Time to check what your missing out on (but shouldn?t be)

If you’re like me, you’ve read the occasional newspaper over the past 12 months, and you probably couldn’t help noticing that home loans and real estate have been the subject of some serious changes.

So if you think about it, it’s possible that your home loan could benefit from a slight update as well. Nothing too serious, but it’s probably worth having a look.

You see, you may have a home loan with a lender who has a new or better product. Now they are unlikely to call you and let you know about this, aren’t they? Or you may have a fixed rate loan that you can now justify converting back to a variable rate.

So if you’re not exactly sure where you stand with your current home loan, why not give me a call and I’ll check it out for you.

You can jump on my website and test our debt consolidation calculator to see how much you could save each month just by refinancing or consolidating some of your debt.

It doesn’t cost anything to find out if everything is still OK and it usually only takes a few minutes. The least I can do is point you in the right direction, and the privacy act ensures our conversation is entirely confidential.

What do you think?

How to be a Mortgage Master!

We can’t control the economy but we can control our budgets. Borrowers should do what they can to pay off their loans fast while times are good.

1. Pretend rates are higher

One of the biggest mistakes mortgage-holders make is pocketing the savings from reduced interest rates. The problem is they’re usually spent, instead of being socked away. Try working to a tighter budget, where you make home loan repayments at the rate of 9% per annum.

If, for example, you have a $250,000 mortgage over 30 years with an interest rate of 7%, you’ll save nearly 11.5 years and a whopping $150,000 if you pretend the rate is 9% and pay an extra $350 a month.

What’s more, if rates do climb, you will be well prepared financially to cope with them.

2. Make more frequent payments

Switching from monthly to fortnightly payments can slice years and thousands of dollars off your mortgage, with minimal disruption to your budget. By halving the monthly repayments and paying fortnightly on a $300,000 mortgage over 30 years, you’ll save more than six years and more than $100,000 over the life of the loan.

3. Make the most of windfalls

Put away the travel brochures and get into the habit of spending your tax return and/or professional bonuses on your home loan instead. You should also channel any annual pay rises into extra repayments (if the terms and conditions of your loan allow you to do so without penalty payments).

Providing your loan has a redraw facility, you should be able to access the funds if the need arises.

4. Offset with savings

Link your home loan to an offset account, where your savings are offset against the principal, reducing the amount of interest you pay. The more you have in savings, the lower your repayments.

5. Small change – big difference

Grab the kids’ piggy bank and start stashing your gold coins. You won’t miss one or two dollars in change, but it can make a big dent in your mortgage if deposited regularly over long periods. Just an extra $20 a fortnight will shave nearly $15,800 or more than 1.25 years off a $300,000, 30 year loan.

Pack your lunch and forgo a take-away coffee each day and your interest savings soar to more than $40,000!

6. Ask your Mortgage Broker to shop around

We shop around for the latest technology deals but probably don’t go to the same lengths for our loans. Lenders can no longer charge mortgage exit fees if you decide to break a variable home loan, so there has never been a better time to ask your broker to shop around for a better deal. Your existing lender may even come to the party with a lower interest rate in a bid to keep your business.

7. Bank on your local Mortgage Broker

Let your broker do the legwork to find the best loan for your circumstances. You may qualify for a package deal with a discounted interest rate over the life of the loan, which could save you thousands. Your broker also has access to a wide range of banks and credit unions, including more boutique lenders who may be prepared to offer more than the majors.

What you need to know about the most important part of your home loan:

Are you an expert on all lending related topics? That’s okay – most people aren’t. If you’re still trying to understand the truth about interest rates, you’re not alone. Here are a few answers to the questions you were too embarrassed to ask.

How are interest rates determined?

The Reserve Bank of Australia (RBA) sets the official interest rate or ‘cash rate’ which takes into account a whole list of factors about how the economy is performing at that point in time.

The RBA meets once a month to review the inflation rate, unemployment figures, CPI, PPI and retail sales, and from that information they decide whether to increase, decrease or leave on hold the official cash rate.

The cash rate is the interest rate that the banks and lenders will pay to the reserve bank. If this increases, your lender will usually pass the cost onto you – the borrower. If the cash rate decreases – the reserve bank intends that the savings should also be passed on by your lender – but this isn’t always the case.

By moving the interest rates up and down, the RBA tries to keep the Australian economy in check, by either slowing things down to keep the cost of living under control, or speeding up spending to help boost growth in certain areas.

What are the different types of interest rates?

The two main types of interest rates are Variable and Fixed.

Variable rates are usually a bit lower, and you pay the best going rate at the time. If the cash rate increases, your lender will increase your variable interest rate. But if the cash rate decreases, your repayments will usually go down.

Fixed interest rates are locked in for a period of time -usually just a couple of years – so that you know exactly how much you will need to budget for. This can be helpful for borrowers on a strict budget who can’t afford a lot of interest rate rises in the short term. However you will usually pay a higher interest rate overall if you choose this option.

