100% Finance

It has been a while since I last posted a blog. I do miss my laptop and with a new keyboard, there is no excuse to not recommence with my blogging now. The topic of 100% borrowings for a home has recently come up again. So what is 100% finance? With cup day and the RBA dropping rates, should we then consider this?

100% finance in short is one's ability to borrow 100% of the equity that is being purchased. This was very common pre GFC. It was about this time in 2007 that lenders could lend 100% here in Australia and one lender went to 107%. Those were the days. Can we still get 100% loans? The short of it is, YES. By why would you?

Getting back to 100% loans. You would most probably find a lender who will "blend" their borrowings of a home loan with personal loans or with a credit card. This is the stop gap measure to force the borrower to "hurry up" in reducing the debts from the personal loan or from the credit card.

Have we not learn from the lessons of recent years? Yes, it is important to own your own home. Have a roof over our heads, but the question still stands, can we afford the loan? Let's say that we can, and the lender with the "blended" solution will help. The next question that you will need to ask is why could I not saved for a deposit? With a deposit, the interest rate would be much more favourable without the complexity of a higher rate with a personal loan or even with a credit card. Not forgetting the mortgage insurance that comes with the 100% lend. The savings from the mortgage insurance and the interest paid for this short term debt, might even be sufficient to purchase a small investment unit.

If we are not in a position to save, then going for this solution is not wise. Yes, some might argue that this will force saving habits, but if they are not there in the first place, what guarantees would there be in the future? We all love to live life to the fullest but are we saving for our future? Are we living within our means?

A Genuine Alernative

I have been reading the latest "The Adviser" a magazine for Australian Mortgage and Finance brokers. In this edition, they discussed the "alternative" lenders currently available to consumers in Australia. The list of alternative lenders or second tier lenders is rather long, AMP Banking, ING, and CitiBank are no means the exhaustive list of second tier lenders.

So are there any differences? These second tier lenders still lend out money to their customers, based upon their lending criteria. They have a variety of loans from Home Loans, Investment Loans, to Line of Credit. These products are the same as the major lenders. So once again, what are the differences?

The above magazine said that since the GFC, the majors are now dominating the home loans market by 90% which leaves the other lenders at 10% market share. But if you are looking for an alternative to traditional banking, perhaps you can consider the other lenders. However here are some things that you may find different.

Transactional Accounts
Not all second tier lenders have transactional accounts that you may be familiar with when comparing with the major banks. However one benefit is that some second tier lenders will offer NO FEE withdraws from other bank's ATM since they do not have ATMs themselves.

Service
Another difference is the level of service you may received from second tier lenders. One lender that comes to mine is based in Queensland. They will ensure that you have the very best experience in your lending. However their lending policy is one of the strictest.

Commissions
As some of these lenders may not have a physical shop front, they will rely on the broker network to write business for them. Some may not even have lending staff, so the entire lending role from interview, collection of information and submission is outsourced to the broker network. Some of these lenders may pay higher commissions, offer their brokers incentive with benefits to consumers. Always with commissions, you should ask your broker what they are being paid to lodge your loan and why they have chosen this lender/product for you. 

Cross Selling
Some consumers may like the idea of a one stop shop whereby they are able to get their insurances, loans, credit cards, personal loans and etc from one centralised location. These second tier lenders may not be able to provide all financial services however your broker if accredited, may be able to bridge this gap.

Once again, the above are some differences. To get the best deal, remember to ask questions, research the product or the lender and if you do not understand what your banker or broker is recommending, do not sign the application form.

All is not as it appears

The above "title" is NOT my title but that of John Edwards from Residex. In his newsletter of April 2010, I found it to be a very interesting read. I know when I read his newsletter, my eye brows were raised.

Here are some of the key points from his newsletter.

1. Melbourne market may be overheating
2. Any further rise in interest rates may lead to defaults
3. Many might have paid a higher price for property than they should have

As I follow the Melbourne market I am concerned mainly for this market. Readers from other states are encouraged to read up on his newsletter relating to your state or region. This blog is not an endorsement of his newsletter or Residex. I encourage my readers to do your own research.

