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.
Thursday, April 22, 2010
Friday, February 19, 2010
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;
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.
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;
- 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.
- 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.
- 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.
- 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.
Monday, February 1, 2010
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.
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.
Friday, January 22, 2010
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.
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.
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