Archive for the 'Interest Rates' Category

Mortgage Myths for Home Owners & Potential Home Buyers

Monday, March 8th, 2010

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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LITTLE STANDING IN THE RESERVE BANKS WAY

Sunday, February 28th, 2010

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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Commonwealth Bank posts $4.8b profit

Wednesday, August 13th, 2008

By: Danny John
August 13, 2008 - 11:06AM

Sydney Morning Herald

The country’s largest bank, the Commonwealth, today helped lift some of the gloom that has descended on the domestic economy by reporting a 7% increase in its annual net profits to almost $4.8 billion.

Whilst the rise was not as high as last year’s initial optimistic predictions, the outcome was in line with market expectations after the most volatile trading conditions seen by the industry in 30 years.

With the global credit crisis still raging and the domestic economy having dropped away from its high growth levels of the past few years, the Commonwealth turned in a result that indicated that the slowdown may not be as sharp as some commentators have suggested.

Shares in Commonwealth Bank fell as much as 2.7%, or $1.20 cents, to $43.31, tracking losses on the benchmark index..

The bank’s cash profits - the industry’s preferred measure of performance - came in slightly lower with a 5% increase to $4.73 billion - just over $100 million more than its 2007 record result.

The profit was struck against a 10% jump in income to $14.3 billion. Cash earnings per share though were more subdued, rising by just 3% to 356.9 cents per share.

Analysts had been anticipating a relatively flat result given the way that global funding costs for banks have risen sharply and that lending growth to consumers has slowed in the face of the steep increase in local interest rates.

That was underlined by Commonwealth’s second half performance - which covers the six months from the start of January to the end of this June - where profits were up by just 1% to $2.39 billion.

This was after a subdued first half in which its interim result was struck just as the credit crisis was in full swing.

Commonwealth’s slowing profits also mean that the returns for investors won’t be so high either. The bank today declared a final dividend of $1.53, slightly up on the corresponding period a year ago, which takes the final pay-out of $2.66 - up ten cents or 4%. Last year the rise was 14%.

However, there were few signs of any nasty surprises in the result with the bank seemingly avoiding the bad debt problems of two of its Big Four rivals, ANZ and National Australia Bank.

Commonwealth, which is exposed to debt-stricken corporates like Allco Finance Group, said its total charge for the year has been $930 million which is nearly $500 million higher than 12 months ago.

That takes the bank’s total provisions to $1.74 billion as it steps up its cover for the possibility of more sour loans from hard-pressed consumers and businesses. However, the charge is significantly lower than some of its competitors.

In a reflection of how difficult trading conditions remain, Commonwealth described its performance as ‘’solid'’ but also warned that the economic headwinds it faced over the past year will continue to dominate the industry over the coming 12 months.

All of its main divisions - retail, business banking, wealth management, insurance, international and New Zealand - all did reasonably well, though, all turned in higher individual profit increases despite the pressures on them.

Its outlook statement was overly cautious, with the bank saying that the uncertainty and volatility in credit markets would continue to put pressure on its funding costs and that loan growth _ the key to future increases in the sector’s profit performance - would drop below the average of the past decade.

Those ten years have produced a golden run for earnings growth for banks but the downturn means that the record results are unlikely to be repeated in the immediate future.

Commonwealth’s chief executive Ralph Norris said this morning that whilst he accepted profit growth had not been up to those recorded in previous years, he was still pleased with the outcome given the period the bank had just come through.

As for the coming year, he said the slowing economy was affecting the bank’s customers which was showing up in slowing credit growth.

‘’Whilst these broad trends are clearly evident the duration and extent of the slowdown is more difficult to predict,'’ said Mr. Norris.

‘’There are clearly a number of negatives at work in the Australian economy but it is important that we recognise there are potentially a number of positive influences.'’

These he listed as rising commodity prices, the growth still coming through from the country’s Asian partners, particularly China, the recent domestic tax cuts and “robust'’ business investment and infrastructure spending.

‘’The balance of these opposing forces favour continued modest economic growth not too far below the average of the past decade,'’ added Mr Norris.

