Levering the Rate of change- Who’s really driving price of money?

May 3, 2017

 

Who has the best rate?

 Why has such a simple question become so complicated?

 Once (many years ago) the Reserve Bank set the Official Cash Rate. The Official Cash Rate acted as the accelerator and the brake for the economy – a lower rate stimulated the economy, higher suppressed it.

 A low rate makes it easier to borrow, both for houses and for business. Low rates stimulate property purchase and this has a multiplier effect in the economy.  The building industry is stimulated, employing many people. New home buyers shop for furniture and homewares, stimulating retail. Home owners or Investors borrow for improvements and renovations. House price goes up and people have created wealth, which stimulates spending… and so the world turns …

 Immediately post GFC (now 10 years ago – 2007) central banks worldwide lowered rates to stimulate a world economy that had stalled.

 In the GFC some world banks had failed. Here in Australia – Bankwest (owned by Lloyd’s of London, which collapsed) was bought by CBA. St George was sold to Westpac. RAMS (a good example of why you, as a borrower should never borrow from a non-bank) was unable to renew its funding – because its European backer collapsed – and so did RAMS. The good loans were sold to Westpac and the bad loans had their rates increased until people could refinance elsewhere. Macquarie deserted its own customers, ceased home lending, and trapped its customers with high rates. It was a difficult time.

 Up until the GFC – The Banks passed on the Official Cash Rate, plus a margin which varied from bank to bank. This margin also varied by loan size. The bigger your loan, the lower your rate – customers who brought more profit to the bank were rewarded. Loan size was the first price leverPost GFC a double price lever was introduced to reward customers who brought a bigger deposit and hence a lower risk to the bank.

  • The bigger your loan the lower your rate
  • The bigger your deposit the lower your rate
  • Bring BOTH to a bank and you were doubly rewarded

 Closer to home, the mining sector was beginning to wind down. To soak up the many employed in mining construction (and keep the unemployment rate down), Governments of the day encouraged residential construction of high density, high rise apartments.

 The Reserve Bank, who had misread the world economy and had been raising rates into the GFC, cut rates rapidly. A housing boom was created – deliberately.

Anyone who could buy, was encouraged. At the same time, people were being told there would be no old age pension until much later in life. Investors – both here in Australia and from overseas were the obvious buyers.

As with all good parties, early in the night everyone has a good time, later in the night though – things can get a little out of hand.

Enter stage right – two new players in the interest rate scene – they are called the party poopers. They are BOTH arms of government. It is no use complaining about the party poopers because the government is directing them

APRA – designated to manage the stability of the whole financial system – can cancel a bank’s licence. Banks MUST listen to APRA. APRA directed banks to do two things

  • Slow down investor lending to no more than 10% growth per annum
  • Raise extra capital for a future GFC

Banks came up with a clever plan … add another new price lever.

  • By increasing rates for investor loans – they could disincentivise investor loans and raise capital at the same time
  • They even tried to look slightly sad while they did it .. pardon my cynicism

ASIC – has a role to “protect” consumers – and has a specific role to oversee consumer law in the lending industry (NCCP) Anyone who sells loans must have a licence (ACL). Anyone who falls foul of ASIC can have their licence terminated. Banks and brokers alike MUST listen to ASIC. 

ASIC took the view that some Interest Only loans were being inappropriately sold. An investor product was increasingly being sold to owner occupiers. Remove the compulsory “P” from P&I and the repayments drop. Why is that potentially bad? The sting in the tail is that after the I/O period, the loan still has to be repaid in the original loan term. Peter has been robbed to pay Paul. Lower repayments in the short term jump markedly at the end of the I/O term.

ASIC took to visiting every bank – yes – door to door visits. ASIC took to scrutinizing lenders loan books. If ASIC decided that the bank was inappropriately approving I/O loans to owner occupiers, then ASIC threatened to cancel their ability to sell loans at all!!

 Banks came up with a clever plan … add a new price lever

  • By increasing rates for interest only loans – they could disincentivise interest only loans .. and make more profit at the same time
  • They even tried to look slightly sad while they did it … pardon my cynicism

 My personal view is that there are sensible reasons behind the current price levers – but every time a bank becomes “responsible” their profit goes up. This is because their cost of funds is independent of these factors. Banks simply alter the price to slow the sale of certain products.

If we wish to point the finger of blame for the two new price levers though – we must go back to the source – APRA (responsible to Treasury, responsible to the Treasurer – this is the government of the day) and ASIC (a statutory body answerable to the Parliament as a whole). Government policy is creating higher rates than need be.

 So, for 2017 who are the players in the game for setting the price of interest rates.

  • Wholesale funders worldwide**
  • The Reserve Bank
  • APRA
  • ASIC

** There are signs that the USA funding market will increase in price post Donald Trump. USA cash rate seems to be increasing (but still only 0.5%) The European Central Bank still has a bond rate of 0%, Japan still has a bond rate of 0%.

 Here’s the weird thing

  • The Reserve Bank still has its foot on the accelerator
  • APRA and ASIC have their foot on the brake

 The Reserve Bank is trying to stimulate the whole economy

APRA and ASIC are trying to slow investment lending

 The government would like to create “jobs and growth” – remember that one? So we would like to have jobs in construction, but restrict a whole class of people who would buy the product.

