My Home Loans Broker

100% Finance

2011-10-31T22:50:00.000-07:00

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

2011-01-21T23:12:00.000-08:00

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

2010-04-22T22:18:00.000-07:00

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

2010-02-19T20:47:00.000-08:00

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;

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.

Cross Collateralised Properties

2010-02-01T01:00:00.000-08:00

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

2010-01-22T05:03:00.000-08:00

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

2009-04-20T21:39:00.000-07:00

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.

Switching Home Loans in this current climate

2009-03-18T01:33:00.000-07:00

With low Home Loan interest rate at the level that it is, I am observing increasing number of people trying to get out of their current fixed rate that they had locked in over a year ago.

It is easy to see why consumers may be quick to conclude that they can save on interest charges when they see the difference between their fixed rate (eg: 7.5%) and the current interest rate (eg: 5%). Furthermore, banking and non-banking institutions alike are advertising their products and services the way all clever advertisements are designed to do - which is to attract consumers to use their products. Nothing wrong with such marketing strategies such as honeymoon rates, no ongoing fees and credit cards with no annual fees...for consumers who read every fine print and pay attention to the smallest detail.

It is a good idea for consumers considering such offers to find a mortgage broker or discuss with your existing broker about the cost of switching home loans. In the early '90s, people with mortgages switched home loans on average every 7 years. Nowadays, it's more likely every 3-4 years. A very plausible explanation of this could be due to the increase in the number of mortgage brokers who were coming out of the banking industry. Consumers with existing mortgages began to hear more often (from broker channels) about the savings they could incur if they switch home loans.

There are a few reasons why people should switch home loans but the most common reason would be to save costs whether it be in monthly repayments, in the shorter term or in the longer term. Some people, particularly investors, may well decide not to switch loans for a given tax advantage even if the costs are higher.

So, the question that every consumer really needs to ask is, will this switch save me money?

Switching home loans is, in most cases, relatively easy but tedious as you will have to do the paperwork all over again. When you switch, you will be up for some costs such as:

* Deferred Establishment Fees,
* Early Penalty Fees,
* Discharge of Mortgage,
* Registration of Mortgage,
* Application Fees,
* Package Fees (of the new loan),
* Valuation Fees,
* Bank Legal Fees,
* Peruse Document Fees (if you have a company or trust).

Some of these costs are bank fees and some are government charges. But regardless, please always ask the question how much will it cost for me to refinance or switch loans. Once you have the numbers, do a quick calculation to see when you will break even after switching. For example, when you switch a $300,000 loan, an indicative break cost could be $10,000 (depending on the bank, loan and other factors). The interest that you will save is 3% per annum. This means that you will break even, and start to save money after the 14th month. The first 14 months will be the time taken to recoup the $10,000 to switch loans.

The decision to switch loans is ultimately yours. Your broker can help equip you with the numbers and the numbers will tell you the story. If the costs are not too high, then it might be a good idea. Otherwise, sticking with your current loan facility is not such a bad idea.

Your broker should provide you with a Broker Contract that will disclose what he/she is paid or the range of commission they will receive when you switch loan.

Banking Errors on your Home Loan Statements

2009-01-16T20:28:00.000-08:00

I have recently received a software that will check home loan bank statements. You can easily procure this software by doing a google search on Loan Checker. Care, there are 2 versions of this software in Australia. Here is the link, http://www.theloanchecker.com.au.

I found this software to be very informative. It will check the trail of money going in and out of the loan account. I have since keyed in a set of mortgage statements and noticed that there are some discrepancies even within a short period of 6 months. However it is not big enough to seek a reimbursement from the bank. This has also been shown on A Current Affairs in Australia. My curiosity has gotten to me and thus the purchase of the software.

Now if I can find discrepancies within a 6 month period, the probability of finding a greater variance for a longer term loan will be more pronounced. I am willing to invest my time to test this theory out and I will be offering my readers a FREE service (free to the first 50) where by I will input all the figures on your bank statement into my software and will provide you with a report and perhaps a sample letter for you to send to your bank for reimbursement. If you are keen, please register on my website, www.myhomeloansbroker.com.au.

It is time to budget and save!

2008-12-07T16:39:00.001-08:00

It is almost Christmas again. Are you going to buy a lot of gifts and max out the credit card this year? or are you going to be wise about buying gifts and stretch the dollar? In previous years, it is common to see that we love to spend money buying gifts for loved ones and we will deal with the credit card bill later. So I think that it will be interesting to see if in the New Year, 2010, will our spending habits be the same as previous years or have we been wiser?

Personal Budgeting and Personal Savings is not a new idea. I learnt about this when I was very young. I was given a money tin to put some of my pocket money in it. I believe that we have been exposed to this concept in some way or another. However everyone has a different view point in how important this concept should be.