So why is this article interesting? Well for a start, there are people who has stated that there is not enough properties in Melbourne and they feel that there is a shortage due to the increasing population of Victoria. I have seen that house and unit prices have been increasing and it is rather difficult for first home buyers to enter into the market for a property under $350,000. Yes, some might argue that there still are properties under this range so each property is in the eyes of the buyer, but I am referring to good quality properties which I am willing to move in.

Developers have a nose for these development opportunities and they have starting to invest in producing properties to sell to this market. The question is, has the demand slowed down? This is a rather hard question since there are still a lot of people migrating in to Victoria and calling this state home. The property prices have risen in this state due to the lack of supply of quality properties in Melbourne. So the market dictates the prices, with the highest bidding purchasing the property.

When the demand drops, with the continuing development of new quality homes, we will come to a point whereby the supply will overtake demand and an oversupply of properties will occur. Once this happens, there will be more choices for buyers and buyers can be fussy in find that dream home. Sellers and developers who planned to sell their property at a given price range will start see the change in the buying dollar and they might not get the price they set out to sell.

The inability to sell when required may cause other issues like bridging finance to occur or sales to fall over. People who are reliant on these sales may find themselves in a insolvent position and lenders may start to call on their loans to protect their interests. The rise in interest rates does no help either as a rise in interest rate means a rise in repayments.

So be vigilant when looking for that property especially during this time. Can you still find a bargain? Yes but you will need to do your home work and research the areas and know your prices. Use Residex or other research companies to assist with your research.

Interest Rate is on the rise

This week we heard the reserve bank governor commented that the Australian Cash Rate is between 15 to 100 basis points below average. With standard variable rates now in the mid 6%, another 1% will mean that those of us who have variable rate loan/s will see an increase of repayments when the rate rises.

One way of controlling this uncertainty is to fix your rate. Before you do so, have a read of an article I wrote some time back on Switching Home Loans and speak to your bank or mortgage broker. If you do not have a broker, go to My Home Loans Broker and register and a broker will be in touch.

An increase in interest rate on a variable rate loan will definitely increase the repayments. Remember when the Reserve Bank increase interest rate, lenders / banks could raise rates independently like that of Westpac Bank. In an example, for an interest only loan, a rate rise of 25 basis points equates to an interest increase of $20.83 per month for every $100,000 of debt, or an interest increase of $250 per year. An increase of 100 basis points will equate to $1000 per year for every $100,000 of debt or $83.33 per month.

So when you think of is, a small rise of 25 basis points might not seem to be a large increase on your mortgage repayments, however when you factor the loan size and potential increase in the future, this amount may increase to a level where it is unserviceable by borrowers. What should borrows do now?

Well there are a few strategies that borrowers can follow;

Budget
A budget is a useful tool. See my article on Budgeting. A budget will assist us in determining what income or money we are receiving periodically and what are our expenses. Remember the GOLDEN rule, money in must be greater than money out.

Money In - Money Out = Positive Savings.
Money Out - Money In = Negative Savings.

Do not fall in the trap that I can spend today as I will be paid tomorrow. There will be other needs and wants that will arise tomorrow and should you spend today and not after you have been paid, you might fall into the "credit" trap.

Re-finance
If you are paying a high interest rate right now. Speak to your banker or broker for options of getting a lower interest rate. Some ways of getting a cheaper loan;

1. Do you qualify for a Package where the bank will provide you with a discounted interest rate. Be careful as you will need to do the numbers to make sure that the annual package fees does not exceed the interest rate benefit.
2. Did you take out a loan in the past with defaults or unstable income and therefore had to pay a higher rate for the loan. If so, and your situation has improved over time, you may be able to re-finance your loan with a standard loan which may have lower interest rates.
3. Are you on a Low Doc loan? If you are able to now show servicing, then moving to a standard loan could lower your interest rates.
4. Do you have facilities that you do not need like Line of Credit? Some lenders will charge for this benefit in the form of a higher interest rate. Some lenders provides FREE redraw or Offset facilities that works in a similar manner. I would encourage you to speak to your banker or broker.