 Confused? – well join the club

 The key message for 2017 – is not to listen to noise. There is going to be lots of noise! Journalists must write something every day – the story should sound compelling and new. Better still if the story is dramatic!!

 What will happen to rates in 2017?

The Australian economy is barely spluttering along; housing is still one of the main bright spots. The Reserve Bank will be most reluctant to raise rates – it will talk a lot and do little (if anything) in 2017.

 APRA and ASIC will continue their current roles – this will fade in time – but not in 2017

The world will continue to give mixed messages

What will happen to rates in 2017? Very little – and possibly nothing

 Of the future – past 2017 – rates will eventually rise, albeit slowly.

 You should stay above the noise and plan … plan now for the top of the next interest rate cycle. 

I could not possibly know what the top of the next cycle will be (or when) – but my prudent suggestion is to give yourself certainty for now, by increasing your own interest rate – get ahead of the game.

Set your own payments “as if” your interest rate is 6%

Overpay your loan.

  • Any extra comes straight off the principle – that’s a plus
  • Any extra can be redrawn in a rainy day situation – that’s a plus
  • You have future proofed your budget by preparing for what your payments need to be

 FIX YOUR REPAYMENTS NOT YOUR RATE

Many people will listen to the media noise and be tempted to fix their rate. The logic is seductive. Your budget is fixed … BUT 

  • Your fixed interest rate will be higher than variable, so you are paying a premium for peace of mind– thus throwing profit at the bank.
  • You will be restricted in what you can pay back – why would you do that?
  • Even if you can pay a little extra back – you cannot draw it back when a rainy day comes – how is that of any help?
  • If a better offer comes along elsewhere – you can’t take it because you fixed.
  • You have a false sense of security – because you can only fix for a defined period – and after that you must renegotiate your loan with a bank with zero bargaining power.

2017 is definitely the time to plan for the future. Your circumstances are of course specific to you. I am happy to talk through your own needs with you personally 

I am often asked who has the best rate – such a simple question – but the answer requires an understanding of your own needs. This is much more complicated than most people realise – that’s why it makes sense to Ask Alan.

I will find the best loan for your specific and personal circumstances.

Call or Email me anytime… It’s what I’m here for… 0411 601 459

Want More? Download my app – Ask Alan – from the App Store and Google Play (click below)

Talk to me, ask questions, read up to date information, video on topics of interest…

App Store: http://apple.co/1ObU9AI  Google Play: http://bit.ly/1MP04tP 

Alan Heath… Mortgage Broker Brisbane CBD

 

 

Is It time to buy real estate? Making Sense of the Market 2017

May 3, 2017

 

Is it time to buy Real Estate?

Hindsight is a wonderful thing, but it isn’t much help when trying to anticipate the best time to buy Real Estate. That said, by analyzing past data it is possible to expose telling trends and cycles. And right now, the trend is your friend.

Let’s take a closer look into three particularly interesting and current trends:

  • Trend 1: When interest rate goes down, house price goes up
  • Trend 2: Sydney Median House Price rises at 7% per annum
  • Trend 3: Brisbane Median House follows closely behind Sydney Median House Price 

Trend 1: When interest rate goes down house price goes up. 

Competing forces are at work with interest rates and there is evidence we are at a significant turning point.

 In early 2016, as inflation fell and the Australian economy slowed, the Reserve Bank cut official interest rates twice, catching (some) people by surprise. The truism that “when rates go down house price goes up” could not have been better demonstrated in Australia’s most expensive market – Sydney, where house price which had paused has kicked up strongly!!

To see where house price is headed in 2017, we need to look at where interest rates are headed. The Australian p1 Jan 26 2017 stated that “low inflation has eliminated the chance of rate rises this year”. A proven reliable source, Bill Evans, Westpac’s Chief Economist, expects the Reserve Bank to stay firmly on the sidelines this year with no change predicted. He does however expect bank funding costs to rise by 0.3% this year. (Westpac Weekly Update Jan 23 2017). This is significant – Westpac are predicting rates will rise (by a small amount) this year.

 There are other players now in the rate equation – APRA and ASIC – both are government regulators with specific roles inside the financial system. (for a more info on their roles and effect, read my blog “What should I do about rate in 2017”)

 2017 could well prove to be the turning point in the (Sydney) property market.

 If rates to consumers trend up that means Sydney property price may well flatten and even turn down. Many people thought that in Sep 2015 and were proved wrong, but this time there is much more political sentiment encouraging a pause for Sydney house price.

 The message here: All signs suggest we are nearing, if not already at the turning point of the current cycle. If you were looking to ‘wait and see’ the bottom of the market, then wait no more!

 

 Trend 2: Sydney Median House Price rises at 7% per annum

Has Sydney house price gone too far? Opinions don’t matter – only numbers matter. And numbers show that by even the most conservative trend – Sydney Median House Price has been rising at 7% over the last 30 years.