It is only human for us to spend but with the ease of obtaining credit cards we could get ourselves into a lot of financial trouble. We are a spending nation and we love to shop. We shop because we need things like food, shelter and clothing; we also shop because we want things like play station, Wii, bigger car, bigger house, electronic gadgets, jewellery etc. However, are we shopping for appreciable assets like properties, shares and collectible items like art and antiques?

So why is savings so important? We save so that should the need arises; we can use our savings at a later date. The older we get, the more we will think about lifestyle in retirement years. With writers like Robert Kiyosaki, we are seeing younger people getting out of the "rat race". Mr Kiyosaki speaks about investing well and building businesses that will provide you with positive or passive income. However with most of us, we will have to start with an active income, IE our jobs. Once we have saved sufficient sums of cash, we can then invest our money to either buy or invest in a business or shares which in turn should give us passive income. The keyword here is should. I do not have crystal ball and therefore I cannot predict what will happen next year let alone tomorrow.

Why is this viewpoint important? This is important because we currently live in an economy with relatively low interest rate. We have a job (assuming that we are employed) and we pay our bills. What happens if we took the path of buying properties with debt, some might even call it good debt, or buy shares and borrow against it? If there is a small change in the interest rate, depending on the amount borrowed, the increase in accrued interest rate payable to the lender could be substantial. Let’s take a small example of a 30 year home loan of $400,000 at 5% interest rate per annum. Interest is calculated on a daily balance and charged at the end of the month. The monthly repayment to ensure the loan is amortised over 30 years would be $2,147.29. If the interest rate were to rise by 0.25% the repayment will increase to $2,208.81, that’s a $61.52 increase per month. Now let’s project a 1.00% rate rise. This will increase the monthly repayment to $2,398.20 or $250.91 per month extra that we will have to pay for the privilege of owning a home with a mortgage.

Again assuming that we are still working, our wages will not increase at the same rate as that of the reserve bank. Therefore with any increase in the official interest rate, if we had budgeted for this, we should be well prepared. However, those who are not ready for this increase, may have to find a second job to make ends meet.

The key to this is budget within our means and not outside our means. Spend within our means. Do not spend more than we earn and do not spend on things that we do not have the funds for. It is easy to say that I will get paid tomorrow or there will be a tax refund cheque coming. What is important is that it is not in your hands at this moment.

Savings is an important key. If our capacity is only to save 10% of our income, then so be it. If we cannot save 10% of our income, then try a smaller amount such that you will not feel it and progressively move to a higher amount. Remember, savings is a discipline, however once you get the hang of it; it will be with you for life.

Another Drop in Interest Rates

2008-12-02T03:35:00.000-08:00

Well the Reserve Bank of Australia has today, 2nd December 2008 announced a reduction in interest rates by a further 1.00% or 100 basis points which now makes the cash rate to be 4.25%.

It will be very interesting to see if the Australian banks and Money Managers or originators will follow suit. I am seeing more clients now breaking their fixed rate loan which they had applied for early in the year to enable saving their interest cost. To break your fixed rate loan today if it has not expired will certainly trigger economic costs to the borrower. Economic cost is where the banks will change the borrower for early termination of the loan.

So is it worth breaking, well you will need to do the sums. Generally those that have a fixed rate and would like to break the loan to get a cheaper rate should work out the benefit of when you will recover the economic costs. Take the difference of interest rate and the savings in dollars and divide this with the cost to break your loan. For example, if your break cost is $5,000 and you have a fixed rate loan of $400,000 at 10.00% and the fixed rate is now 6.50%, this would be a savings of 3.50% of interest. Working on interest savings only, this will mean that you will save approximately $14,000 per year in interest or $1,166 per month in interest. With $1,166 per month, you will be in front with just over 4 months by breaking your loan. If the break cost is $10,000 then it will be just under 9 months.

So those of you with high interest rates which was locked early in the year, you should now speak with your mortgage broker and get them to find you the best rate. Alternatively, go to www.myhomeloansbroker.com.au and we will assign a mortgage broker to you.

Fixed Interest Rates going down

2008-11-12T19:57:00.000-08:00

CBA has today reduced their fixed interest rates. What does this mean? In short, CBA economists believe that official interest rates will most probably go down and therefore they can pass this on. This is good news for consumers but .... will it last?

Let's see how far down both the variable and fixed rates will go and see the reversed of how high and when the rates will go.

Again, if you are asking should I therefore be fixing now, please read my previous blog, to fix or not to fix.

Mortgage Broker under attack

2008-11-10T19:43:00.000-08:00

Have you seen any reports about mortgage brokers doing the RIGHT thing? In fact, it would appear that the media loves to report on negative experiences with mortgage brokers.

