation. As a result these homeowners may be led astray by inaccurate information on the Internet. Homeowners who wish to avoid the potential for this problem should consider verifying the information they find online through an outside source such as a published book from a renowned author or by conferring with an expert in the subject of re-financing.

Homeowners should also do the majority of their research on well established websites. This includes websites owned and operated by major lenders which have been in business for years. The information on these websites is likely to be much more up to date and accurate than websites which are created for profit by website owners.

Consulting with Re-Financing Experts

Finally, consulting with financial experts who specializes in re-financing can be very helpful for homeowners who are considering re-financing. This might be the most expensive option as many of these experts will likely charge a fee for their services but it can also be the most reliable source of information.

There are a number of advantages to consulting with an industry professional as opposed to researching the subject independently through published resources. The most significant advantage is the ability to ask questions throughout the re-financing process. This will help to ensure the homeowner fully understands the available options. It will also help to ensure the homeowner receives the best possible re-financing option for his specific needs. The re-financing process works best when the homeowner offers their input about the type of re-financing they are seeking as well as the benefits they hope to obtain through re-financing. The re-financing expert can than make a better recommendation which will suit the homeowner’s needs.

Whatever your reason for thinking about refinancing your home loan, your ability to do so will depend on a variety of factors, with your amount of available equity being one of the most important.

What is equity, and how much do you have?

Equity is essentially the difference between the current value of your property and the amount you owe on your mortgage principal. To put it another way, the equity in your home is how much of your property that you own for yourself, and not your mortgage lender.

You can find your level of equity using the following basic formula:

Equity = property value – amount owing on your mortgage principal

Keep in mind that your property value isn’t just the price you paid when you bought the place – it also includes any capital gains from making improvements to the property, or from increased demand in your local area.

How can you use your equity to refinance?

There are a few ways that your equity can be used, depending on your refinancing goal. Generally, your equity will play a similar role to that of your deposit when you first took out your home loan – providing security and reducing the lender’s financial risk.

If you’re refinancing your existing loan to lower your interest rate, whether so you can enjoy more affordable mortgage repayments, or so you can pay back your loan’s principal more quickly, the more equity you have available in your mortgage, the more security you’ll offer your lender, and the lower an interest rate you’re likely to receive. You may also qualify for loans with access to useful features such as offset accounts and redraw facilities, which can provide further flexibility and options for managing your finances.

Example:

Jacob considers refinancing his home loan by switching to another lender with a lower interest rate. Because he has more than $120,000 in equity available (the minimum 20% deposit required to avoid paying Lender’s Mortgage Insurance), he qualifies for one of his new lender’s low-interest loans with an offset account and a redraw facility, so he can enjoy greater flexibility from his personal finances.

If you’re refinancing in order to borrow more money, such as when you want to upgrade to a bigger house, the equity in your current home loan can serve as the deposit on a new home loan, with all of the same requirements.

Keep in mind that a new home loan comes with new fees, charges and expenses such as stamp duty, which often average to around 5% of the purchase price. Take this into account when estimating what you may be able to afford.

Example:

Jacob considers selling his current place and buying a new one in a better area, which will require refinancing his mortgage and borrowing more money.

With $300,000 in equity available, and assuming that his new loan will require a minimum 20% deposit to avoid Lender’s Mortgage Insurance (LMI), Jacob could theoretically buy a place worth up to $1.5 million… assuming he can afford the repayments and the costs of refinancing!

To hopefully keep his finances more manageable, Jacob instead looks at homes worth up to $1.2 million, using $240,000 of his equity as a deposit and keeping the remaining $60,000 available to cover the other costs.

It’s also possible to keep your current home loan and property, and to use your equity to fund the purchase an investment property. However, in this case, you likely won’t be able to put all of the equity in your current loan towards taking out a new one – many lenders require you to maintain a minimum Loan to Value Ratio (LVR) in your mortgage to help limit the financial risk involved. You’ll need to take LVR into consideration when determining the amount of usable equity in your home.

