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 Terry McCrann

From: Herald Sun  February 25, 2010 12:00AM
THE Reserve Bank will almost certainly lift the official interest rate by 25 points next Tuesday.
Both the governor Glenn Stevens and his deputy Ric Battellino have ‘told us so.’

Not, obviously, in specific words. Indeed they haven’t even yet ‘told’ their fellow board members. The management’s recommendation will be finalised and sent to board members today.

Further, any prediction of what might emerge from Tuesday’s meeting has to carry one big and one small asterisk.

The big one, is that some cataclysmic event doesn’t come out of left field. Like another, heavens forbid, 9/11, a Greek default, or even just a big - very big - fall on Wall St.

The small asterisk is that the actual decision really is made by the board; it doesn’t just rubber stamp what RBA management - Stevens - puts before it. So why only a ’small asterisk?’ Does that deny my very point?

No, it’s only a tiny risk, because the board has clearly signed on to both the overall strategy of lifting rates; and in doing so will, indeed has to, leave the tactical month-to-month (pause or lift) decision to management.

Yesterday’s benign wages - and so, potential future inflation - numbers are essentially irrelevant.
Because the RBA is not lifting rates to target an immediate emerging inflation threat.

Thus for the immediate future any inflation data impacts asymmetrically on the RBA’s tactical rate decisions. Bad data would tend to lock in a rate rise. Good data would be neutral; ‘other’ factors would drive the decision.

This in a sense is what Stevens ‘told us’ last Friday at his public appearance, what Battellino ‘told us’ in his second recent seminal (as in, telling us) speech; and what the whole RBA has ‘told us’ in its latest analysis of the economy a couple of weeks ago.

Simply, broadly, that in this crazy mixed-up world, the RBA has signed on to the China thesis not the Greek one.

That there’s more chance (risk?) of China continuing to boom than Greece causing some sort of financial and then perhaps economic implosion.
If not necessarily something as bad as GFC Mk II. The RBA forecasts in the latest analysis had our growth strengthening to more than 3 per cent through the year and then kicking a little higher next year. And doing so despite the higher interest rates the RBA would deliver.The critical thing to understand is that the RBA believes it has to move rates back to neutral through the course of this year. Indeed, Stevens said that explicitly on Friday.

But also very importantly, it’s doing so not to fight emerging inflation. Again the RBA expects inflation to keep falling back into its 2-3 per cent target ban and stay there through 2011, although edging close to the limit by the end of that year.

So yesterday’s news of benign wages would merely reinforce the RBA confidence. But not divert it from its desire to lift the official rate by between 50 and 100 points. That’s importantly two to four moves.

Why important? Because it goes to the timing.  How many ‘in-a-rows’ increases we could get; how many pauses and of how many months at a time.

Stevens and Co are fully mindful of the uncertainties both ways. China could ‘peter out’ - that probably means growing at ‘only’ 6 per cent rather than 10 per cent. Or the developed world could pick up some pace, backstopping if you like a booming China.

The first would tend to see the RBA only delivering two more rises, if that; with an extended pause after Tuesday’s increase.

The second would tend to see the RBA deliver four rises and do so pretty quickly.

As it would want to get back to a ‘low neutral’ fairly quickly, by say June, and perhaps an ‘upper neutral’ by July-August.

Politics and the budget will also have to be factored in, more to the timing of moves than the aggregate.

The other critical thing to understand about both timing and quantum is that if inflation does start to rear its head, Stevens will want to go above neutral.

In those circumstances, he would end up wanting to deliver, say, six increases over the year. Passing next Tuesday would leave a lot of ground to make up. In those, it needs to be stressed, unexpected circumstances.

Passing next Tuesday would also mean we would go (at least) four months without an official increase.

From the last one in December, to the next (possible) one in April.

That is too long a gap in the context of what the RBA believes is likely to develop over the year and where the official rate is. In three words: still too low.

The RBA wanted time to assess the impact of the initial increases and also the mix of global developments. It has had that time, and the statements all show very clearly how it has decided the balance of risks.

There’s an interesting coincidence around the word ‘four’ and an interesting comment on the psychology of the economentariat.

Three weeks ago, the economentariat unanimously believed the RBA would do ‘four-in-a-row.’ After in December being all-but united in declaiming it wouldn’t possibly contemplate ‘three-in-a-row.’

Not there’s a significant sanguinity that the RBA would sit on its hands for ‘four months.’ It won’t.

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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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By Nick Gardner 

From: News Limited newspapers February 23, 2010 9:32AM

WE all have a credit record that collects data about us, but few of us know what it says or what is allowed to be shown.

Here are 10 things you should know about the system, and what is going to change when new laws come in next year:

1. There’s no blacklist

At the moment, your credit record simply details “bad” behaviour such as defaults, bankruptcies and court judgments. Different companies assess you in different ways, so somebody may get refused credit by one company, but accepted by somebody else.

2. Positive reporting

Currently, credit agencies collect only negative information such as defaults and bankruptcies but under comprehensive reporting, credit agencies will be able to collect extra information, including repayment histories. “So even if you’ve had trouble in the past, you will be able to work off much of the impact of any earlier misdemeanours,” says Christine Christian, chief executive of agency Dun & Bradstreet.

3. Don’t be lateComprehensive reporting will capture more bad behaviour. Late payments on credit cards or utility bills, even if just a few days late, will be noted.
 

4. High limits hurt

It’s the outstanding limit on your credit card, not the balance that counts. “This can be particularly damaging when applying for a mortgage because having a $10,000 limit even with nothing owing can reduce the amount you can borrow by tens of thousands of dollars,” says Mortgage Choice broker John Manciameli.

5. Offences aren’t equal

Dun & Bradstreet says there is a sliding scale for offences. For example, a default from five years ago is less damaging than a default in recent months.

6. A long recovery

Defaults stay on your record for up to five years and bankruptcies for up to seven. A default a late payment of 60 days or more can severely impact your ability to get credit.
 

7. Shopping around

If you go from shop to shop and allow the assistant to check if you would qualify for credit, this is logged. Most lenders interpret these as refusals, even if you didn’t buy anything.
 

8. Small defaults count

Even a default worth just a few dollars on a mobile phone bill could result in the refusal of a mortgage application later on.
 

9. Divorce debt

If you have joint accounts, even in divorce you will be equally liable for the debts and your credit file damaged. “You need to be very wary before entering into a joint agreement over which you have little control,” Christian says.

10. Checking is easy

Check your credit record regularly to ensure it is accurate. Big agencies such as Dun & Bradstreet or Veda Advantage offer free access to your file in about 10 days.