Home Loans and Property Prices - To buy or not to buy?

Written by Michael McAlary

With significant increases in property prices being recorded across capital cities many of us question whether prices are too high, and if so when will they fall and return to “normal levels”. It also raises fears for some home buyers that they will be priced out of the market. So on the one hand home buyers do not wish to pay too much, while on the other hand they do not want to miss out. This can create enormous tension and stress.

We get asked about this a lot. When considering what to do home buyers should remember a couple of important points. Firstly, in the long run property prices track increases in average weekly earnings of a 2 person income earning household. If property prices increase at a faster rate they inevitably fall back to track this benchmark. History shows that this time frame could be months and even years. Secondly, each generation believes that they will be priced out of the market, however when prices do fall and return to pre-boom levels those that have been patient get the opportunity to buy in and bargain levels. So remember sometimes it is best to hold your nerve and wait. This can be very difficult to do when emotions are at play. Thirdly, over extending yourself in boom periods may lead to difficulties in future years in paying off the mortgage, if there is an unexpected life event. At a simple level if most of your income goes to paying off the mortgage it may mean that you can’t enjoy life and go on holidays, or those dinners that you enjoy so much.

If the above resonant with you and you wish to discuss your situation, please call us on (02) 9233-1111 for a free consultation.

Fixed rate home loans...

To fix, or not to fix?

Written by Michael McAlary

In managing home loan debt it’s always important to take an active approach. Specifically, home loan borrowers should stay abreast of interest rates and where the markets believe they are going. This is critical as it could save or cost you thousands of dollars, if you make the right or wrong decision to fix.

There are some key rules that home loan borrowers should remember. These are:

  • Fixing your loan may provide the long term security of consistent repayments but rates may continue to fall, reducing any benefit
  • Be careful when setting the term of any fixed period as the costs associated with breaking a fixed loan (economic costs) can be expensive
  • Fixed term loans generally limit your ability to make additional repayments
  • All lenders offer the ability to fix a portion of your loan i.e. part variable/part fixed. If unsure whether to fix, this allows you to hedge your bets

What is a yield curve?

The yield curve is a line that starts with today’s cash rate and plots all market rates, (e.g. 90 day bank bill swap rate) to longer dated interest rates, e.g. 10 year Australian Government Securities (bond rate).

When is a good time to fix?

  • If the yield curve is positive, i.e. the cash rate is lower than the 10 year Australian Government Securities (bond rate) then the market expects interest rates to rise, i.e. home loan interest rates will likely increase
  • If the yield curve is negative, i.e. the cash rate is higher than the 10 year Australian Government Securities (bond rate) then the market expects interest rates to fall, i.e. home loan interest rates will likely decrease
  • If the yield curve is flat, then the market does not know the direction of interest rates

The Reserve Bank of Australia has been reducing interest rates; however there will come a point in the economic cycle when it will stop doing so, increasing the probability of a cash, then home loan rates rise.

In determining whether to fix your home loan, it is important to consider where in the economic cycle interest rates are, in relation to the yield curve. If it’s negative then rates could fall further, but be careful as the banks may only reduce their variable rate and not their fixed rate loans.

Home Loan Interest Rates in 2014...

Written by Michael McAlary

We do not anticipate any major movement in variable home loan rates during 2014, either up or down. With the Reserve Bank of Australia (RBA) hoping that reduced US quantitative easing will lead to a lower Australian dollar to help our exporters, any rate increase would likely lead to an increase in the Australian dollar. On the other hand, with current rates at historic lows the RBA will want to keep its options open with regards to stimulating the economy and will therefore use a rate decrease as a tool of last resort.

Are you paying too much for your home loan? Call us on 02 9233 1111 to discuss.

The home loan challenge...

Written by Michael McAlary

There are over 5,000 home loan products on the market being sold by banks, non-banks and brokers on behalf of banks and non-banks. Before you see any of the above, following are a couple of questions you should consider:

Question 1: How do you know which product best suits your needs?

Answer: A “Client Needs Analysis” must be completed by all brokers when assessing your needs. Make sure one is completed for you.

Question 2: How do you know whether the broker is independent?

Answer: Ask the broker who owns the company. Most of the major brokers, including Mortgage Choice, Aussie and RAMs are either fully or partially owned by the banks, so the broker may be inclined to sell you their banks product.

Question 3: What is loan serviceability?

Answer: This is a calculation that determines whether your income is sufficient to pay off your mortgage each month.

Question 4: What is a Loan to Value Ratio (LVR)?

Answer: This is the level of borrowings for a given property and is used by banks to determine their level of risk. It is calculated as the loan amount divided by the property value. Higher LVRs can attract additional fees such as lenders’ mortgage insurance.

WealthMaker is an independent financial services company that can help you with all your questions and needs. Call us on 02 9233 1111.

What is an Interest Offset account and how do they work?

Written by Michael McAlary

Interest Offset accounts have become a standard feature in the home loan market. Yet we’re often asked what an Interest Offset Account is?

An Interest Offset account is a separate non-interest earning transaction account that is linked to the home loan account. The balance of funds held in the Interest Offset account is deducted from the home loan amount and interest is charged on the reduced balance.

The benefit of Interest Offset accounts is that while your Principal & Interest (P&I) repayment remains the same, the amount of interest payable has been reduced, with the difference used to reduce your loan balance. Over the term of your loan this can assist you in repaying your loan early, saving you thousands.

Interest Offset Accounts Are Complicated.

However, Interest Offset accounts work best when a considerable sum is consistently held in the account. To maintain the Interest Offset account balance, customer income is deposited into the account and day to day living expenses charged against a credit card with an interest free period. Once a month the balance of this credit card is paid from the Interest Offset account prior to the expiry of the interest only period.

The issues that need to be considered when considering a home loan product that comes with an Interest Offset account are:

  • The importance of being disciplined in managing the Interest Offset account each month. If borrowers are not disciplined the financial benefits will not accrue
  • Home Loan products with Interest Offset accounts are generally offered with a monthly fee or a higher interest rate
  • Depending on the size of the home loan the saving in interest is not significant compared to a basic home loan at a lower rate
  • Is it better to have a home loan product with a Redraw feature which allows you to access any additional repayments that you have made? Making extra repayments reduces the principal, and interest components of your loan
  • Funds in the Interest Offset account are readily available for other purposes such as investing, life’s emergencies and lifestyle purchases. It is important to recognise that if the funds are used for these purposes the benefits of Interest Offset account are diminished

The above factors are important when considering whether a home loan with an Interest Offset account is the right product for you.

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