Example:

Another option for Jacob is to use the equity in his home to take out a second mortgage to purchase an investment property. Because Jacob’s lender requires that he maintains a minimum LVR of 80%, his property value for determining his usable equity effectively becomes $480,000 ($600,000 – 20%). This in turn means that Jacob’s usable equity is only $180,000, rather than the original $300,000 figure.

Assuming Jacob’s second mortgage requires a 20% deposit to avoid LMI, he could potentially buy an investment property valued at up to $900,000, but it may be more affordable to look at $720,000 properties, using $144,000 as the deposit and keeping $36,000 to cover the other expenses involved.

Another option is to take out a home equity loan, also known as a line of credit, where you borrow money from your lender using the equity in your home loan as collateral. This line of credit could be used to finance a home renovation, to buy a new car, or to pay for a dream holiday.

Much like the previous investment property example, you may be limited on how much you can borrow in a home equity loan, as your lender may require you to keep a certain percentage of your home’s value invested in the property in order to secure the mortgage.

Example:

Another option for Jacob is to use his equity to pay for that big round-the-world trip he’s always wanted to go on. As previously determined, he has $300,000 of equity in his home loan, but only $180,000 of this is usable equity.

By approaching his lender and organising a home equity line of credit, Jacob can set off on his trip, armed with what is effectively a credit card with a $180,000 limit.

ARE YOU THINKING OF RE FINANCING YOUR PROPERTY?

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Credit Card Reward Cards

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No matter where you look, there is always a credit card company that is offering reward programs with their credit cards. New ones pop up all the time, making it sound too good to turn down. Even though they may sound great, you may wonder if the rewards are truly worth it. In some cases they are, although in others they may not be quite as good as you would like.

Although having more than one reward card is something many people instantly think about, you should always keep in mind that not all of them are worth having. Even though using your credit card is always good, you can sometimes end up paying quite a bit if you don’t pay attention to what you are buying. When it comes down to credit card reward cards, you should use caution – with a dash of common sense.

Any reward cards that come with high interest rates should always be avoided. With most reward cards, you’ll find that they include higher rates of interest than standard cards. This higher interest rate can quickly and easily offset any type of reward. To be on the safe side, you should always look at the interest rates and determine if the reward is indeed worth it. If you pay off your entire balance at the end of every month – then this won’t be a concern at all for you.

You should also keep your eyes peeled for reward cards that offer a high annual fee. These cards can be very tough to keep a grasp of, and they can also interfere with any type of reward you may think your getting. If you look at the fine print before you get choose your reward credit card, you can help to eliminate problems.

Cash back is a type of reward card that is becoming very popular. A lot of the top credit card companies and banks offer cash back programs that are normally around 1% for every purchase that you make. Before you rush out and get a reward card, you should always make sure that you read the fine print and see if there is a maximum limit on the card.

Another type of popular reward credit card is the type that give you points for every purchase you make using that card. Once you have accumulated enough points, you can redeem them for items and other cool things. Some cards will have limits as to how many points you can receive, which again makes it your best interest to shop around.

There are also credit cards with frequent flyer miles, which have been around the longest. Some cards will base their rewards on points, while some choose to use actual miles. For every dollar you spend using your frequent flyer credit card, you’ll receive either a point or a mile. Once you get enough accumulated, you can redeem them. Most frequent flyer rewards take about 25,000 points or miles in order to redeem them, which can make it nearly impossible for some to reap the benefits of using the card.

No matter where you look, finding the right credit card reward card can take some time and effort. You may have no problems finding the card to fit your needs, and if you do, you should consider yourself lucky. Before you choose your card however – you should always take the necessary time to read the fine print and compare what each unique company has to offer you.

 

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Basic Financial Information Tips (Part 1)

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Savings. Pay yourself first. Start now stashing 10% of your income in an “Emergency” savings. Don’t use it for anything but real emergencies. Keep a “For Sure” savings account for yearly expenses you know are coming and you can estimate (e.g. Christmas, insurance, taxes, etc.). Also have a “Buy Stuff” account. If you do, you’ll be able to avoid many financial disasters which will face you, and you can avoid borrowing money from high-rate lenders.

Borrowing. Don’t borrow money unless you are willing and able to pay it back. Failure to pay debts – on time – causes severe financial, emotional, and family problems. Experts recommend you don’t borrow for wants, only for needs, or for things that increase in value. Many lenders will loan you money you can’t afford to pay back, especially high-rate lenders.