Which interest rate is best for me?

The decision of whether to choose a variable or fixed interest rate should be made after carefully considering your own personal needs and commitments.

A mortgage broker should be able to help you weigh up the pros and cons to work out the best option.

We have all heard of credit reporting, but have you heard of credit scoring?

Your credit file is one of your most important financial assets. Safeguarding this file is an important part of the finance application process.

Your credit file contains
– credit applications
– overdue credit accounts
– payment defaults
– clearouts (as a missing debtor)
– commercial credit information
– public record information.

You will have a credit score calculated from your credit file.

Did you know that a score of less than 500 will severely affect your ability to gain finance from many lenders?

Read our one page guide – “Keeping Score” – to find out more: https://www.mortgageaustralia.com.au/email/files/keepingscore.pdf

Do you know the difference between how much you ‘can’ borrow, and how much you ‘should’ borrow?

There might be a very big difference between how much a lender is willing to give you, and how much you can comfortably afford to repay.

So how do you work out your real ‘should’ borrowing capacity? Don’t you want to be sure that you can afford to make the repayments on your loan?

Lenders will take into account your ability to repay the loan, based on what you earn, how many dependants you have, what your credit rating is, and your declared living expenses.

However, lenders only know what you tell them, and there are a few things you need to take into account that might not be considered by a lender when deciding on your borrowing capacity:

Job Security

How secure do you think your job is? If you’ve worked for the same company for several years and earn a decent wage, your lender will view this very favourably.

But have you been hearing murmurs about a possible restructure? Do you work in a department that could potentially be outsourced offshore?

You’re in a much better position to assess your job security than a lender is, and you need to be realistic. If you commit to the maximum loan amount and then your role is made redundant, you might struggle to keep up your end of the bargain.

Job Satisfaction

Your excellent employment history was a definite tick for your lender, but how do you feel deep down about your job?

Have you just been hanging on until you can get finance approved? If this is the case, think carefully about how much you should borrow.

You might need to take a pay cut early on, if you decide to move into a different line of work.

Family Planning

You answered ‘zero’ when asked about your dependants, which contributed to the assessment your lender made when offering you a bumper loan.

But what if you were suddenly expecting a child, or if you decide to expand your family a few years down the track?

Your Lifestyle

You might be able to ‘afford’ the repayments on a big loan, but what happens when mother’s day, your brother’s birthday and your car registration all come around at once and you need some extra cash?

Or maybe you would like to take a holiday at some stage next year. Don’t leave yourself short, or it’s going to be a very long 25 to 30 years.

Your other goals

Would you really love to continue your studies in a few years? Do you dream of taking off for a few months to take the kids around Australia?

Don’t forget about your other dreams and goals when you work out how much to borrow.

You still need to have a life, and some things are more important than having a spare room for your shoe collection.

How to buy with a friend – without killing the friendship or your credit rating

Have you ever heard the expression, ‘no friends in business’?

It’s an oldie but a goodie.

This is the attitude you should bring when considering buying property with a friend.

Many good friendships have gone under the bus, and lots of people have taken a bullet to their credit rating by not giving this decision adequate thought.

So what are the risks involved with co-ownership, especially when you purchase with a friend?

What if one owner wants to sell?

One of the biggest problems with co-ownership is when one owner decides they want to sell the property, but the other owners don’t agree.

This often ends up in court, and the process can be costly and upsetting for everyone. And needless to say – the friendship probably won’t survive.

Buying could be harder in the future.

It might seem like the dream scenario to invest now with your best friend.

But if you decide in a few years to purchase a home to live in, the lender will assess your financial commitments based on the whole loan for the first property, not just the portion that you agreed to cover.

This could make it very difficult for you to get another loan.

You could be left holding the baby.

If something happens and your friend is unable to make their repayments, you could be left in the difficult situation of repaying the entire loan by yourself.

Coupled with your other living expenses, you might not be in a position to cover the whole amount yourself.

But there are some ways that you can reduce the risk, if you are keen to purchase property with a friend:

1) Put a legal will in place. It’s important to make arrangements for what will happen to your assets if you pass away or become incapacitated.

2) Draw up a co-ownership agreement. If you can think about any issues that might possibly come up in the future, and have an agreement in place to solve them, you’re less likely to wind up in court trying to work things out.

3) Choose the right structure – tenants in common, or joint tenants. Tenants in common can own a different portion of the property, and they need to specify in their will who will inherit their portion if they die. Joint tenants jointly and equally own the property, and if one person dies, their share automatically goes to the other(s) regardless of the instructions in their will.

4) Choose the right person. It’s important to discuss your financial goals and values before you enter into this sort of arrangement. You need to feel comfortable knowing that your friend will be financially secure enough to keep up their end of the bargain – otherwise you might be left trying to cover the repayments alone.