However, he also sounded a cautious note and said that The Commonwealth would continue to adopt a ‘’conservative stance'’ until more signs of economic improvement emerged _ a reference to the possibility of interest rate cuts by the Reserve Bank.

Today’s result caps a torrid time for the country’s banking sector which has been gripped by huge volatility in debt financing and equity markets, all of which has been primed by the global credit crisis that erupted exactly a year ago.

Commonwealth’s relatively stable if somewhat flat outcome will at least partly re-assure investors who have been rattled in recent weeks by the profit warnings that emerge from both National Australia Bank and ANZ about their forthcoming figures.

Banking shares took a massive hit last month when NAB revealed it had taken a provision of $830 million against its $1.2 billion of collaterised debt obligations, a portfolio of US subprime housing loan-linked investments.

That portfolio is now effectively worthless with a total charge of over a $1 billion against it - a move which will cut $600 million from NAB’s previously expected profit of $4.4 billion for this year.

ANZ’s annual earnings are expected to be $800 million lower and will only reach around $3.1 billion when it reports its results in three months time because of higher bad debt charges taken against its exposures to the hard-hit property and financial services sectors.

However, some immediate relief has been provided by the two Melbourne-based banks’ rivals in the last few days with Westpac, Bendigo and Adelaide Bank and just yesterday St George confirming that their 2007-8 earnings would all hit a record.

Nonetheless, all three banks stated how tough trading had become over the last six months as the combination of higher funding costs and the wild swings in equity markets - which hits their investment earnings - had put pressure on their margins.

They have also suffered a ‘’double whammy'’ effect with increased interest rates (partly pushed through by the banks themselves) rising fuel prices and soaring food bills have seen lending to consumers drop off at a faster-than-expected level.

This, in turn, has seen growth in the domestic economy tail off sharply with the effect that analysts now expect the banking industry’s 2009 financial year to be harder than the one that is just finishing.

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New trinity will influence intervention on rates

Wednesday, April 16th, 2008

Terry MCrann
April 16, 2008 12:00am
Article from: heraldsun.com.au


THE minutes of the last Reserve Bank board meeting confirmed the immediate interest rate future. Absent a big - a very big - shock, no change at the next meeting in three weeks.

But much more importantly, it gave critical but understated clues to the dynamics that will shape the decisions about rates into the back-end of the year and through 2009.

Broadly, there are three.

How accurate the latest predictions of global growth prove to be.

How quickly domestic spending and especially consumer spending slows.

Those two are what might called the old dependables.

They were always going to be the major determinant of when and what — the predicted cut — the RBA next did with rates.

Now there’s a third, which in truth has also always been lurking there and has already affected the size and to some extent the timing of the rate rises.

What banks do with credit at a time of banking re-intermediation in the decimation of all forms of non-bank finance thanks to the sub-prime meltdown. Previously it was a matter of price.

Those ‘extra’ rate rises delivered by the banks over and above the official ones from the RBA.

While price - rates - will remain a potential factor, increasingly the issue will be one of credit supply.

First the short-term, through the May meeting; and by implication June and July as well.

In deciding not to hike in April, the minutes confirmed that the RBA ‘locked-in’ an expectation of inflation going up to around 4 per cent for the year to the March quarter.

That data comes out later this month and would normally be the key influence on what the May meeting did with rates.

Now it’s ‘official’. As long as inflation is around 4 per cent - even though that would not only be way above the top of the RBA’s 2-3 per cent target range and would represent a a big jump from the December quarter which sparked two rate rises, in February and March - the RBA will not hike.

And don’t take that 4 per cent as some sort of new absolute ceiling. That if inflation came out as, say 4.2 percent the RBA would consider hiking.

Inflation would have to be really, really bad - like 5 per cent - to make it contemplate another hike. And even then it would have to contemplate very hard.

It really, really wants to leave rates unchanged; in the bigger broader context.

The left field possibility is a rate cut. If not in May, then June or July if conditions turned really bad. And inflation looked like it was moderating.