Debt Consolidation
Another strategy is to consolidate your debts. Try and get rid of all high interest loans like car loans, credit cards, personal loans, and store cards.

Some credit card companies are offering lower interest for a set period or for the life of the transferred debt. Remember that set period means that at the end of that period, the interest rate will revert to standard rates. The key to this strategy is NOT to use the card for NEW purchasers or cash advancement as the fine print will state that the low interest is only applicable to the transferred debt and not any new debts.

Borrowers who has equity in their property could re-finance to consolidate debts. Since you are paying the higher repayments already, make sure that you continue to maintain the repayments, this will ensure that your debts will be reduced quicker. The trap here is that, there is more disposable income and therefore I could spend it. Consolidating to a home loan will in effect allow the borrower to extend the debt over 30 years. 

Debt Reduction
Some borrowers have investments in shares and cash. These funds could be used to make a lump sum deposit on to the debt. By doing so, this will reduce the loan amount and the borrower could make a request to their bank to have the repayment adjusted to a more affordable level.

Again, if the repayment at the higher amount is comfortable for the borrowers, I would encourage borrowers to repay more.

NOTE: some borrowers may have tax advantages within their structure. These borrowers should seek financial advice from their accountant or their financial planner before restructuring their finances.

Obtain a second Job
A second job could provide further income and in turn allow the borrower to repay more or maintain their current loan repayments due to a potential interest rate rise.

Cross Collateralised Properties

I have been asked recently, what does it mean to have your properties to be cross collateralised? This term is not a new term. I will try and explain it in the most simplest way possible.

In this article, I am only talking about Cross Collateralising Properties. In general terms so long as there is a tangible value to an asset, like properties, and established businesses, lenders may allow these assets (case by case basis) to be Cross Collateralised.

Cross Collateralised can only occur if you have 2 more more properties. Cross Collateralised Properties in general terms is linking properties into ONE mortgage document. There are benefits in cross collateralising your properties, they are:

Utilising equity in your existing property to secure another property.

This strategy in effect creates a 100% borrowing capacity so long as you have sufficient equity in your existing property to do so. Please speak to your financial planner or tax accountant to understand further in regards to your tax position in utilising this strategy. In this example, it will be assumed that the borrower has the capacity to service the debt and therefore servicing will not be cover in this article. The example starts with a borrower who currently owns a property say with a Market Value of $800,000. Current debt on the property is approximately $500,000. This equates to a 62.50% LVR and $160,000 in equity (80% LVR - $800,000 x 80% -$500,000). So long as you can service the debts, you should be able to borrow up to 80% LVR without the need to pay mortgage insurance.

With this equity, the borrower can now purchase a property up to the value of $800,000 without paying mortgage insurance. To work this out, long form,

Property 1                                                                       $   800,000
Property 2                                                                       $   800,000
Total properties                                                             $1,600,000

Max LVR                                                                                   80%
Max borrowing on properties based on 80% LVR            $1,280,000
Equity not borrowed                                                         $   320,000
Total                                                                                $1,600,000

NOTE: other soft costs are not cover here and it is assumed that the borrower has funds to cover them.

As mentioned before one of the main reasons for doing this is to "tap" equity in your existing property and using this same equity to purchase another property at 100%.

Crossing Properties not belong to different borrowers

Another common reason for Cross Collateralised Properties is when the borrowers were to enter into a borrowing relationship with properties in their respective names. For example, borrower A has a $600,000 property with debts of $300,000, which means, that the current LVR is 50% with $180,000 equity (80% LVR - $600,000 x 80% - $300,000) and borrower B has a $500,000 property with debts of $350,000, current LVR is 70% with $50,000 equity(80% LVR - $500,000 x 80% - $350,000).

If both borrowers wanted to borrower an additional $225,000, borrower A might be able to by paying mortgage insurance however borrower B will not be able to as it will be a negative equity. (NOTE: this does not take into consideration of servicing or the ability to provide commercial facilities). Thus by Cross Collateralising both of their properties, their combined borrowings and also the new debt will fall under 80% LVR and therefore they will not have to pay for mortgage insurance.