 

 

 Look back to 1998 and 2002 when Sydney Median House Price “overshot” the trend. FOR EVERY YEAR THAT HOUSE PRICE OVERSHOOTS TREND, there is a year down the track that it must pause for.

 Fact – in Sep 2015 Sydney Median House Price overshot the trend. Fact – Sydney Median House Price has now overshot the trend by MORE in the current cycle.

 In my opinion, this means that Sydney Median House Price will now take a pause sometime soon. This upward trend cannot continue forever – it just doesn’t work like that.

 The message here: Buy in Sydney if you are going to hold long term until the next cycle – but don’t buy in Sydney to make a quick gain – as the saying goes – “that boat has already sailed”.

Trend 3: Brisbane Median House Price follows but lags Sydney Median House Price

Certainly, one of the most topical trends of the moment is the confident up-rise of Brisbane Median House Price. Interestingly this is equally true at the moment in … Gold Coast, Canberra, Hobart and Adelaide as well. (Domain Quarterly House Price Report Dec 2016)

 Our Sydney clients buying in Brisbane at the moment are doing so confidently, and either at or above asking price. They’ve seen this trend before…

Brisbane clients however, are experiencing frustration at not having their lower than asking price offers accepted and consequently are taking several attempts before being successful.  

 The market where you can offer low and wait to hear back from the agent to negotiate has GONE.

Look back at 2002 when this has happened before. Sydney house price swiftly rose, then stalled, and Brisbane (suddenly looking more affordable) eventually then caught up.

It is happening again right now – the numbers speak for themselves.

The message here: Buy now in Brisbane (Gold Coast, Canberra, Hobart and Adelaide) and capitalize on an upswing…  The trend is your friend.  

As always, you can call of email me anytime, it’s what I’m here for.. 0411 601 459

Take control when buying …Gaining the upper hand

May 3, 2017

Sometimes simply understanding the mood of the market can give you the upper hand when buying…

In Brisbane, the current market’s mood is strongly characterised by two, in my opinion, needless worries.  

Worry 1: That rates are about to go up, making it difficult to afford a loan.

Worry 2: That Brisbane house prices have peaked and are about to fall, meaning that buyers will end up paying too much. 

It would be safe to say that when purchasing a property, you the buyer want your offer to be accepted, while keeping your offer as low as possible. Worried buyers however, that are acting warily rather than decisively mean that the “average” Brisbane buyer is taking 6-12 months to buy and missing out on typically 4-5 properties in the meantime (by offering too low).

So why are these worries unfounded?

Worry 1, Rates: In the short term, markets analysts are predicting, as a near certainty, that the Reserve Bank will further cut the official cash rate as soon as next week.

In fact, there is a new “normal” in interest rates.

Around the world long term official interest rates are close to 0%. This will impact on keeping rates to borrowers low for YEARS to come. (http://www.bloomberg.com/quicktake/negative-interest-rates)

If you’d like to see your own numbers in the flesh, I have developed a loan calculator in my phone and tablet app Ask Alan (app store and google play). Input your loan amount, interest rate and loan term and it will calculate your payments now and also at 6% (which I predict to be a possible top of the next cycle). This way you can clearly see how any rate changes could affect your day to day costs, as well as helping you to plan for the future.

Worry 2, ‘falling’ House Price: A good way to look at Brisbane house price is in its relativity to Sydney house price.

Historically when Brisbane house price is 50% of Sydney’s it is considered ‘cheap’ and inevitable buying pressure sends it upwards. Brisbane is currently 51% of Sydney price.  

It is only when Brisbane house price reaches 80% of Sydney’s that it is considered ‘over-valued’ and something has to give. Usually this is where we see Brisbane’s market pause, not fall! Which means the time now is to buy, and leave the ‘wait and see’ for another day.

Gain the upper hand and become a decisive buyer:

 1.     Research the property online and ascertain a guide to the property’s value. Sites such as On The House or Domain are good options for reliable free data.

2.     Take the estimated property value, and then confidently offer MORE than that – knowing that your opposition (other buyers) are generally offering low or thinking timidly out of two misplaced worries. 

I believe I can say with confidence, that rates will stay low, and your property’s value is headed up. In a year’s time you will feel justifiably proud of yourself.

If you’ve enjoyed this blog and would like to read or watch more of my research and professional insights into all things Home Loans, Rates and Housing, I strongly recommend downloading my free, informative app: Ask Alan, which offers unlimited access to my library of blogs, articles, videos, trusted referral contacts, and of course my loan repayment calculator.

If you’ve already downloaded it- make sure you take a sneak peek- Ask Alan has a whole new fresh look!

Ask Alan…Free Download from your app store..

App Store: http://apple.co/1ObU9AI

Google Play: http://bit.ly/1MP04tP

Alan Heath… Mortgage Broker Brisbane CBD

Why use a Mortgage Broker?

May 3, 2017

When I first began in Mortgage Broking, over 17 years ago, only 10% of the market used mortgage brokers. The question was – “why would you use a one?” It was as if the reason to use a mortgage broker was because there was something “wrong with your credit”.

Today 60% of the market uses mortgage brokers and the question has changed – “why wouldn’t you use a broker?”

It’s primarily about trust.

