Home Loan Rate – Australia

Predicting the future of the property market is always fraught with risk, but the current global financial crisis is making the task virtually impossible.

The Australian media are full of conflicting opinions from property experts on where the market is headed, making it even harder for the average home owner or investor to plan for the future. Real estate markets in most parts of the USA have taken a hammering over the last two years, and the big question in Australia is: Will the same thing happen here?

On the positive side, there are several crucial differences between the US and Australian property markets:

Housing Supply

Many areas of the US housing market such as Phoenix Arizona are significantly over-supplied with homes. In other words, many more homes were built than each area’s regular demand. The overhang of unsold new properties has been added to by the significant number of foreclosure properties on the market, leading to sometimes dramatic price reductions.

By contrast Australia has, according to property experts, been building fewer homes than the normal demand would dictate. This has primarily been a result of planning restrictions, escalating building costs, and the growing tendency of local government to meet budgetary demands through huge levies on developers rather than increased local taxes/rates for existing homeowners (read: voters).

The resulting shortage of homes is evidenced by the very low vacancy levels in the rental markets in all major cities, accompanied by rising rents. Together with the cost of new homes being significantly higher than the existing housing stock, these factors have underpinned the Australian property market.

Lending Rules

Jingle mail – where homeowners can no longer afford the repayments on their house and mail the keys back to the lender – has become common in the US in recent times. Most (but not all) US mortgages are non-recourse, in that the loan is secured solely against the property and there is no opportunity for the lender to get their hands on the borrower’s income or assets. Once the keys are handed back, the liability of the borrower is essentially over.

This mortgage structure has been at the heart of the sub-prime mortgage crisis – there has been no pressure on the lenders to verify the borrower’s ability to repay the mortgage, and no liability on the part of the borrower to continue repayments if the going gets tough, or a property market correction leads to the home being worth less than the mortgage.

In Australia, the loan liability rests with the borrower, and the lender can pursue the borrower’s income and assets should repayments not be kept up to date. This places much more responsibility on the borrower to organise their affairs to ensure that they can meet their repayments.

Additionally, Australian consumer legislation puts considerable onus on the lender to assess the borrower’s ability to meet their loan obligations prior to approving a mortgage. Over the last 5 or 6 years, low-documentation loans (where the level of loan servicing proof has been lower than for standard mortgages) have grown in popularity, but these are still significantly more secure than the sub-prime loans on the US.

As a result, the mortgage default rate in Australia is only around the 1% mark in 2008, which is about average for the last decade or so.

Other Factors

Other positives for the property market include strong immigration inflows, an economy growing at a significant (albeit slowing) pace, historically low unemployment, and a growing trade surplus.

The Downside

Despite the above positive factors, the outlook for real estate is far from rosy.

The elephant in the room of course is the current global financial crisis. Frozen credit markets and downward-spiralling stock markets do not bode well for any asset class in the near future. Property however, is particularly vulnerable in Australia, with massive mortgage debt a millstone around consumers’ necks. Home affordability is at a record low, as prices over recent years have been ratcheted up by a public which thought price appreciation would go on forever.

And if efforts to loosen up credit both here and overseas do not work – and work soon – it is difficult to see any other outcome than falling house prices. No matter what the demand side of the equation looks like, if you can’t borrow money then you can’t buy a house.

Anecdotal evidence from real estate agents suggests that prices have already started softening in many areas. Whether this softness gains momentum will depend on how the various factors above play out in the coming months.

The Labor Government has recently passed legislation which will see the introduction of First Home Saver Accounts, as promised by Prime Minister Rudd in his election campaign. By providing a combination of lower taxes and Government contribution, the new accounts are intended to offer a simple, tax effective solution to help first home buyers kick start saving for their first home. These new accounts will be available to potential Australian first home buyers from financial institutions, including banks and some super funds, as of 1 October 2008.

According to the eligibility criteria, in order to open a First Home Saver Account, the taxpayer needs to:

be at least 18 and under 65 years of age;
have a tax file number;
be an Australian resident for taxation purposes;
have never owned a home in Australia that has been their main residence;
have never previously had a First Home Saver Account.