NOTE: in this example, it is assumed that the lender is the same for both borrowers. This will not work if the lender are from 2 different lenders.



Selling a Cross Collateralised Property

We have talked about a couple of benefits, here is one main reason why having properties Cross Collateralised may cause problems. Whatever the reason is, there will be a time when one might want to sell their property. If this property is Cross Collateralised, the lender will need to ensure that their exposure to the existing debts can be sufficiently covered by the existing security (property) that is not going to be discharged. If this debt cannot be comfortably covered by the remaining property then the bank may not allow the property to be sold until the debt is paid down to a comfortable level which the lender will be happy to release the property.

Getting to know your Mortgage Broker

It has been a while since I last wrote a blog. There have been so many changes in the mortgage industry since. Smaller mortgage brokers have been forced out of the industry, a merger of smaller brokers, merger of large brokering firms and brokers expanding their product range from home loans to financial planning or even property sales.

So is the GFC (Global Financial Crisis) over? Well there are opinions and more opinions. What I can see is that people are getting smarter, "street smart" in regards to managing their finances. Buying needs rather than wants. So for those who is seeking to buy a home to occupy, or even an investment property, what are the best ways in looking for the best possible loan?

The good old days when parents who picked a bank generally stays with the same bank their entire life and their children would follow suit. However times have since changed due to phrases like improving shareholders wealth, banks are looking for way to increase profit. The title of the bank manager, a friend for life if now replaced by bank manager who would sell you products to meet their KPIs. But this is ok, so long as consumers themselves need to be more vigilant in seeking out the best possible loan for their own scenerio. Remember everyone has their own unique lifestyles and therefore, my lifestyle might not be the lifestyle of, say my neighbour.

There are now a number of website that consumers can visit to understand more about interest rate, may it be for borrowing or for investing. One such site is www.infochoice.com.au. This site will allow consumers to search for a loan that may suit them, may it be a credit card, personal loan, home loan or investment loan. Once you have this information what should you do next? Well once you have the information, it is important to look and understand what the lenders are offering. If you are looking for the "best" rate, then you will need to read the "fine print" to understand if there are any monthly fees, early penalty fees, annual fess and etc. The "best" rate might not be the best if you factored all the "hidden" costs.

Here is a simple example, say you own a property with a market value of $500,000. The amount that you had borrowed is $400,000 being 80% of the market value. The key to 80% of market value is that, most banks will not charge you mortgage insurance if you borrow 80% or under. So given an interest rate of say 6%, the monthly Principal and Interest repayment is going to be $2,398.20 based on a 30 year loan. This calculation is relatively simple, but here comes the interesting part, say you have a package fee (note: lenders will change this to wealth package, borrowers choice, professional fee, and etc, this is simply a fee to reduce your interest rate or provide you with a discount off the standard variable rate - generally) of $375 per annum. This fee per annum equates to $31.25 per month. So what does this mean? Well the $31.25 plus the month repayment of $2,398.20 equates to $2,429.45 or 6.12% in a true rate comparison. So you are in effect paying 6.12% rather than 6% in interest rate.

So do not think for a moment that a cheap interest rate is cheap. The other factor to consider is the early penalty fee. Early penalty fee is when you want to pay off your loan before the term is up on your loan. Why? because there might be a cheaper product, or you may choose to sell your property or other reasons. Some lenders will charge a percentage depending on how long you held you loan and some would charge a flat fee. Why this fee? Well it is the cost of borrowing or opportunity cost in providing you with a loan. Banks in the early days will have to absorb costs to fund your loan. So read the clause in your contract or ask your broker for the fee. Knowing your lifestyle and when you might discharge the loan, puts you in the best position to understand if this fee is applicable to you.

Imagine, if there were no branches, no back office and no staff to help you out with setting up a loan. The savings would be passed on to the consumer and we will get a cheap loan. There are a couple of banks doing it right now and I have heard both positive and negative feedback. I think that this is really an individual choice do utilise this.