A client of mine said to me when we first met; “I don’t trust my bank – but at least I know that … The problem with a broker though is how to know which one you can trust”.

A broker is paid by a lender – so how can you trust their intentions … well a bank employee is ALSO paid by the lender and HAS to tell you what their employer TELLS them to say. A bank employee may well provide you with a legal duty of care BUT – an employee’s PRIMARY responsibility is to their employer.  As a Mortgage Broker in Brisbane the thing I find most perplexing is that almost half the market STILL walks into their bank and takes what they are given often without question or options. How do you know for instance that a bank will give you the best home loan rate or the best home loan for you – and not for their own bottom line?

Here are some proven tips to find a trusted mortgage broker – if a mortgage broker ticks all these boxes they are the one for you ·        

  • Are they PAID THE SAME no matter which lender they recommend?       
  • Do they ask you for your personal circumstances before making lender suggestions?          
  • Do they explain the reasons behind their recommendations – including the impact that mortgage insurance may have on the choice?          
  • Are they a member of the leading professional body: the MFAA – to be a member a broker now MUST hold a Diploma in Financial Services?          
  • Do they work for a reputable brand – avoid one-man bands?          
  • Do they have experience?         
  • Do they have a website – does this web site have regularly updated information and useful tools such as a mortgage calculator?         
  • More particularly these days do they have a presence on other online sites? – facebook, linkedin, twitter, google places. You don’t want a broker stuck in the past.          
  • Do they have peer and industry recognition – you should be able to type their name and brand into Google – what has happened in the past should be there for you to see.          
  • Can they give you names of people who recommend them – better still does someone YOU TRUST recommend them?   

Above all, what you want is someone who will find the best home loan for you.

Want More? Download my app – Ask Alan – from the App Store and Google Play (click below) Talk to me, ask questions, read up to date information, watch video on topics of interest…

App Store: http://apple.co/1ObU9AI  

Google Play: http://bit.ly/1MP04tP 

Alan Heath… Mortgage Broker Brisbane CBD

Positive Credit Reporting – Not as Positive as it sounds!

May 3, 2017

 

STOP PRESS!  Positive Credit Reporting… 

In George Orwell’s book “Nineteen Eighty Four” the term doublespeak was coined. Specifically and deliberately deceptive, doublespeak makes a negative term sound appealing.  Positive Credit Reporting is doublespeak.

Your credit report has always been made up of a series of negatives. If you defaulted on a credit contract, a telephone bill, a rental agreement, a personal loan, a credit card, this showed on your credit file as a “default”.

If you eventually made payment for this amount then it would be amended to a “paid default”.

In my opinion this is a fair system. If I was going to lend you my money – I would like to know if you have a history of not paying debts back and arguing about them if you didn’t. That may sound a little harsh, however, as my personal opinion, I think it is fair.

Under a new ‘Positive Credit Reporting’ scheme introduced recently, lenders now have access to an extensive database of information that records not just your defaults, but also the timing in which you pay your bills. They can now even tell if you have paid the minimum amount or extra.

In my opinion no amount of doublespeak can make this a “positive”.

Some people like to pay bills early, some like to pay them close to the required date. And there is nothing wrong with either of these two statements.

Some people like to do everything “before it is due”, and some people run closer to or even after a due date. You knew all of these people at school – dare I say it the former were called “nerds”. The latter were more likely to be “popular”.

Take a step back and consider that scenario from the opposite perspective. Imagine that same mentality in present day– the “nerds” would actually now be more likely referred to as efficient effective and organised and the “popular” inefficient, non-committal and disorganised”.

Unfortunately however, it is often the nerds that end up in charge of banks and credit agencies.

When positive credit reporting was introduced every time you were just 5 days late – your late payment would be recorded. There has been discussion now to make this 14 days.

Sites such as mycreditfile.com.au allow the everyday Joe (be he nerd or popular!) to purchase a copy of their own credit file, however the information recorded on this new system is available only for lenders. Meaning you may have a squeaky clean credit file and still be turned down for credit because of a history of late or irregular payments!

I have already had an anecdotal example where someone applying for a personal loan has been told that they were “delinquent” by an average of 9 days on their “positive” credit  file and hence credit was declined. The term “delinquent” doesn’t sound very positive to me!!

Until the system is changed though – what is the lesson?

Positive credit reporting is now here and it is in fact the MOST negative system imaginable.. BUT … it is what it is.

The nerds are in charge and you need make every endeavour to fit in.

Here are some suggestions;

  1. Arrange for your home loan to be debited from your account the day after pay day
  2. Establish a separate “bills” account and allow your providers to direct debit from this account
  3. Check and update your Direct Debits periodically, if a processing error occurs and your bill isn’t paid – It won’t be deemed the banks fault and you may also be stung with penalties and fees from both sides

This should help ensure you are never “late”.

Perhaps the “popular” people need to become nerdier.  Perhaps the “nerds” need to let a little bit of “disorganised” spill in their world! It is what it is.