So assuming inflation at 4 per cent, the RBA sits on its hands in May and the next two meetings. It comes back in August with the next inflation numbers. And what’s developed more broadly.

The RBA has built its analytical and so policy construct on the latest IMF forecasts of lower, but still sustained 3.75 per cent growth in the global economy through 2008 and 2009.

If they prove wrong, and growth is significantly lower, this will make the RBA’s rate expectations ‘no longer operable’. Monetary policy will be too-tight in a world of probably falling commodity prices (in 2009).

Similarly, it is building in a certain reduction in domestic demand. So the simple fact of bleating retailers and poor consumer confidence isn’t going to change its rate construct through mid-year.

It’s the opposite of a bad inflation number not sparking another rate hike.

But if consumer spending turned seriously sour and/or business investment went seriously south, that would be ‘new information’. That could spark a change in monetary policy or accelerate it.

The ‘new’ third uncertainty is bank credit. So far the price of bank credit has influenced and been incorporated into the official rate decisions.

What could change is if banks tightened the non-price supply of credit. That’s to say they just refused to lend. Either because they didn’t like the credit risk or they were capital-constrained.

That could spark the change in RBA policy. To cut rates. But all of these probably later rather than sooner.

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Interest rate drops in sight

Wednesday, April 9th, 2008

Article from: Herald Sun
Stephen McMahon
April 09, 2008 12:00am

INTEREST rates may drop back to 6 per cent by late next year as the latest economic data shows a significant slowing in the economy.

NAB chief economist Alan Oster said there is a 30 per cent chance the Reserve Bank of Australia will begin cutting rates this year as economic growth deteriorates.

As the RBA looks to have won another round in its heavyweight fight against inflation, Mr. Oster is forecasting interest rates will fall steeply in 2009 from a 13-year high of 7.25 per cent back to 6 per cent.

“An interest rate cut this year is a possibility, but there may not be enough of a slowdown,” Mr. Oster said.

“But we think that by the late 2009 they will be down to about 6 per cent.”

This view comes as the latest NAB business survey shows spending patterns are slowing and business conditions have plummeted to the lowest point since late 2002.

Mr. Oster said the economic downturn is now “broad-based” and the “deceleration is gaining momentum” after the RBA’s back-to-back rate rises in February and March.

The business survey showed a double-digit fall in business conditions for retailing, transport, finance and property.

Mr. Oster expects the slowdown will result in unemployment levels jumping from just over 4 per cent to about 5 per cent next year.

This follows Monday’s job advertisement survey that registered its fourth consecutive month of declines as employers pare back hiring.

Citigroup co-head of market and economic analysis Paul Brennan said the upcoming consumer price index on April 23 will show inflation is still very high but that the RBA will look through the data.

“There is still a lot of inflationary pressure in the economy from the strong growth in the second half of 2007 but inflation pressures should begin to moderate in the next few months,” Mr. Brennan said.

“The RBA is adopting a wait-and-see approach because there has been a lot of tightening and this takes time to work its way through the system.”

Sydney Futures Exchange traders have priced in a greater than 50 per cent possibility of interest rates falling to 7 per cent in November.

But Mr. Brennan forecast that rates won’t start falling until early next year and will drop to about 6.5 per cent by the end of 2009.

Deutsche Bank economist Phil O’Donoghue said it is “a bit early to be talking about rate cuts” as the finance house is still forecasting another rate rise to 7.5 per cent later this year.

He points to the surge in coal prices as being a major threat to inflation as it could push the terms of trade even higher than February’s record $3.3 billion trade deficit.

Australian coal exporters are expected to secure a tripling of coal prices.

The higher terms of trade, tax cuts in next month’s federal budget and a rebound in farm prices are expected to offset some of the recent downturn in economic growth and bolster inflationary pressures.

Despite his short-term reservations, Mr. O’Donoghue said the RBA is getting on top of inflation and in time, the bank’s tightening bias will begin to soften.

He is predicting that as the economy slows the RBA will be forced into a series of rapid interest rate cuts next year to take official cash rates to about 6 per cent by late 2009.

