How to Deal with a Rising Rate Environment

 

After 2 years of record low interest rates, The Reserve Bank of Australia (RBA) has lifted the cash rate for the third consecutive month. The RBAs latest rise of 50 basis points now puts the official cash rate at 1.35 per cent. All lenders are expected to pass on this rate rise to borrowers which will result in a $500,000 home loan seeing an increase in repayments of $144 per month.

The rise in rates will place added pressure on household budgets, however there are some strategies that can be implemented to manage your loan repayments

  1. Ask the Bank for a Cheaper Rate

The quickest thing you can do is pick up the phone and negotiate with your existing lender to offer a discount on your current variable home loan rate. Before you do this, you want to be armed with the knowledge of competing lender rates as well as your current bank’s rates on what they are offering new borrowers. Remember, banks generally offer sharper rates to new customers so understanding what the going rate is on a similar mortgage is important to negotiating your position.

If the bank isn’t willing to offer a rate reduction, threatening to refinance is the last resort. Given that refinancing can be time consuming and not always an option, many banks assume that most people are too lazy to refinance. Make it clear that if your rate isn’t reduced then you willing to refinance to a different bank offering a better deal.

  1. Refinance

Refinancing to a new bank and taking advantage of a better deal may provide you with a greater capacity to manage repayments. If your existing lender isn’t willing to sharpen your rate, it is then time to compare what other banks are offering.

Before refinancing, it is important to ensure that the benefit in moving lenders doesn’t outweigh the costs. For example, you will need to have at least 20% equity in your home otherwise large Mortgage Insurance fees will incur. Additionally, there are fees and charges in moving lenders so weighing up the interest savings verses these costs is important to figure out if it is worthwhile moving banks.

By talking to a Mortgage Broker who has access to multiple different banks, a comparison can be made against your existing deal to see if the concept of refinancing is a genuine reality.

  1. Access funds in your Redraw Facility or use an Offset Account

A redraw facility allows you to take out any additional repayments that you have made over the required minimum repayments on your home loan. Where you need some extra cash reserves to make repayments, accessing these funds is a good option.

An offset account works differently to a redraw facility whereby this is a separate transaction account that is linked to your home loan. By storing your savings within this account, you will be reducing the interest charged on the linked variable home loan which enables you to pay off your mortgage faster. Holding funds (savings) in your Offset account is a great way to lower your interest bill and ultimately trim years off your home loan term.

  1. Financial Hardship Arrangement

Financial hardship is when there has been a change in your circumstances and you are finding it difficult to make the repayments on your debts when they are due. This is experienced by many in times on illness, unemployment, relationship breakdown, natural disasters or reduced income. The good thing is that every bank has a Financial Hardship Team who are there for support and to map out a plan to manage the repayments. This may take the form of reducing or even stopping the repayments for a period of time so the borrower can get their finances in order to recommence the repayments. Although one might think of the repayments as a ‘holiday’, the interest is still accrued on the daily balance of any loan and you will still have to catch up on your repayments in time.

In the instance where a Financial Hardship arrangement has been made, this will be added to a borrower’s credit report providing a comprehensive picture of the credit worthiness over a period of 24 months. This credit report will alert to events where a repayment has been missed which in turn will lower the borrower’s credit score. Missed repayments don’t just stop at home loans but also extend to other credit obligations such as personal loans, credit card repayments or car loans for example. The good news is that in the instance where a missed repayment incurred and a satisfactory explanation can be made (i.e. moved house and repayment notification was sent to previous address), then you can request a correction and dispute any defaults on your credit file.

The key thing when any Hardship is applied for is to act early. Your bank wants to work with you to solve the problem, so notifying them before you start missing repayments is critical to finding the best outcome.

  1. Other Support

Ultimately, increased costs to anyone’s budget is stressful. Having a mortgage broker proactively manage any of the above with you will ensure you are well supported and taking the right action at the right time. If you think 40 Forty Finance can be of any assistance to you, please don’t hesitate to reach out.

Home Loans for Physiotherapists & Podiatrists

Are you a certified and practicing Physiotherapist or Podiatrist and looking to get into the property market?