Want More? Download my app – Ask Alan – from the App Store and Google Play (click below) Talk to me, ask questions, read up to date information, watch video on topics of interest…

App Store: http://apple.co/1ObU9AI  

Google Play: http://bit.ly/1MP04tP 

Alan Heath… Mortgage Broker Brisbane CBD

 

 

Lets Talk About Brisbane

May 2, 2017

Go back only 5 years to 2012 and the talk was that “property price never went up”. Now the talk is that it (Sydney) has gone up too far.

The Reserve Bank and the banking regulator APRA are applying measures to slow the growth in investor lending.

Banks are responding in varied ways that are now favouring owner occupied loans over investor loans

  • This is great news for owner occupiers and first home buyers
  • Serious investors aren’t being deterred – they just factor in the price

To cut through the noise .. owner occupiers were given the last rate cut, investors were not .. it’s not the end of the world

The noise is over what is “causing” property price to rise. I would simply state that property value rises on average per annum between 5-8% (in a cycle that is not uniform) and so it has been for a 100 years (Alan Kohler : ABC economics journalist)

Peter Costello (former Aust Treasurer) states “Negative gearing isn’t causing property price to go up, interest rates are. When interest rates fall, property prices have to go up. The only way to bring down property price is to increase interest rate” (The Australian Fri 17th Jul).  However, as stated by the Reserve Bank, Interest rates are forecast to stay low for the “foreseeable future”.

Here is a property truism of my own, gained from historical data over several property cycles

  • When Brisbane Median House Price is 80% of Sydney Median House Price – it is “overpriced”, and
  • When Brisbane Median House Price is 50% of Sydney Median House Price – it is historically cheap – it’s time to buy.

Sydney Median House Price is now $1million and Brisbane Median House price is still only $490,000

The last time Brisbane was this “cheap” was in 2002.

When Sydney appears expensive buyers shift their focus north (and why wouldn’t you!)

The last time Brisbane was only 50% of Sydney’s signalled the start of a long buying cycle that “ended” when Brisbane hit 80% of Sydney’s.

What does this mean? – history would indicate that Brisbane is at the start of a cycle that may last 3-5 years and end with Brisbane Median House Price at around $800,000.

The message? The time to buy in Brisbane is now.

Call or email me anytime… It’s what I’m here for… 0411 601 459

Want More? Download my app – Ask Alan – from the App Store and Google Play (click below)

Talk to me, ask questions, read up to date information, video on topics of interest…

App Store: http://apple.co/1ObU9AI  Google Play: http://bit.ly/1MP04tP 

Alan Heath… Mortgage Broker Brisbane CBD

DREAM Home? DREAM Loan?

May 2, 2017

 

You’ve Found Your Dream Home? Let Me Find Your Dream Loan ..

Working out what makes your dream home is one thing, but what really makes the “Dream Loan”? 

My job is to find the “perfect fit” for a loan that works with your life

When approached by new clients I often get asked, “what’s the rate?” The rate of your home loan is indeed very important and rest assured I will leave no stone unturned to secure you the best rate I can BUT it’s vitally important to slow down first and let me take into consideration all aspects of your needs before we should decide on a loan for you.

Choosing a home loan based solely on the rate is like trying to buy a house based only on how many bathrooms it has – sure, it may be an important factor, but it isn’t the only one. If we get the wrong loan to begin with, then the costs involved in correcting the mistakes down the track can be very unpleasant.

Your dream loan has to be one that fits in with all aspects of your needs and wants. Your loan will most likely be a part of your and your family’s lives for a long time.

Let me state the MOST COMMON MISTAKE that people make when choosing a loan.

Thinking that their life won’t ever change…YOUR LIFE WILL CHANGE..!

YOUR LOAN NEEDS TO BE ABLE TO CHANGE WITH YOU … It still surprises me how many people ignore this obvious connection…?

The most common mistake that people make is to get talked into a loan that can only change with significant cost, because they fear change. Anyone who runs a business successfully knows that managing change is the MOST important thing they will have to do.

The only certainty in life IS change ….

Your dream loan is a loan able to morph with your lives, shift house with you (see my last blog on shifting home), stay stable through the good times and the hard – to put up with, metaphorically, everything from baby spew to teenage tantrums.

Every person is different – every family is different; Every bank product CAN be different…How? By talking to me, your experienced professional – I am here for the LIFE of your loan – each time you shift, each new addition to the family – each job change – together we can help your dream home work wonders with your dream loan…

So…Exactly how will I find your dream loan?

I will talk to you.

We will discuss your current needs and also the things that you can reasonably see going forwards. I will make sure that we choose a loan together that matches those needs and also leaves wiggle room for the unexpected.

I will absolutely find you the lowest rate from a lender and product BUT it is not where we should begin.

If you use me as you should, I will become part of the journey with you, a phone call, an email – and you will be surprised how often I answer you “in the moment” even as the years go by – and I will make sure that your loan really is a dream and not a financial nightmare

Want More? Download my app – Ask Alan – from the App Store and Google Play (click below) Talk to me, ask questions, read up to date information, watch video on topics of interest…

 

Shift your Home, Shift your Loan

May 2, 2017

 

Life evolves and so do our living needs. Relationships change, children appear, grow up (and stay increasingly longer at home), there may be times when we are single, employment opportunity leads to new places … the list is long and as varied as you can imagine…

When property prices stayed flat post GFC, shifting house became very difficult as the deposit for the next home is usually found within surplus from the sale proceeds of the previous.