The Australian economic slowdown will also be aided by the global economic slowdown stemming from a recession in the US.

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THE latest interest rate rise will further increase the debt burden

Tuesday, March 11th, 2008

- but there is a way out

by Jason Bryce
heraldsun.com.au (Source Article)

February 11, 2008 12:00am

THE latest interest rate rise will further increase the debt burden – but there is a way out.

FINANCIAL counsellors, debt counselors and mortgage consolidators are being overwhelmed with calls from distressed consumers who have maxed out cards and can’t make the payments.

It seems the post-Christmas financial blues are hitting an increasing number of people. Added to the stress this year will be the extra burden from yet another interest rate rise.

Australians spent up big in the months leading to Christmas and much of this was on credit. But it is only now that most people and families sit down to work out how to manage the debt burden.

Some options include transferring the debt balance to a low rate credit card, consolidating debts into the mortgage and, for really distressed consumers; there is the option of insolvency and a debt agreement.

The bottom line, however, is there is no easy answer.

“What’s the best way to deal with credit card debt? I recommend handcuffs,” said Jennifer Schelbert, a mortgage broker based in Altona.

But Aussies love spending and our credit card debts are trending up.

Retail sales figures from the Australian Bureau of Statistics show that shoppers handed over almost $20 billion a month during the last three months of 2007.

The number of applications for credit cards in the months leading up to Christmas period also grew strongly, indicating that for many people, planning for Christmas meant planning to take on more debt.

Average credit card debt is now in excess of $3000.

According to Erica Hughes, from debt company Veda Advantage, the spike in credit applications in November indicated a pre-Christmas rush to secure credit.

“There is definitely a trend towards more people applying for credit cards and personal loans at the end of the year,” said Ms Hughes. “Yet Christmas joy can soon amount to new year tears if people are spending and celebrating beyond their means and that can mean a lasting negative record on a credit file.”

Multiple card debts

If you are faced with a number of card debts, Ms Schelbert advises paying the smallest debt off first.
“I usually say pay off the card with the smallest debt first and get rid of it. Then add the amount you’re paying on to the next card and so on,” she said.

Ms Schelbert says people who only make the minimum payments on a credit card are not paying off their card.

“The minimum monthly payments are actually, when you do the calculations, only paying the interest. Those people are not getting anywhere.”

Consolidating — cards vs. loans

Traditionally, debt consolidation is done through a personal loan but increasingly people are turning to credit cards to consolidate debts.

Credit card companies are targeting the consolidators with attractive low and zero interest rate offers on balances transferred from rival credit cards.

“After car purchases, debt consolidation is the second most popular reason for taking out a personal loan but credit cards are challenging this with very appealing zero per cent balance transfer offers,” said Cannex senior financial analyst Harry Senlitonga.

There are currently 15 credit cards on the market offering zero interest rates for a limited time on balances transferred from other cards.

Two of those cards feature zero interest rates for four months, while the rest have six-month honeymoon periods.

Many other cards are offering low rates, even as low as three per cent, on balance transfers. Some of these are for the lifetime of the balance.

After the zero rate honeymoon period is over, those cards revert to interest rates ranging between 9.89 per cent and 19.75 per cent. Only three have no annual fees, with one card charging $200 per year.

Only one of those cards also extends the zero rate honeymoon to new purchases as well as balances transferred from other cards.

Getting a credit card is simpler than getting approved for a personal loan and this is the main reason why they are taking over as the preferred option for debt consolidators said Mr. Senlitonga.

“In some cases I have heard about, you don’t even have to show 100 points of ID to get a credit card, compare that to all the documentation you need for a personal or car loan.”

Consumers can be better off using a zero rate card for consolidation, says Mr. Senlitonga, but only if the card is not also used for new purchases.

Comparing the two options on a debt of $10,000 to be paid off over three years, the zero rate cards come out slightly cheaper than a 9 per cent personal loan, if the consumer is disciplined and committed to the repayment plan

“You may start out with the purest of intentions but if there’s even the slightest chance of you relapsing and using the credit card again, repaying late, not repaying as much as possible during the introductory period or, worse still, making only the minimum repayment required, forget the credit card idea,” Mr. Senlitonga said.