This year, we have seen consumers becoming more aware of products and services offered by mortgage brokers because of the credit crunch in the US and bad practices of mortgage brokers in the US. It was very common in the US for mortgage brokers to write loans for consumers who do not qualify for normal market rates. Over here in Australia, most home loans are securitised which means that they are generally conforming loans and have a lower probability of default.

"Brokers were once again subject to negative press over the weekend with Herald Sun columnist Scott Pape telling consumers to “steer clear” of brokers and their “expensive” products" as quoted in today's Breaking News section of Mortgage Business article (http://www.mortgagebusiness.com.au/index.php?option=com_content&task=view&id=1368&Itemid=37).

Mr Pape’s advice stemmed from a recent Choice report which claimed borrowers could save thousands by avoiding brokers – but failed to acknowledge the real role that mortgage brokers play.

Yes I would agree with Mr Pape that there are mortgage brokers out there that have had other interests in mind, eg: looking after their own back pockets by choosing the lender that pays higher commission or even asking for a fee over and above the commission from the lender. But these are the minority of mortgage brokers which does not make ALL mortgage brokers bad.

Let's talk about how a good mortgage broker looks like:

A good mortgage broker will usually come with good references from past clients.
On making contact with a potential client, the mortgage broker will have set a rapport with the client and then set a mutual time to either visit them at their home or an alternative venue.

During the interview process, notes will be taken by the broker to capture the scenario of the loan applicant. There are generally 4 C's associated with this:

Capital (deposit/savings)
Character (of the applicant)
Capacity (the serviceability of the loan repayment)
Capability (ability to maintain the capacity)

Following the interview process, the broker should have gathered sufficient information to search for the most suitable product(s) based on the client's requirement.
The broker will generally present 2-3 options to the client taking care to explain the advantages and disadvantages of each product.
Upon selection of the product of choice by the client, the broker will lodge the completed application with all supporting documentation to the lender.
The client is advised about each step of the process ensuring a smooth settlement.
A good broker would have removed a lot of the complexity of the process away from the client.

I firmly believe that the consumer will need to do their home work and ask all the relevant questions to their mortgage broker. Also, it is important that consumers trust their mortgage broker and will provide, in confidence, information that will assist with the application process. Without this trust, it is a hit-and-miss type application and the mortgage broker can only describe the scenario to the lender as per the information available.

By the way, most mortgage brokers are paid by the lenders and will not require additional commissions. However please note, for some cases, especially the more difficult and complicated loans, the broker may charge a reasonable fee. This of course is negotiable with your mortgage broker.

There are a lot more stories of how mortgage brokers have saved their clients money and time. Where are the writers of such stories? Can it be that there are only bad stories out there? Mortgage brokers like any professional service, if used wisely can save the consumer a lot of time, money and help the consumer gain a lot more insights about a loan that they would otherwise just follow what a banker might introduce. There are over 30 lenders in Australia and over 3000 loan products. I do not dare to count as products are changed regularly by each lender. So how can a consumer or borrower find the right product for them if they do not have the time to do research? Hence the mortgage broker.

A lot of mortgage brokers were once a point a time, a banker. Regardless of whether the mortgage broker was a banker or not, all mortgage brokers have to comply with Commonwealth and State laws. Some of these compliance will require the mortgage broker to pass courses in Anti Money Laundry, Certificate IV in Mortgage Brokering, accreditation with the respective lenders, a clear police report, a clean credit report and on-going professional days. If you think that it is easy to be a mortgage broker, think again. The amount of paper work, courses, memberships and not forgetting the costs (telecommunications, marketing, print materials, corporate image, office equipment, back-end support, insurance etc), that a broker is required to incur are enough to turn someone off from being a mortgage broker.

So now knowing that it is not as easy to be a mortgage broker, what steps could I take to find a GOOD mortgage broker? The easiest is to ask your friends who they had used. Once you have made the appointment with the mortgage broker continue to ask questions. Questions like:

how long have you been brokering?
what background do you have?
have you written loans similar to my scenario?
what type of clients do you look after or prefer to see?
what are your commission structure?
do I have to pay for your services?
are you a member of a professional body like MFAA or FBAA?
are you a member of the credit ombudsman office?
do you hold professional indemnity insurance? and so on

The above are just some of the questions what you should ask your broker, and if at any time you are uncomfortable with the answer or if the mortgage broker is not able to answer them, then walk away.

Seeing a mortgage broker is like seeing a specialist. Would you go and see the dentist if you had a heart attack? Mortgage brokers are specialist in the mortgage field. They are not insurance or real estate specialist, they are specialist in mortgages. Do not ask them about real estate or even insurance. If they are going to comment on other topics besides mortgages, then ask them for their credentials. At the end of the day, ask yourself a question, who are you seeing? A mortgage broker or a financial adviser?