Now that house prices are moving again, I am finding that many of my clients want to shift home.

It’s stressful enough with worrying about the money…

However with the right professional advice the process of shifting your loan with your home can be made a little simpler…

For most people the process starts with a Saturday morning coffee, an ipad and realestate.com (or some such similar). This is always the exciting part, you only want to shift if you can find the next home of your dreams.

A phone call or two later, you get in the car with GPS programmed and a Saturday filled with head spinning as you walk through good houses and bad. Inevitably … maybe over a café lunch and a bottle of wine you settle over the house of your dreams and you decide it’s for you. 

Regardless of the motivation behind wanting to shift, this blog is about the HOW. How can you shift house and shift your loan with you?

The practical side of “how” generally appears in only a few ways..

  • You might only want to shift if you can find exactly what you are looking for first
  • You might simply have decided to shift come what may
  • You might decide to shift house and hold on to the current house as a rental

To keep things simple I’m going to focus mostly on the first and second points- shifting and selling.

(I will say that if you wish to shift house and hold your current as a rental you must talk to me well in advance as it is crucial to ensure we have the correct loan structures in place – this loan structure will be VERY different from the way we structure finance for a shift and sell.)

So where do you begin in making such a big change to your life? Here are a couple of common options:

– You might want to have an “overlap” allowing you to shift furniture between houses with a touch of convenience. This gives you “two” houses for the overlap period (In this option we need to be mindful of staying under 80% to avoid mortgage insurance and ensuring that your income can support what is called the “peak debt”)

– You might like to sell first so that you know exactly how much you have to spend, sometimes “renting back” your own house while you find your new home. (This option gives you “no” houses for a while but might suit when the budget is tighter as it presents less risk)

– You might decide to be the master of timing and precision, aiming for a simultaneous settlement.  This can be a little like hitting a moving duck standing on a revolving platform at a shooting gallery – but with the help of your expert team (agent, broker, conveyance and removalist!) we can make that happen too. With expert precision the furniture leaves the old house in the morning and arrives at the new by evening. There is a service these days that packs, unpacks (including your clothes) and even has dinner cooked for your arrival!!

(with this option we need to ensure there are clauses in the contract to give you “wiggle” room just in case something unexpected causes the date of one settlement to change)

At various stages of life I’ve personally done all of the above… so I understand all of the butterflies you get in your stomach along the way (Can I say runny poo in a blog?) It is comforting to know that your broker has road tested the various solutions!! I will make sure that your worries are unfounded and guide you safely and surely throughout.

The “overlap” option will involve what most people call “bridging finance” – a term from long ago. These days all money comes at the same price and given that there are no exit fees on loans anymore, finance to cover the overlap is generally not difficult to arrange.

The purchase price of your new home and the sale price of your current home will determine the size of your final loan. There will be costs associated with the purchase and costs associated with the sale. I will help you work all of this out so that you feel in control.

Shifting home will involve many things for you to juggle but one that you need not worry about is how to shift your loan.  When I began mortgage broking some years ago it was always my hope that I would become “part of the furniture” in your life and that I would have the privilege of being part of the evolution you and your family, by making sure that finding the right loan to suit each stage would never become the “nightmare” story you sometimes hear.

Every situation is different, and it is my job to ensure that we find the right solution for your shift.

If you shift house, settle in and at the house warming you get to show off your dream home without finance nightmares being mentioned to your friends, then I will have played my part.

My role is to be a valuable, but unseen, member of the team – that is what makes me happy.

Want More? Download my app – Ask Alan – from the App Store and Google Play (click below) Talk to me, ask questions, read up to date information, watch video on topics of interest…

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Google Play: http://bit.ly/1MP04tP

 

Variable or Fixed? Which should you choose…?

May 2, 2017

 

Essential advice from Brisbane’s expert mortgage broker; Alan Heath of Mortgage Choice Brisbane CBD.  

Quite possibly the most debated issue faced when buying a property; ‘Should my home loan be Variable or Fixed? Let’s take a look at each broken down into some finer details.

Variable Interest Rate Home Loans

As the name suggests the interest can vary at any time. The interest rate can go up or the interest rate can go down. Here is a good question for you – over the last 20 years have interest rates in general gone up or down more often? Most people will take a negative view and say that they think rates go up more often. The opposite however, is in fact true! Since 1994 variable interest rates have had a general downward trend. So the FACTS – for the last 20 years interest rates have GENERALLY GONE DOWN!!

What are some of the features of variable interest rate loans – in particular let’s rate these features as good for the borrower or bad for the borrower;

  • You can make additional repayments – good – this shortens the term of the loan
  • You can redraw your additional repayments at no charge in an emergency – good
  •  You can hold money in an 100% offset account on a daily basis which reduces the interest paid – good 
  • You can adjust the payments at any time to suit circumstances as long as you stay above the minimum – good
  • You can repay a variable interest rate home loan in full at any time without penalty – good – most commonly this is when you sell your house ·         
  • You can switch your home loan to a different type (usually for a small charge) – good – this creates flexibility
  • Your variable interest rate can go down – good!! 
  • Your variable interest rate can go up – bad!! But given that over the last 20 years variable interest rates have generally gone down, it is, in my opinion, that the good outweighs the bad. 