“It may be slow and steady but if you can’t trust yourself with a credit card, a personal loan will get you over the debt finishing line a lot sooner.”

But using a personal loan for consolidation is not for everyone.

“Most of the banks will only lend up to $30,000, unsecured,” broker Ms Schelbert said.
“Many people have a few cards and a car loan and suddenly they owe more than that. The banks won’t refinance them.”

Mortgage refinancing — pros and cons

Mortgage refinancing is a popular option for people with high consumer debts.

Home owners who have built up equity in their homes can combine these debts with their home loan in a new, bigger mortgage.

The advantage of that is you can reduce the number of debts you have to manage down to just one — the mortgage.

Plus all your consumer debts now attracting high interest rates will become part of your mortgage and be charged at the lower home loan rate.

The downside is that the interest is charged over a longer period of time. A mortgage can last up to 40 years so over time more interest will be charged on that original debt in the long run.

The Mortgage and Finance Association (MFAA), the industry group that represents mortgage brokers, is warning that high credit debts and even high card limits can affect your ability to access finance.
“Lenders don’t like risk,” said mortgage organisation MFAA chief executive Phil Naylor.

“They assess a range of risks when determining how much they are prepared to lend and approving your loan.
“A simple way to increase your borrowing capacity is to lower your credit card limit. In the eyes of the lender, the higher your credit card limit, the more chance you have to get into financial difficulty. A low limit reduces the risk of defaulting on a loan repayment,” Mr. Naylor said.

Ms Schelbert, who has a profitable business refinancing mortgages, says it can often be the only option outside of bankruptcy for people with high debt levels, but unless the consolidation is followed up by a more disciplined approach to spending, it won’t work.

“Most of the banks say we will do this refinancing for you but only if you cut up your credit cards. Of course they can’t force you to do that but some ask for a statutory declaration that you will.”

Ms Schelbert has one client who signed a statutory declaration for a big bank, agreeing to cut up their credit cards. Six months later the same bank issued that refinanced mortgagee with a new credit card. The lesson from that tale is that consumers can’t expect to get assistance with being disciplined from their lenders.

The other downside to mortgage refinancing is that your home loan repayments get bigger. Along with recent interest rate rises, with more rate rises are likely, that can add to a household’s “mortgage stress.”

“I honestly believe that the mortgage stress that everyone is talking about is not being caused by high housing costs and interest rates,” Ms Schelbert said.
“Mortgage stress is caused by consumer credit debts.”

Just how much consumer debt is hidden in refinanced mortgages is not measured and is the unknown aspect of the mortgage stress debate. That debate dominated the recent federal election, but mostly was blamed on rising interest rates.

Debt agreements — no interest, no more credit.
“Want to pay off your unsecured debts at no interest?” blares a colourful advertisement in a local suburban newspaper.
“Through a government legislative debt agreement, you can remove the stress of dealing with your creditors and debt collectors plus remove the stress of repaying your debts individually.”

What the ad doesn’t mention is that a debt agreement (under part nine of the Bankruptcy Act) is just one small step away from full bankruptcy and requires the debtor to declare themselves legally insolvent.

That can have major ramifications later on.

The debt agreement will be recorded on their credit reference file for up to seven years and will definitely prevent them from accessing almost all forms of credit for at least that length of time.

The ad also doesn’t mention that a debt agreement costs money which is added to your liabilities.
Of course, it also fails to explain that any consumer has the right to negotiate with their creditors directly if they are unable to meet all their repayments.

Nevertheless, the number of debt stressed consumers starting debt agreements is growing rapidly. In the last three months of 2007, 451 new agreements were started in Victoria, a rise of 14.46 per cent over the same period one year ago.

Deborah Southon runs Australia’s largest specialist debt agency and says business is booming.
“Something really bad is going on,” she said.
“We have never had the volume of calls coming through as we have now.”

February is traditionally the peak period for bankruptcy activity, and the debt industry is preparing for another bumper year.