Did you know that some lenders offer discounts to this group of health professionals when it comes to borrowing money, specifically discounts on Lenders Mortgage Insurance! This is very unique and some banks recognise the stability of these professions and subsequently are happy to waive this often limiting fee for those looking to purchase a property.

What is Lenders Mortgage Insurance?

Lenders Mortgage Insurance (LMI) is an insurance policy taken out by the banks to protect them in the instance that you default on your loan. If you have less than a 20% deposit, or in other words, are seeking to borrow greater than 80% of the value of the property, LMI will incur. It is a once off expense that is paid by the borrower at settlement or is added on to the total loan amount.

Benefits of being a Physiotherapist or Podiatrist?

  • Waived LMI for funds borrowed up to 90% of the property value
  • Save on thousands of dollars for a fee that is only protecting the bank
  • Purchase at a lower deposit without incurring insurance fees
  • Purchase sooner
  • If you intend to purchase a property with your partner, husband or wife, the LMI waiver will apply to the entire application if you are a certified Physiotherapist or Podiatrist

What is the catch?

  • There are only a few lenders that offer this policy per profession
  • Must be a fully qualified Physiotherapist or Podiatrist
  • Registered with AHPRA
  • Working full time in Australia

Case Scenario: Jess – Physiotherapist

Jess is a full-time physiotherapist and has been saving for her first home. She has managed to save $50k

Jess can borrow $441k and the property she has her eye on is worth $490k. This means that she would be borrowing 90% of the value of the house

Usually this would incur an LMI fee of approximately $9k meaning that she couldn’t afford the property

This shows you that by Jess being a Physiotherapist she has just saved $9k in insurance costs

Case Scenario: Sarah & Daniel 

Sarah is a full-time physiotherapist and Daniel is a full time Engineer and they have been saving for their first home. They are in a de facto relationship and have saved $112k. Their dream house is worth $700k

Their combined salaries allow them to borrow $630k which is 90% of the value of the house

Usually this would incur an LMI fee of approximately $17k meaning that they couldn’t afford the property if they didn’t have access to this waiver.

This shows you that although one applicant is a physiotherapist, the LMI waiver policy is still applicable for the entire home loan application

 

Saving money on LMI may very well be the key to entering the property market sooner. The power of having a Mortgage Broker on your side will allow you to find out what is best for your given circumstance. If you are a Physiotherapist or Podiatrist and wish to find out more then get in touch with the team at 40 Forty Finance to run through your options.

When is the right time to buy?

Deciding when the right time is to buy property can be exceptionally overwhelming and challenging. In a world where information and social pressures are never too far away, the decision about when to buy is typically made more confusing and complex than what it really is. The extensive amount of information and influencing factors can not only lead to stagnation and stress but also hinder progress through the purchasing journey.

For those deciding about when to purchase their first home, there are some key considerations that need to be understood when embarking on this process.

Buy when you are financially ready

Investing in property is typically the greatest expense in one’s life so being aware of the monetary outlay and ongoing commitments is critical in determining whether you are ready to buy or not. It is exceptionally difficult to predict future market conditions, interest rate changes and property growth so if you are in a position to buy, and you have been Pre-Approved, then look to make an offer if you have come across a desirable property. If you feel any hesitation in the outlay then you may not be financially or psychologically ready to make the leap. It’s a common occurrence where social pressures of friends and family expectations can push someone into thinking they are ready to purchase when this might not be the case. Buying in your own time is the key to ensuring you are entering the market at comfortable time in your life.

Property is for the long term

Adopting the mindset that property is a long-term game is a sensible approach. The large outlay of initial fees such as stamp duty, settlement fees, pest and building inspection fees need to be considered when planning how long you intend to hold on to the property. Property is not a ‘get-rich quick’ scheme and most often you will have to wait several years before capital growth breaks even to the initial financial outlay. Having a five-year minimum approach allows enough time for the property to grow in value and for also personal circumstance to change requiring an upgrade.

Market rises and falls

Be careful not to be overly analytical when trying to time your purchase with current market conditions. This is because the property market tends to operate in cycles of rising and falling. Economic changes are inevitable so minor fluctuations in market ups and downs tend to even out over time. Historically, the performance of property has shown tremendous results so adopting a ‘buy when ready approach’ is a far better method than trying to time the market.