Fixed Interest Rate Loans

Again as the name suggests a fixed Interest rate loan is not affected by market fluctuations, as a ‘fixed’ rate is locked at a specified percentage for the duration of the fixed period. 

Let’s take a look at the features of a fixed rate loan;

  • You are heavily restricted in your ability to make any additional repayments, in some cases you can make no additional payments without penalty – bad  
  • Even if you can make small additional repayments you cannot ever redraw this additional amount – bad
  • With very few exceptions – you cannot have offset accounts against fixed rate loans – bad 
  • You cannot make changes to the repayments – bad
  •  You cannot repay your loan in full without paying penalties called “break costs” – bad. If you decide to sell your house you will have to pay these break costs 
  • You cannot switch to a cheaper product – ie.  to a lower fixed rate two years into your three year period – VERY bad 
  • Your fixed rate loan cannot go up – good
  • Your fixed rate loan cannot go down – bad 

Also understand an underlying principle here; when a bank lends at a fixed rate, the bank has usually borrowed money elsewhere at a fixed rate and is lending it to you at a margin. The bank itself has restrictions placed on it when it initially borrowed to lend to you.

Clients often ask me, “Is now a good time to fix?” My answer? “The best time to fix is never!”

So why do people fix their interest rates. People generally fix their rates because they want the peace of mind of knowing their budget. In uncertain times they want to know they will be ok financially.

TWO reasons to CHOOSE variable… 

 1. When fixing, you will need to select a time period that you wish to fix for – usually 1,2,3,4,5,7 or 10 years. Logically, you would want to try and come out of fixed rate the very next time rates will be low. It’s now 2015 – so which year between now and 2025 do you choose to gamble your interest rate on? Even economists don’t see that clearly into the crystal ball. You also need to be sure you won’t be selling your home between now and 2025, or you face excessive “break costs”.  In essence, you need to be sure that life won’t throw any changes at you that will require you to readjust your strategy over that period. For most, that is far more easily said than done!

2.  Something that is rarely, if ever, spoken of. Most variable loans are now written as a “standard” rate less a discount. The size of the discount is negotiated at “point of sale” and this discount stays with you for the “life of the loan”. Fixed rates are just that – a fixed rate .. but .. When you come out of your chosen fixed rate period, what happens then?

At the moment in a highly competitive market banks are offering very generous discounts on variable loans. Let’s say you opt for a 50% variable rate / 50% fixed rate split loan and you negotiate a very generous discount on the variable component.

In three years’ time when your fixed rate loan comes out of fixed, perhaps in a less competitive environment when discounts aren’t as generous, you decide to go variable. Will you get the generous discount from the past applied or the less generous one from the present?

I can say categorically as a broker that no matter what you may be “told”, you will not get an undertaking in writing about the discount that will apply in the future, and if it’s not in writing it’s not real.

Variable loans are often looked upon as taking a gamble on the market and Fixed Loans as a stable “safe” choice.

Upon closer inspection however, it’s actually quite the opposite. Personally, I see more “stability” in knowing what percentage discount would be applied, written into the loan contract, servicing the entire life of the loan. I wouldn’t take the “gamble” of only knowing my rate commitments for period of time much smaller than the life of the loan.  

THERE IS A BETTER WAY … “Fix your repayments not your rate”

You can have the peace of mind of planning a budget and keep all of the advantages of variable interest rate home loans. Irrespective of the interest rate on your variable rate home loan, pick a nominal interest rate – either the loan term average of 7%pa or if you wish to be even more conservative choose a rate higher than the average – say 8%pa. Work out the repayments and start paying them now. Any additional payment over and above the required minimum builds up in your loan as available redraw able to be taken back should a “rainy day” arrive.

A conservative view would say that if you can’t afford repayments at the long term average you probably shouldn’t be buying that house.

THE BEST WAY TO REDUCE YOUR REPAYMENTS isn’t by fixing your rate – it’s achieved by buying a cheaper house. That said, in certain situations, there are of course exceptions to the above suggestions;

  • If you know that you have a period of say 2-5 years coming up when you might drop back to only one salary. This might typically be during a period of having children. If you know you simply cannot afford rates to go higher during that period then perhaps you might need to forego all the benefits of variable rate loans and ensure you take a loan for that period where the rate cannot go up.
  • An investor for commercial reasons might decide to fix the interest expense for a period of time.

I will always discuss your circumstances with you and take careful note of your requests. Of course if you prefer to take out a fixed rate loan I will assist, however I will not approach this decision as many advisers do which is to encourage you to fix by creating a sense of fear and uncertainty.

Keep in mind when an adviser or a bank employee promotes fixed interest rate loans they are promoting a product that makes it harder for you to leave. Discussions with advisers or bank employees about fixed rate loans aren’t always as they seem. An employee of a bank must act in his or her employer’s best interests

The primary message here is that you need a mortgage broker to act in your interests. 