It’s important to think about your own relationships as well, if your partner is keen for you to buy a house together next year, you might want to think about how this first investment might impact your borrowing power.

Should you buy or build your next home?

Many buyers struggling to find the right home are going back to the drawing board and building rather than buying an existing home.

There are obvious benefits to a brand new home: you can build exactly what you want and enjoy shiny new surrounds, with no wear and tear costs for years to come. But there can be downsides to creating your castle.

Let’s look at some of the pros and cons of building versus buying.

THE PROS OF BUILDING

You get what you want

The great pleasure of building your own home is choosing what you want for today’s lifestyle. If building, you have two options: a project home or a custom-built one.

Project homes offer a suite of designs, usually with options to mix and match or upgrade some features. They are cheaper than custom-built homes because the builder works on an economy of scale for the building materials and products and knows exactly how much money will be made on each design.

The other benefit is that you can tour display villages and see exactly what you will get.

A custom, or architect-designed, home will cost more but allows you to create your dream home. Just remember, the higher the quality of your materials and fittings, or the harder they are to source, the higher the cost. Size also matters, with builders working on square meterage.

You can go green

The Nationwide House Energy Rating Scheme requires all new homes to have a minimum energy rating of six stars (one being the lowest and 10 being the highest), which means lower energy and water bills for your household, plus the feel-good factor of helping the environment.

Green design includes the home’s aspect to make the most of natural cooling and warming, water tanks, energy efficient lighting and better-insulated windows.

You can be part of a new community

In a world where increasingly few of us know our neighbours, a new home in a new estate can help knit you into a community.

New estates are generally located in high-growth areas that attract young families, a plus for those with kids who want to feel part of a neighbourhood.

These estates are also carefully planned, often with new parks and purpose-built shopping centres. Some are even large enough to have their own schools, heightening the sense of community for residents.

THE CONS OF BUILDING

Time and stress

Building a new home, even if you opt for a project design, requires your input and time. Even the simplest projects can take their toll, especially if couples disagree about certain fixtures, bad weather impacts timelines or the builder gets something wrong.

Busy people might struggle to find enough time to make decisions, liaise with the builder and other contractors and visit the building site. If that’s the case, buying an existing home might be a less stressful option.

Locating land

While new homes are generally part of new communities, the trade-off is that the land is often located in outer suburbs, with fewer public transport options and longer commutes.

Finding vacant land in established areas is nigh impossible in some cities, so older homes in poor condition are being snapped up and knocked down. For many, the cost of buying and demolishing a home and building a replacement is prohibitive.

If you are looking to settle in an established suburb with ample infrastructure and amenities, buying a home and renovating it to suit your needs may be more affordable and convenient.

Downsizing? – How to invest those extra dollars:

So, you put the family home up for sale after many years, and moved into a home that better suits your lifestyle. What did you do with the extra money from the sale?

If you’re still trying to work out the best way to maximise the proceeds, the six ideas below should start you on the right track.

First – Get advice from a financial planner

Nothing is a substitute for good qualified financial advice. A financial planner can sit down with you and explain the implications and benefits of every option for you. They can help you to avoid creating a tax nightmare for yourself and create as much wealth as possible with your surplus cash.

There are a few different options that you can generally choose from when you have extra funds because you have downsized your home. Keep in mind – your financial adviser is the best source of information, and this is in no way intended to be seen as personal advice.

Deposit money into a high-interest account

If you want a low-risk option and you don’t want any nasty surprises, depositing the funds into a high interest yielding account could be the best option for you. Banks offer great deals on term deposits, if you’re happy to have the money locked away for a specific period of time.

Re-invest the money in property

If you’re keen to build a property portfolio and try to grow your capital, property investment could be the way to go. You will need to consult your accountant or financial planner about the tax implications, and if you need to take out a mortgage to cover an extra amount, make sure you can afford to make the repayments.

Even if you plan to rent the property out, it’s worth planning for short periods where it may sit unoccupied and not generate rental income.

Invest in your superannuation

If you choose to invest money in your superannuation, make sure you discuss the tax implications with your accountant or financial planner, but generally speaking you can make some lump sum payments into your super.

Invest in shares

Shares are overwhelmingly the most risky choice for investing your extra dollars. If you don’t understand a lot about the share market when you start out, you might want to read a few of the many horror stories out there, and consider if this option really suits you best.

Otherwise, there are experts who can provide advice and give you the best chance of success in the share market – but keep in mind there are never any guarantees.

Invest in fixed-interest government bonds

Another option which is very secure if you want to earn decent interest, is to invest in fixed-interest government bonds. These are guaranteed by the government so you shouldn’t have to worry about losing the lot with this option – unless our government really drops the ball during your fixed period.

Remember, your accountant or financial planner should be your first port of call before you jump into any of the above investment options. But at least now you can turn up to your appointment ready to talk the talk!