Purchasing a property takes a lot of financial and emotional investment so being comfortable and certain that the timing is right for you is key when looking to buy. If you believe that you may be in a position to buy your first home then be sure to get in contact with the team at 40 Forty to map out a home loan and purchasing plan.

Is now a good time to refinance my mortgage?

Banks are continuing to fight hard for business amidst the current Covid-19 pandemic with many lenders offering the lowest interest rates in Australian history. Further to exceptionally low interest rates, some lenders are offering cashback offers of up to $4,000.00 when those refinance their investment loan or home loan. The Reserve Bank of Australia (RBA) final interest rate decision for 2020 has seen the cash-rate remain on hold at a record low of 0.10 per cent. Lenders pass on rate cuts in a variety of ways, however, the majority of lenders are currently dropping their rates on their fixed term products.

What does it actually mean to refinance?

Refinancing simply means to switch your home loan from one lender to another. This is commonly done when consumers look to secure a lower interest rate at a new bank or decide to restructure their loan. In Australia, the average term of a home loan at one lender is 4.5 years. Since the maximum typical home loan in total will last for 30 years, refinancing is more common that you may think. We see it as a savvy way to ensure that you have the lowest interest rate possible throughout the entire term of your loan.

What needs to be considered before I choose to refinance my home loan?

The process of refinancing is relatively straight forward however there are some important considerations that need to be understood before an application commences. Like all new finance applications, the lender will want to know if you can service (afford) your loan. Evidencing reliable and steady income is a very important aspect of applying for finance so if you are currently between jobs or unemployed then you may have wait until you can prove a consistent and steady income stream.

Refinancing almost always occurs when the loan to value ratio (LVR) is below 80%. LVR is a ratio between the amount owing on your loan to the value of your property. In the context of lending and refinancing, if the LVR is greater than 80% then you will be required to pay lenders mortgage insurance, and this is most often an immediate barrier to refinancing.

How much does it cost to Refinance?

When you are refinancing, it is important to weigh up the savings against any costs of making the move to a new lender. The likely fees to be incurred are:

  • Government registration of your new lender against your title – $250.00
  • Discharge Fee from your current lender – $250.00 – $350.00
  • New Annual Fee at the new lender – $250.00 – $370.00
  • Fixed-Rate break fee – This figure is a complex calculation that your current bank determines using the remaining loan balance, remaining fixed term and interest rate differential. This is a figure that is only obtained from the outgoing lender.

How Long does it take to Refinance my Loan?

From start to finish, refinancing a loan can take anywhere from 3-8 weeks. This is all dependent on the lender assessment time as well as the applicant’s efficiency in gathering the necessary documents.

Are there any downsides to refinancing?

Changing lenders means that you will need to go through a new credit assessment to ensure you are able to service (afford) the new debt. Due to the creation of new accounts with the new bank, you may need or want to notify any employers about the change of account details so you can receive your remuneration in that particular account. On a positive note, if your direct debits are coming out of an existing offset account, this account will remain active at your current bank (as a savings account) when you refinance. This means that you don’t have to worry about missing any direct debit payments while you get things set up at your new lender.

How do I know what lending options are out there?

Refinancing can be a serious financial decision with many variables to consider. If you would like to understand whether this is possible for you then be sure to get in contact with the team at 40 Forty Finance to undergo a home loan health check and gain the valuable information required to make the right decision.

 

Should you borrow as much as you can?

Applying for a home loan to purchase a property almost always comes with the question of how much should be borrowed. It is important to know that although a bank is willing to lend you an amount of money, it may not necessarily be within your best interest to take on that amount. In the eyes of a first-time buyer, borrowing a large amount of debt may be required to break into a competitive market but does that mean it’s the right approach. In recent years, we have witnessed a Banking Royal Commission, Federal Election and some of the lowest interest rates by the Reserve Bank of Australia (RBA).