Want More? Download my app – Ask Alan – from the App Store and Google Play (click below) Talk to me, ask questions, read up to date information, watch video on topics of interest…

App Store: http://apple.co/1ObU9AI  

Google Play: http://bit.ly/1MP04tP 

Alan Heath… Mortgage Broker Brisbane CBD… Home Loan Specialist for the everyday you

 

Untangling the Complications: Structuring Your Loans, Avoiding Cross Collateralising

May 2, 2017

The term cross collateralise means that one loan uses two properties as security. Why might this happen and why should you avoid it?

You have decided to buy an investment property. Your owner occupied residence is worth $500k and your home loan is now only $250k. You have what is called equity in your home. The usable equity is the available equity that a bank will lend against. For this example let’s also stay under 80% to avoid mortgage insurance. This means you can take your borrowing against the home out to $400k giving $150k of usable equity.

The investment property is $500k. For simplicity sake, lets say that the purchase costs are being taken care of with cash. Therefore you need a loan total of $500K. However, a bank will not lend $500k against a house cost of $500k.

A common example outcome from a bank conversation: “You’d like to buy an investment property? – certainly. You’d like to borrow 100%? – certainly. Here is your loan for $500k” It all seems so simple. You have a home loan for $250k and an investment loan for $500k. You have two houses.  What’s the catch?

The catch is in the loan documents and most people don’t even spot it because it seems so “natural”.

Your $250k home loan is secured by your owner occupied house, but the bank has used BOTH houses as security for the $500k investment property loan. You will find TWO addresses in the $500k loan documents. This loan has been “cross collateralised”. Total borrowings are $750k; total value is $1000k.

What’s the problem? The problem is that the bank has structured this to its own benefit and its own protection at your expense. The problem is that you have voluntarily handed complete control to the bank for your own future choices. Future choices that include not just your investment property, but your owner-occupied “home” as well. 

Take two examples;

  • You have decided to become self-employed, and need to find start-up capital. 
  •  You have had a new baby and need to take extended maternity leave on half pay. 

In each scenario, you would like to sell the investment property, using the profit for either the business start-up, or income to support extended leave. Despite still receiving income that covers your living and business expenses, in both cases banks will “assess” your income as zero. Herein lies the problem.  

To sell the investment property, which is cross collateralised with your owner-occupied home, you will need to fill in a form for a “partial discharge”. This is where you request PERMISSION to be able to retain borrowings against the house that is not being sold. The bank will assess your ability to keep the remaining loan (for your owner-occupied) with a full loan application based on your CURRENT earnings (which they count as zero). They can decide to deny your request and decline the application, forcing you to sell BOTH properties. This is not to say they will – BUT why would you give a bank this heavy handed and totally unnecessary position of power.

So how can you avoid this eventuality and still use the equity in your owner-occupied to purchase an investment property?

We still wish to borrow $500k for the $500k purchase. We borrow $400k using only the investment property as security. We can even do this with a different bank if that bank has a better product for the investment loan.

We then take a separate loan for $100k and secure it against your owner occupied. You now have your owner occupied with a $250k home loan and a $100k investment loan against it.

The difference is that you have control – over lender, product and future decisions. You can choose a different bank every time you purchase WITHOUT having to leave your owner occupied bank. The bank that has the best owner occupied product for you may not be the one with the best investment product! Just because one shop has the suit or dress you want, doesn’t mean that another shop mightn’t be the best place for shoes. You would never give one retailer all of your current and future business with the power to veto future decisions as well. Why on earth would you accept this behaviour from a bank??

Some finer points:

  • Yes you now have three loans – which means two direct debits for the investment property. Yes it may appear more complicated but it is in fact simpler. If you need or wish to sell a house then the loans against that house clear to zero in a “full” discharge. The other house is not involved. The bank does not need to, and in fact is unable to make an assessment about the other property. Quite correctly – it is none of their business what you do with your money and what decisions you make. 
  • How can a loan against the owner occupied property be an “investment loan”? An important principle is called the “purpose test” The purpose of the $100k loan is to purchase the investment property. The property it is secured by is not relevant. Of course you need to check this with your accountant – but that is because I have to say that in a blog. Your accountant will agree with this point. 
  • Some people baulk at this structure saying that “they don’t want to involve the family home”. To even say this means they have not understood at all what the bank is doing with the cross collateralised loan. In my scenario only $100k of the investment purchase is secured by your home, $400k is secured by the investment. In the banks scenario the whole $500k is secured by your owner occupied and the whole $500k is secured by the investment – how is that for overkill!! 

What I am going to say next is not a criticism – it’s just the way it is. An employee of a bank must act in his or her employer’s best interests The primary message here is that you need a mortgage broker that acts in your best interests.

Let me help you make your money work harder for you and keep your futures in your hands.

Want More? Download my app – Ask Alan – from the App Store and Google Play (click below) Talk to me, ask questions, read up to date information, watch video on topics of interest…

App Store: http://apple.co/1ObU9AI  

Google Play: http://bit.ly/1MP04tP 

Alan Heath… Mortgage Broker Brisbane CBD.. Home Loan Specialist for the everyday you..