“Honestly, if this keeps up we are going to see a record number of debt agreements and refinance deals,” Ms Southon said.
Personal bankruptcies are also trending up, especially in Melbourne’s outer suburbs. There were 1165 non-business related bankruptcies in Victoria during the December quarter. That is up nine per cent on the previous year.

With discipline and planning, indebted consumers can overcome their post-Christmas financial blues.
Without discipline, you can look forward to appearing in next quarter’s insolvency statistics.

http://www.news.com.au/heraldsun/story/0,21985,23189710-5012854,00.html

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Home Loan Application

Saturday, March 8th, 2008

Getting a Mortgage Loan Approval

What is important to Banks & Lenders?

Not every applicant is approved for a home loan the first time he or she applies. For a variety of reasons, even after a lot of hard work, sometimes a loan just can’t be approved. It may have to do with the applicant’s credit or savings history, employment stability, debt structure, or the value of the home.

Homeownership is not out of reach with some planning, discipline, hard work and applying the following tips.

Before applying for a home loan establish a constant record of paying bills on time

Most Banks and Lenders will want to review how you have handled your credit in the past. This includes all credit accounts, including utilities, revolving debt (credit cards, etc) and installment debt (car loans, student loans, etc.)

It is critical for you to bring all overdue bills up to date immediately and begin paying them on time in a consistent manner.

Frequent employment changes are normal.

Banks and Lenders are likely to look more favorably on an applicant who has been in the same (or very similar) line of work for generally two years or more.

If you have been working for less than two years, expect the Bank or Lender to ask why. There are many acceptable reasons they include:-

• You recently finished school, vocational training and or left the military.
• Your work is typically seasonal and gaps in employment are customary to the particular industry that you work in.
• You may have been laid off from your job.
• Frequent employment changes are normal in your line of work (sales, contract work, etc), but you have been consistently employed and maintained a consistent level of income over a 2 year period which can be substantiated by end of year group certificates.

You may want to pay off some debt to lower your debt – to – income ratio.

This step will make it easier to qualify for a loan, if your debt ratio is high.

Get used to paying a mortgage by saving

If you are still living at home and not used to paying a housing loan a good idea would be to work out the repayments on a potential property that you like, from the many calculators on the internet today.

Once you have determined the repayment begin to save that amount, this will have a two fold effect you will have some savings when you are ready to apply for your housing loan and you will be used to repaying the loan amount.

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Debt Consolidation – Structure and Save

Saturday, March 8th, 2008

With almost everything available on credit, borrowing via loans and cards has never been easier.

But some of this credit comes very expensive, with interest rates up to 20% and more.

An effective strategy to help you reduce your debts is to reduce the interest burden.

The first step is to separate all the different debts that you have – credit cards, car loans, store cards etc – and establish exactly what you owe, and what interest you are paying on each account.

The second step is to look at how much you can afford to repay each month.

If the bulk of the ‘debt’ is high interest it may be worth consolidating all your debts into one lower – interest loan.

One regular monthly repayment can be easier to manage, and a lower interest rate will give repayments more impact.

The lowest interest rate may be achieved by consolidating debt into a home loan. Most lenders will offer this option as long as there is sufficient equity available in your property to provide security for the loan.

Things to remember:

• Pay attention to any fees and charges associated with consolidation
• Keep repayments at the previous level – with the lower interest rate this will result in the debts being repaid sooner.
• By giving a mortgage over your property you place your property at risk if you default on the loan.

When looking to refinance – make sure your broker or loan provider is a member of the MFAA. All members of the MFAA adhere to a strict Code of Practice, have undergone comprehensive industry training and are bound by the Credit Ombudsman Scheme.

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WHO INCREASES OR DECREASE INTEREST RATES IN AUSTRALIA?

Saturday, March 8th, 2008

Interest rates are based on decisions made by the Reserve Bank of Australia (RBA) on behalf of the Federal Government.

The RBA meets every month to decide whether interest rates should be changed.

Lenders then use these decisions as a ‘basis for setting the interest rates for their individual loan products’ and will usually alter interest rates a day or two after any RBA announcement.