Co-signing. Don’t co-sign on a loan unless you are willing and able to pay it back. Often, co-signers end up paying off loans they are unprepared for, and financial hardships follow. Numerous co-signors now have negative credit ratings because a primary borrower paid late. Many lenders do not notify the co-signor before reporting delinquencies or repossessions to the credit bureau.

Compare. Before you decide who to borrow from, compare! Find out who is offering the best deal at that time – look for the loan with the lowest rate (APR).

APR. The Annual Percentage Rate (APR). It is the standard rate, so we may compare the cost of borrowing. It is the cost of credit expressed as a yearly rate. When you borrow, always beat 13% APR (consider “13” to be unlucky when it comes to borrowing). Some have been illegally stating other rates such as weekly or monthly rates. Compare APR to APR. If you pay your bills on time, and you aren’t over-extended, you can nearly always find loans or financing arrangements at rates lower than 13%. Beware though, because beating 13% does not always mean you are getting a good deal. For instance: the difference in total interest paid on an 11% versus an 8% 30-year, $100,000 mortgage loan is $64,283 (assuming all payments are made as agreed).

Consolidation Loans. A consolidation loan can result in great savings to borrowers if the new interest rate is significantly lower, and if you don’t run-up debt similar to what was just consolidated. But beware, because consolidation loans usually result in substantially more money out of your pocket into the lenders’. For instance, mortgage loans usually involve closing costs. They increase the total debt. Many refinances involve reducing the monthly payment, but increasing the length of payback, which substantially increases the total interest paid. Borrowers, who refinance unsecured debt (e.g. credit cards) into a home mortgage, also increase their risk of losing their homes. Also, remember to keep all of your payments current until the old debt is paid off. Too many people have damaged credit ratings, and are in bad financial condition because they counted on money which didn’t come when they expected it. Expect delays when applying for loans, especially consolidation loans. Don’t spend money before you get it.

Desperation. Don’t get desperate for money. The more desperate you are, the less likely you are to get a good loan.

Auto insurance. Keep your auto insurance current. If you fail to keep your insurance up-to-date, you could end up making loan payments for years after your car has been totalled.

Establish good credit. To avoid bad credit, don’t borrow too much, and do pay your bills on time. Inexpensive ways to establish good credit: (1) Obtain a good credit card. When you charge things, pay off the balance each month – on time – and pay no interest. (2) Establish a revolving line of credit (an empty loan) as an overdraft protection against bounced checks, and don’t use it as a loan. (3) Get a loan to buy a car, or furniture, or etc.) and pay it off within a few months.

Late fees. To avoid late fees (which multiply the cost of borrowing), pay early, or at least on time.

Repossessions. To avoid repossessions and associated fees, pay early or on time, and keep your insurance current.

Extra principal ® less interest. To pay less interest on loans, pay more than the minimum required payment. Even small amounts of extra principal, can significantly reduce the total amount of interest you would otherwise pay over the life of the loan. Before doing this, however, make sure your lender accepts extra principal payments, and find out what particular procedure you need to follow to ensure your extra principal is properly applied.

Bi-weekly payments. If you get paid weekly, or every other week, paying bi-weekly is a very convenient (almost painless) way to reduce your loan term and interest. For instance, if you make ½ of your required monthly payment every 14 days (a bi-weekly period), you pay the equivalent of 13.052 payments in an average year. If you don’t get paid bi-weekly, or if your lender doesn’t like biweekly payments, you can pay the equivalent amount in monthly instalments. If you pay 1/12 of the sum of 13.05 payments each month, you will match the bi-weekly advantage (minor rounding differences).

Contrary to popular belief, the frequency of paying ½ payments bi-weekly doesn’t accomplish much, the real advantage is paying the extra principal (13.05 payments, or more, each year) which reduces the term and the interest paid. If you are considering signing up for a bi-weekly program, pay close attention to the cost. Some servicers have large set-up fees and transaction fees. Also consider the credibility of any company handling your money, some have diverted payments into their own pockets, leaving borrowers to make payments twice.

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