To prevent mortgage stress is recommended that mortgage repayments are around 30% of total household income. Due to the rapid rise of housing prices and competition, many buyers have turned to borrowing more in order to break into the market. If you have very few other debts (credit cards, personal loan, car loan, HECS) then justifying going to 35% is possible, but much further than that and you place yourself at risk of not maintaining your repayments.

Don’t rush!

When deciding about purchasing a house, buyers shouldn’t jump at a perceived bargain or feel rushed. In a competitive market and social pressures on numerous fronts, buyers need to critically analyse their financial situation, goals and future outlook when taking on debt. A house secured from a high level of debt in a falling market can quickly turn sour, especially those that have leveraged themselves to a high point. On the other hand, borrowing high levels of debt when the value of a property is increasing and paying off the loan can strengthen your financial position. This is when borrowing big makes the most sense…. But how confident are you of picking the market?

Awareness and sound judgement of position

Buyers need to be aware of their budget and stick to a plan that works for their given situation. Taking into consideration all lifestyle variables, potential future changes and aspects that may affect your cash flow is important when thinking about how much debt to take on. For any debt you need to be absolutely certain that your loan repayments can be met in addition to all of your other expenses.

If you are looking to understand more about borrowing debt and the costs involved then contact the team at 40 Forty Finance to undergo an assessment.

Buying vs Renting: What is right for you?

Taking the plunge and entering the property market or choosing to rent is a decision many encounter throughout their lifetime. The age-long debate of whether it is better to buy or rent can be a confusing and complex decision for some. With recent housing affordability challenges, some believe that the great Australian Dream of owning your own house is a bridge too far. It is now that this debate couldn’t be more relevant as many ponder their options and future.

Ultimately the decision comes down to each and every individual situation and the first step is to work out whether renting or buying suits your own financial and personal situation.

Here are the pros and cons of each option as well as the main things to consider if you are considering to buy or continue to rent.

Renting

Pros:

  • Flexibility to live in different suburbs and properties
  • Allows for potentially greater savings and diversification of investments
  • Live in an area that you couldn’t necessarily afford if you were to buy
  • Cheaper monthly outgoings of rental payments as oppose to mortgage repayments
  • Avoid costly maintenance and rates that are to be covered by the landlord

Cons:

  • You never stop paying rent as opposed to those that pay off their mortgage in the long-run
  • Cost of renting steadily increases due to inflation
  • Restrictions to what you can and can’t customise within the rental property
  • Reduced stability and uncertainty with landlords having the right to put their property on the market at any time. This may impact your need to be living in certain school zones or close to transport links to work.

Buying

Pros:

  • Sense of stability and freedom to create a world around your home and make changes to the property to sure your particular needs
  • You can add value to the property and access equity within your home for other investment or lifestyle needs
  • Based on historical property prices, it is likely your property will increase in value over time

Cons:

  • Large financial outlay and utilisation of savings
  • Paying interest for the life of the loan
  • Restrictions on lifestyle costs as most of the money can be tied up in the loan repayments
  • Responsible for maintenance, council rates and any other costs associated with keeping the property in a liveable state

The truth is that what works for someone may not necessarily work for another. Understanding and deciding what works best for you is the fundamental question before you commit to either option. Additionally, it may be that for the next 5 years it is better for you to rent, then look to buy at a later date…. Or the other way around.

If you would like to understand fees and charges involved with purchasing property, or you wish to find out more about your capacity to apply for a loan, then contact the team at 40 Forty to arrange an appointment.

Why your mortgage broker is calling you

You’ve scored the home of your dreams and you’ve just popped the bubbly to celebrate.

When the bottle’s empty and you’ve settled in to your new home, you’ll notice your finance broker is still in your life, and you might wonder why – after all, they got you the loan and it has since settled so why would they still care about how you are going?

The simple answer is that we genuinely care about your finances in an ever-changing landscape and are motivated to ensure your lending continues to suit your needs. We know it’s a good idea to touch base at the 1, 6 and 12-month mark to ensure that everything is going according to plan. After that, annual reviews are really important to ensure the long term plan is stuck to.

A financially savvy individual will build a relationship with their finance broker, similarly with their accountant, to ensure they have and maintain a solid plan for the future. My goal with every client is to stay on top of their personal situation to ensure any new products or lending strategies can be capitalised upon.