So all in all, my advice is to equip yourself with knowledge. With knowledge you are in a better position to negotiate what you want in a loan. Lenders can only "sell" you what they are approved to sell. A mortgage broker will be able to evaluate most loans and provide you with some guidance to the best possible product for you. Remember, brokers are "sales" people and unfortunately some brokers will sell you loans that pays the highest commissions. Therefore it is important to do your "homework" before seeing your broker.


There are many brokers out there who is willing to "win" over your business. Ask questions and keep asking them. Only when you are satisfied with the answers, then make your decision. I trust that you have gain an insight of how to calculate a simple effective interest rate and how some mortgage broker operates.

CBA Raises Fixed Interest Rates

Interest rates were bound to rise, but did anyone think that this would happen this week? In the news today, CBA announced that they be increasing its fixed rates but will leave the 12 months rates alone.

With the Reserved Bank of Australia (RBA) reducing the cash rates just 3 weeks ago due to a forecast of a weaker economy ahead, why is CBA then increasing its fixed rates? We all know when the RBA reduced rates 3 weeks ago, most of the banks could not pass on the full rate reduction stating cost of funds are too high and therefore, to pass the full rate reduction is just not economically feasible. Now is this true? Well I think that part of this could be related to us as investors of bank shares. We have been seeking higher dividends year on year and in the same economic climate, we are still seeking the same level of return for our investments.

I believe that companies (IE banks) these days should look after their customers and not just shareholders. If they do not then consumers will seek alternative banking solutions. The other side of the equation is, if the banks did look after the customers, then the shareholders might lose on the income. So the challenge here is to find a balance for both camps. We are also seeing a lot more owner managed type banks such as Bank of Queensland and community banks like Bendigo Bank are just a couple of examples whereby consumers will feel a sense of belonging to a financial institution who cares about their customers.

Now back to the fixed rate, it is known that when interest rates move, especially with the fixed rate, the variable rate should move in the same direction in time with it as well. This is because the fixed rate is an indication of where the variable rate will be heading. Economist in the banks utilise economic models to create hypothesis on a prediction of rates in the future. So when the banks starts to increase their fixed rate, this will be a test to see if the RBA will continue reduce interest rates any further in the coming months.

We have also seen after CBA has raised their fixed rates, WBC and NAB follow suit. Should the other banks follow CBA's lead in increasing their fixed rate, this may start a trend of interest rates rising. So the next question is should I now start to fix my interest rate or wait? If I had a dollar every time someone asks me this question I would be well and truly retired!

So let's discuss a little about fixed rates and why someone should fix their interest rates. Like anything there is a reason to do something and it's a question of lifestyle. Whether it be staying at home and doing gardening or going out on weekends. Everyone is different. So what has lifestyle got to do with fixing your interest rate, well my argument is that it has a lot to do with their lifestyle. How you save, and how you spend your well earned money it has all to do with lifestyle. So to fix or not to fix? Do you need to have a routine with your finances? Do you need a plan to assist you with your budgeting? Do you need help in meeting some of your monthly expenses including lifestyle expenses? If you had answer yes to most the these question, then I would suggest that you consider fixed some if not all of your mortgage.

By fixing your interest rate, this will give you some routine, in that you know how much you will need to put in every month towards your loan. The other aspect of fixing interest rate is that it will stop the interest rate from rising. Thus should the rate increase by say 1% you rate will remain at the rate that you had fixed.

What are the negatives towards fixing? Well the reverse will occur, you will lose the flexibility in repaying your loans earlier or putting in lump sum money. If you had equity in your property most banks will not allow you to redraw from your fixed rate account. Only a couple of banks will allow redraw from a fixed rate loan but majority will not. Should you wish to put more money into a fixed rate loan, the banks may change you a fee for doing so. The other negative is should the rates decrease then you will not get the benefit of the further rate decrease.

So what is your lifestyle? Do you need to fix or remain as variable? If you are finding it hard to answer some of these questions, I would recommend that you speak with your accountant, financial planner or your broker or a combination of them. Arm yourself with the right information and make the right decisions.