Generally, when the economy is in a trough (that’s when unemployment is high and consumer spending is low) the RBA reduces interest rates to stimulate economic activity.

The reverse is the case in a ‘boom’ situation and rates are increased to curb inflation.

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A GUIDE TO HOME LOANS & RATES IN AUSTRALIA:

Thursday, February 28th, 2008

All organizations in the mortgage industry in Australia require a prospective borrower to fulfill their selection criteria before they will approve a home loan. Traditional lenders tend to have more stringent criteria; the non-conforming lenders are a lot more flexible, and the mortgage managers are somewhere in between.

How interest rates are determined…

The Reserve Bank of Australia RBA sets the official interest rate, according to how the economy is performing at the time. In its monthly meetings, the RBA considers the inflation rate and such key economic indicators as unemployment, the consumer price index (CPI), producer price index (PPI) and retail sales. After analyzing this information, the board determines whether the existing rate should be held or changed.

The RBA sets the cash rate - the rate at which banks borrow money. Banks then add their own margin - the fee you pay for the use of the money - to set their mortgage rate. The RBA uses interest rates as a tool for controlling monetary policy. For example, if economic activity is deemed too strong, it may try to slow things by raising the official cash rate.

This flows on to higher mortgage rates and so higher repayments. More money repaying the mortgage means less to spend on other things, so economic activity slows.

Interest rates on home loans…

There are two types of interest rates that apply to home loans - variable and fixed. You can choose whether you’d like a variable or fixed-interest rate, or a combination of both, depending on the type of loan product you decide on.

Variable interest rates: The majority of home loans in Australia have been taken at a variable interest rate. As the name implies, variable loan rates will fluctuate with the market and the official cash rate. Therefore, if the official cash rate rises, your loan interest rate rises and so does your repayments, and vice versa. Loans with variable interest rates tend to offer more flexibility in payment options.

Fixed interest rates: This type of interest rate allows you to fix the interest rate you borrow at for a certain period within the overall loan term. Fixed terms tend to be from one to three years, however some lenders may offer 10-15 year terms. With a fixed interest rate you have the certainty of set monthly repayments, which are not affected by changes in the official cash rate. This works in your favor when the official cash rate rises because your repayments will not increase; but you cannot enjoy lower repayments when the official cash rate falls. With a fixed-interest rate, your loan provider is taking the risk on the market, which is based on their assumptions about future interest rate movements.

What’s been happening in the market?

Interest rates have been decreasing for more than a decade, and for the past few years Australians have enjoyed low interest rates. January 23, 1990, the official cash rate was 17-17.5%; on July 2, 2004, it was 5.25%. As a result, household borrowings are at a record high: in June 1997, Australians owed $202.8 billion in housing and in May 2004, this figure has increased to $577.1 billion.

What Interest Rate is best for you…?

• Your loan decision should be based on a mortgage product suited to your individual needs not on a type of interest rate.
• Do not borrow so much that a rise in interest rates would leave you in trouble. Factor in possible rises so you are not left short.
• You should be able to switch between interest rates over the loan term without having to refinance.

Speak to your mortgage broker, who should also be a member of the MFAA. Under of code of practice MFAA members are encouraged to continually improve their industry knowledge by keeping abreast of economic trends and undertaking MFAA-approved and run courses and industry seminars.

For more information on interest rates, most newspapers, television and radio news broadcasts contain information on interest rates, official cash rates and the housing market in their financial and property sections. Additional information can be found on banking and financial institution websites. You can also visit the Reserve Bank of Australia website at www.rba.gov.au and the Australian Bureau of Statistics website at www.abs.gov.au
Figures from the Australian Bureau of Statistics Website - www.rba.gov.au

*Jennifer Schelbert A.Fin. /Dip. Fin. Serv. /FinMBM is a director of Mrs. Mortgage, a licensee for Choice Aggregation Services, and a full member of the Mortgage Finance Association of Australia & COSL. Phone +61 3 9315 9750

Disclaimer: This document is for information purposes only, and must not be relied upon as a substitute for professional services or legal advice.

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