Life changes may impact your mortgage such as welcoming a baby into your home, receiving a higher salary, deciding to get married, coming into significant inheritance or having your income temporarily reduced. All of these events can trigger a need to revisit your lending situation.

Other situations like refinancing to a better a deal, consolidating debts, accessing equity for renovations or removing a guarantor from a loan are all reasons for having a mortgage broker within your financial team.

Even the most seasoned of investors benefit from staying in touch with their broker, who can help them maximise returns later down the track.

I pride myself on creating a client for life mentality and endeavour to be proactive in meeting every client’s needs as they change during their lending lifetime.

Signs you could be closer to buying than you think

For some, owning a home has been portrayed through various media channels as a bridge too far however you may be closer to owning a property than you think.

Here are the key factors to consider if you wish to take the next step on your property journey:

Stable employment status

Buying a home and being granted a mortgage means you need income to meet the loan repayments. To make these repayments, lenders need to be confident that your income is stable and consistent. There are many ways in which employees are remunerated (base, bonus, commissions…) so every individual’s case is treated differently. Additionally, different lenders have different policies that will make them view your personal position more or less favourably. Simply put, if you have a consistent ongoing income, then there is a lender for you.

Saving a Deposit

Previous generations of first home buyers have always purchased with at least a 20% deposit. With the average house price rising sharply in proportion to average wages, getting to this 20% figure is harder than ever. Lenders have many products for borrowers that have a 10% deposit… in fact, the smallest deposit you would need would be just 5% in some instances.

Consistency, consistency, consistency

Another sign that you may be closer to buying than you think is that you can prove how you have saved the deposit. Having a consistent and transparent savings history is a sign to a lender that you have been diligent and can demonstrate genuine savings. This is looked upon favourably by lenders as you can show that you are not only responsible with your money, but also able to save the equivalent of the repayment per month.

The understanding of debt and being smart about it

Having a sufficient deposit is one thing however being aware of the way lenders view debt is another. Debt such as credit cards and car loans can directly influence a bank’s decision about granting you a loan. Lenders understand that debt such as these are necessary for some however being financially savvy can help you set in motion decisions on either keeping or paying off these debts prior to purchasing a home. This takes careful consideration but can certainly be a factor in placing you in a more favourable position of purchasing sooner than you think. A well maintained repayment history on an existing debt wont harm your application, however an existing debt where you have missed or made late repayments will.

Property is for the long run

Having a stable income, being aware of existing debt and proving you have a sufficient deposit saved are all very important factors when deciding to buy. Understanding that property is a long-term investment and that the first property doesn’t have to meet all requirements is the difference between a savvy buyer that makes the most out of opportunities as oppose to a unconfident buyer looking for endless reasons why not to purchase.

A discussion with the team at 40 Forty Finance can analyse your existing financial situation and provide information on potential barriers within your application.

We’re having a baby… does this impact our ability to get a home loan?

Expecting a child whilst simultaneously applying for a home loan can be a tricky and confusing process to understand. The excitement of a new addition to any family brings challenging barriers in the eyes of lenders with several factors influencing the loan decision process. It is therefore important for applicants to be aware of certain requirements and policy that will impact the final decision by the banks.

Here are some areas of consideration to be aware of:

Serviceability Challenges

Any addition to a family brings an extra mouth to feed and consequently an increase in living expenses. It is no surprise that the additional expenses and a reduction in income through maternity or paternity leave will directly impact your serviceability capacity for a home loan.

Banks will use different formulas to estimate cashflow to make a loan decision based on several factors involving, existing living expenditure, likely outflow once the baby has arrived and any predicted changes to your household’s income.

The banks are aware that although parental leave may be paid by the employer, it traditionally doesn’t last for the entire leave period. This means that there is likely to be a period of time where your household income will not sufficiently ‘service’ your commitments.

Is there a way?

Although it is more challenging for banks to approve a loan while on parental leave, it is still possible to secure finance. The easiest way to provide lenders with the confidence you can meet your household cash flow needs and maintain your mortgage is to show you have enough cash reserve available to cover the serviceability shortfall while on parental leave. For example, if your annual mortgage repayments is $20,000 and you will be off work taking unpaid leave for 6 months, then the banks would want to see cash reserves of $10,000 plus half of your household’s general living expenses in cash.

