Mortgage Blog

Redraw Facility - Paying extra pay’s your loan down:   Not necessarily, if you have a redraw facility attached to you’re home loan and you pay extra funds into it, the extra funds sit in the redraw and are available for you to redraw.

The extra funds paid into the account do impact on the amount of interest you pay but the extra funds are not actually being paid off the principle of the loan. If you want to pay extra off the principle you need to contact your Bank or Lender and increase the actual monthly repayments.

 Assets are the same as income:   No matter the strength of your assets (for instance how much property you own or gold bricks you have hidden under the mattress), what makes the difference is your capacity to repay the loan through ‘regular substantiated income’, such as payslips and group certificates.When it comes down to servicing, a Bank or Lender will only lend as much as people can afford to repay. The amount of income earning capacity you have, will ultimately determine how much you can borrow. It’s the credit card balance, not the limit that counts:  When it comes to credit cards it’s not about the balance on your card or cards, it’s the total credit available that counts. Having a large range of credit does not necessarily equate to a good credit history. The same applies to ‘Lines of Credit’.

A fixed rate is always safer than a variable:  Every home loan is different – so too are the needs of each individual and family. What is important to remember is that fixed rates are calculated by capital markets over the period you sign on for, whether that be for three, five or seven years. If variable rates go down during this fixed period, you could end up paying a higher interest rate compared to the standard variable.  

When making the decision to fix, it is worth reviewing your budget, mortgage plan and strategy. Once a loan is fixed, if you suddenly decided to sell your home and or want to change back to a variable loan, you will be faced with break costs which can amount to thousands of dollars. Making your repayments minimum and monthly is the best strategy:  Not true. In fact, the interest on a home loan is calculated daily and is charged monthly, so the more regularly you make repayments, the less interest you pay over the life of the loan.    

A bad credit history doesn’t matter if you eventually pay it off:  Your credit history, records any missed or defaulted payments on such things such as credit cards, interest free contracts and mobile phone plans. A patchy credit history can haunt you – even if it is very old or just a one off small amount. There are two major credit reporting agencies that record all of these debts and lenders consult these agencies before they complete your loan application.

100 per cent home loans = no money upfront  Most people think that a 100 per cent home loan means that they do not have to pay any money upfront – however, this is not true. A 100 per cent home loan does cover the property purchase price, but does not extend to the additional upfront fees involved in buying a home such as legal fees, Lenders Mortgage Insurance, purchase & mortgage duty. Cheapest is the best:  A ‘cheap as chips’ interest rate may be a good incentive to sign on the dotted line, but beware – in many cases these loans may have higher fees and less flexibility, costing you more money over the life of the loan. A standard variable loan at a slightly higher rate with flexible features, such as the ability to make additional and lump sum repayments, can save you more money in the long run.

Personal debts can be rolled into a new home loan:  So you have a car loan and credit card debts, and you want to roll all of these into your home loan?  Makes sense, as the interest rate on your mortgage will be lower than your current rate.  But, first home buyers are not usually able to just throw all their debts together like this.  Usually you have to build up equity in the property and then use this equity to service the additional debt.

Start by paying just the minimum amount:   Many first home owners pay only the minimum monthly repayment, as they adjust to the new financial commitment.  However, at the start of the loan you are really only paying interest so by paying more than the minimum, you quickly reduce the amount of interest and principle on the loan.  As interest is calculated daily, repaying twice a month instead of once per month can also save you thousands in interest.

Refinancing saves you money:   Perhaps you have just bought your first home, and you are enjoying all the benefits of your own home.  Your first time mortgage is going well, but perhaps you fixed your rate six months ago and now rates are coming down, or maybe you want to switch to a different lender.  Refinancing sometimes costs money. In the way of exit fees for existing home loans, and settlement fees for the new loan.  However, the market is quite competitive currently and some lenders are giving all the power to the home owner.  Shopping around and refinancing your home loan can save you thousands over the life of you loan, but can also end up costing you more, so talk your possible choices through with your mortgage broker before making your decision.  Mortgage Insurance protects the borrower:  More commonly known as Lender’s Mortgage Insurance, this form of insurance protects the lender, not the borrower. The less deposit you are able to pay at application, the higher the premium you pay to compensate risk. Generally if you have more that a 20% deposit you are not required to pay Lender’s Mortgage Insurance.  

 

 

 

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By Anthony Keane 

HOMEBUYERS and investors have nearly doubled their borrowings over the past five years, figures show.       

 

Latest Reserve Bank of Australia figures show total housing debt hit $910.1 billion in December, up 17 per cent over 12 months and up 92 per cent since December 2004.   

Total housing debt is set to reach $1 trillion within a year. The figure itself is not a worry, but there is concern the pace of borrowing is exceeding household income growth. 

AMP Capital Investors chief economist Shane Oliver says the rapid growth of housing debt could be Australia’s “achilles heel” amid any sharp rise in interest rates or unemployment, although neither is expected in the short term. 

Oliver says factors driving the borrowing boom include government first-home buyer incentives in recent years, generational lows in interest rates and rising house prices as demand outstrips land releases.  “Last year we started building 135,000 houses but the underlying demand was (for) 180,000-190, 000,” he says. “This year we should start building about 155,000 houses but the underlying demand is close to 200,000.”  “It’s a worry that we have such a high level of household debt.

Over the past 20 years we have gone from the low end of comparable countries to the high end,” Oliver says.  Reserve Bank figures show our housing debt is currently 135 per cent of disposable household income.

Ten years ago, it was 75 per cent and 20 years ago it was 45 per cent.  “The RBA has to be careful raising interest rates because, if they go too far, they can end up tipping the economy over the edge,” Oliver says. Investors represent about 31 per cent of total property debt, down from 34 per cent five years ago.

In 2003, it was 50-50, amid concerns about a property investment bubble that did not eventuate.  Real Estate Institute of Australia president David Airey says the sector “cruised past” the global financial crisis, with younger buyers not afraid of high debt levels. 

“In the first part of 2009 real estate agents were quite depressed. In the second half, auctions took off and that shows people are competitively bidding against each other, in many cases, pushing prices up,” he says. 

“This year’s looking to be a very strong year for property and that will have an upward effect on prices.”      

 

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SOURCE: Laura Cochrane - Bloomberg