Now on the other hand, have you had a bad experience with a broker? If so did you report it? and who did you report it to? If you did not report the broker, what is the reason you did not report it? There are many organizations to which you can report the particular mortgage broker.

the lender, IE the bank that the broker referred you to
the credit ombudsmen office, COSL
the aggregation company which the broker is linked to
the professional body who monitors brokers, like MFAA or FBAA

As consumers, we must all take the time to advise the relevant authorities so that the unprofessional mortgage broker can be taken off the list of professional mortgage brokers. We should strive for a regulated industry so that everyone can have the best possible experience of a professional mortgage broker.

To Fix or Not to Fix my Interest Rate

2008-11-03T17:48:00.000-08:00

On Melbourne Cup Day, 4th November 2008, the Reserve Bank of Australia reduced the official cash rate from 6.00% to 5.25% which is a 75 basis points decrease. With the ever growing concern about what is going to happen tomorrow, borrowers should start to ask the question if fixing their interest rate now is worth doing or wait for further interest rate drops.

I have been hearing in the news about doom and gloom scenarios, about companies restructuring under the current economic pressures, investigation of companies and their board, share prices going down, super funds not allowing withdrawals (especially funds linked to mortgage funds) and job losses. These sort of reports from the media do not really give confidence that there is light at the end of the tunnel. However I am sure that there is indeed light at the end of the tunnel, it is just a little dim right now. To quote an ancient proverb, "To everything there is a season, A time for every purpose under heaven".

A number of my clients have asked me the question, should they fix their interest rates on their home loans or leave it as variable. Hence the topic, "To fix or not to fix". Well, the answer is not that simple and you the borrower will need to evaluate your current situation, and lifestyle.

You might ask, what has my current lifestyle got to do with fixing the rate? Simple. Do you have a budget? If so, are you sticking to it? Have you been able to stick to it? If your answers are Yes, then keeping the rate type as variable and riding the interest wave should not affect you. However if you had answered No to one or more of the questions above, then you might want to consider the security of fixing your interest rate, IE knowing how much you need to pay your loan every month.

The above is simply "living within your means". I have noticed that clients who keep to a budget also have goals. They are driven by the same set rules to minimise their loans or get it under control as soon as possible. This drive has earned them "reward points" or "reward dollars", like the ability to redraw from their current loan or to utilise their savings to purchase another property. The power of reducing your mortgage is the ability to budget well and be disciplined at it.

So what has this to do with variable or fixed rates you might ask. Well let's just explore this. In good times, do we save? or do we spend? If we start with an income of say $50,000 per annum, we would generally spend up to (hopefully) $50,000 and not more. So what happens when our income increases to $60,000 per annum? Do we spend just $50,000 and save the $10,000 or do we now spend $60,000?

Again, it is relatively simple. Are you living within your means? Have you a safety net in the event that you might need to live off your savings for a while? Everyone is different and understanding where you are at right now might provide you with the answer of fixing or not.

Ok so let's talk about lifestyle. Now everyone has their own "style". There is no right or wrong to this but you will need to balance this out with income and expenses. Income is the money that you earn, whether it is a business or salary, rental or interest, they are all income. Expenses are all the cost that is associated with living, for example food, entertainment, insurance, motor vehicle running costs, going to work every day, all monies going out are known as expenses. So the question of lifestyle is simple, where is your money being spent? Are you saving enough, are you paying off your debts (and not increasing them) and are you living well?

I have heard some people call it the 1/3, 1/3, 1/3 rule. 1/3 is utilised for living expenses, 1/3 is used for savings, and the final 1/3 is used for paying off debts. Where are you in regards to this? Also in good times, some of us will have spouses who can help reduce the mortgage quicker. Are you using this additional income to pay off the mortgage or are you spending this additional income because you can, because it is there?

Hence it is very important to know where we are at with our lives and are we living within our means. Things that need to be considered would be:

what if my income were reduced
what if I lose my job
what if my spouse stops working
what if interest rate increases
the same question could be asked, if interest rate were to decrease

The above are just a few questions that we need to ask of ourselves. Are we prepared for it?

There are some disadvantages in fixing your interest rates. Here are just some of them:

in a market whereby interest rates are falling, locking the interest rate might see you pay more in interest.
when you want to get out of your loan for whatever reason, for example whether you would like to sell your property or just refinance your loan, if you are in a fixed rate period, there might be penalties imposed on the loan.
if you need additional funds and you managed to deposit the additional funds into your fixed rate loan, you might not be able to redraw the additional funds.
some lenders will not allow you to deposit more funds into your loan without charging you a fee for doing so.

The best person that can decide if it is better to fix or not to fix the interest rate would be yourself. Your mortgage broker will be able to help you explore and weigh out advantages and disadvantages in fixing your interest rate.