While some banks try to be flexible by considering the income on the applicant on leave, not all banks will do the same and therefore deem that applicant as unpaid or unemployed during this period. It is therefore an option for some to demonstrate employment through a letter by their employer outlining their role, return date and income that can be utilised in the decision process. This can help prove to lenders that the financial obligation will be met by the applicant when they return to work.

Already have a home loan?

If you already have a home loan in place and are expecting a baby then as long as you have been diligent with your repayments and can manage your finances then there will be no issues. It is important to plan well in advance to ensure your cashflow is managed and you can cover your existing repayments on top of the new addition to the family, particularly while household income is lower than usual.

Differing policies and lender requirements it can be confusing and challenging in understanding the options when applying for a loan whilst expecting a child. 40 Forty Finance can point you in the right direction through this challenging and complex process to ensure the right product is selected and necessary steps are implemented to put forth a strong application.

The property has passed in…what happens next?

With auction clearance rates dropping across the Australia’s capital cities, it is important to know what happens once a property is passed in. If a property goes to auction and doesn’t meet the reserve price then it is the duty of the auctioneer to ‘pass in’ the property. Typically, the auctioneer will give first rights to negotiate to the highest bidder.

What are the buyer’s options?

The highest bidder has first rights to negotiate with the real estate agent and vendor. As the highest bidder, you can elect to negotiate in private within the property or outside if preferred. Often Agents will encourage you into the property to create a deeper emotional attachment the property they are trying to sell you. It is important to try and maintain a calm, professional and respectful negotiation technique. Remember everyone is working towards the same goal.

As a prospective buyer, you may ask the agent to disclose the reserve price before making any further offer. In Victoria, the agent is obliged to provide the bidder or bidders with a Statement of Information, which should indicate the potential selling price. It is therefore very important for the bidder to be familiar with recent sales in the area and have an understanding of the current market climate. As with all negotiations, information is power.

If the reserve price isn’t disclosed then the buyer may have to meet the asking price or risk losing their first rights advantage to other interested parties. Should there not be any other interested parties then the ball is back in the hands of the initial bidder to negotiate a price.

When negotiating as the buyer, you don’t have to make the same counter increments as the vendor so sticking to a plan and being aware of your options is important in sealing a deal. The buyer shouldn’t feel pressured to “meet the vendor halfway”. Remain strong in your position and certainly do not over reach your financial limits.

If an offer is accepted, contracts will be exchanged on the day with the same rules applying under auctions terms. This means that although negotiation has occurred in private, the cooling-off period still doesn’t apply and a deposit will be required…. The property is yours!

What are the seller’s options?

It is important to know as the vendor that although the property didn’t sell during auction then it doesn’t mean you won’t find a buyer. Some vendors might use this strategy to negotiate with a potential buyer on a best price instead of lowering the reserve mid-auction where the results might not be the same. For others it may be an indication that their asking price is too high or simply there isn’t enough interest in the property at the time. Either way, a proactive approach to understand reasons why the property didn’t sell and adjust for a new selling campaign should be implemented quickly.

Negotiation with a buyer on a comfortable selling price can be a tricky process. It is common for both parties to employ tactics for the best possible result however this has to be done in a respectful manner. A seller has the right to walk away or cancel the negotiation should the buyer negotiate too hard and in an unreasonable manner.

If the property fails to sell on the day of auction then the vendor can market the property through private sale. A review into the marketing strategy should be implemented to ensure that the property is advertised in a revitalising manner to entice new or old prospects. Once listed for private sale then it is up to the seller to choose whether or not to accept each offer or enter into a negotiating process with the help of a real estate agent.

If the reserve was set too high then the vendor can review this in consultation with the real estate agent. It is the choice of the vendor to reduce the reserve price before relisting for a private sale or keep it as it is.

As a seller it is important to keep perspective and understand why their property was passed-in. Most properties do eventually sell but acting swiftly and being open to suggestions is important for a successful result.