There are a number of restrictions and conditions that distinguish the First Home Saver Account from the regular savings products that are currently offered by financial institutions. When opening and holding an account the following conditions must be adhered to:

The account can only be in one name. No joint accounts are permitted, however it is possible for those who want to purchase a property together to combine the monies from their individual accounts.

Each individual can only have one account.

Deposits can only be made from after-tax income; this means that it is not possible to use salary sacrificing in order to make deposits into a First Home Saver Account.

Account holders must deposit a minimum of $1,000 in four separate, although not necessarily consecutive, financial years before the balance can be withdrawn.

The account limit is capped at $75,000 for the 2008/09 financial year, to be indexed for subsequent years.

All of the money that is deposited into a First Home Saver Account must remain in the account until the entire amount is withdrawn as a lump sum. Once it is withdrawn, the monies must be used within 6 months towards building or buying a first home. In addition to this, the first home buyer/s must also meet the occupancy rule. The occupancy rule dictates that the newly acquired property must be lived in by the account holder as their main residence for at least six months. The six month period must begin within 12 months of the settlement date or building completion.

If it occurs that the account holder decides not to go ahead with building or buying their first home, the money from the account must then be deposited into their superannuation fund.

There are further elements of the First Home Saver Account that set it apart from traditional savings accounts. These provide significant benefits to the account holder through offering:

Competitive variable interest rates

Any earnings on the account are taxed at a minimal rate of 15%, and this is payable by the account provider.

The Government will make a contribution of 17% on the first $5,000 deposited into the account per each year, resulting in a maximum contribution of $850.

Additionally, First Home Saver Account Holders are still entitled to apply for the First Home Owner Grant. This is yet another financial leg-up for potential first home buyers.

The First Home Saver Accounts are a welcome addition for future generations of home buyers. The accounts, with the benefit of Government contributions and reduced tax rates will make the possibility of purchasing a first home a reality for a wider range of people, in a shorter length of time.

As with any financial decision it is wise to seek the advice of professional accountants and financial planners before acting. This will help to ensure that you have considered all of the necessary facts and are making the correct choice for your situation. If you have any questions or would like advice regarding the First Home Saver Accounts or any other financial decisions contact the The Quinn Group on 1300 QUINNS or click here to submit an online enquiry.

If you’re applying for a home loan, it’s important that you find the best possible loan available to you. This can prove to be an intimidating task, even for loan veterans. It’s important to make sure that all your goals are met and that you stay within your budget. For this, it’s important to properly educate yourself on the finer points of home loans. You can always hire an advisor, visit with a financial consultant, or simply learn on your own. But whatever you choose, it’s vital that you know what you’re getting yourself into. In general, advice on this subject is in plentiful supply. So as long as you decide you want to learn, it shouldn’t be hard to obtain the information.

Among the many things to consider is the topic of rates. For example, you may need to know the different between a fixed rate and a variable rate. This will all depend on the particulars, of course. A fixed rate simply means that even if a reserve bank lifts their interest rates, your specific rate will not change, hence “fixed”. Conversely, the opposite is true when your bank lowers the rates. Your fixed rate won’t allow you to reap the rewards of your bank’s changed ways. On the other hand, variable rates fluctuate with the bank’s interest levels, both positively and negatively. So, you will most likely see many variants in a variable rate.

You always want to consider things like having a line of credit in your home loan. This acts more like a personal loan that is secured against property you own. There are two basic types of the line of credit loan. The first: a revolving line of credit. It gets its name from the nature of the “revolving door” type of credit that will allow you to borrow and draw down on the line of credit as it’s required. On the flip side, reducing the line of credit has a definite end to the cash regardless of your home equity. Depending on your cash flow requirements, it’s important to know what you’re getting into for this type of loan. You don’t want the well to be dry in times of need.

After you have decided the home you want to buy, you will have to look for a loan to finance the buying of the home. This is the tricky part. There are different types of home loans available marketed by different banks and lenders and offering different interest rates and benefits.

So the first thing that you need to identify is the interest rate: should you go for a fixed home loan or a variable home loan? Both the loans have their own pros and cons. Once you have decided between fixed and variable, you can move ahead and choose the type of loan you want in that particular category.

The first thing you need to do is check which of these two are doing well in the market. The basic difference is that in a fixed rate home loan, you will be charged a flat interest rate through the entire period of the loan. In the variable rate home loan, the interest rate will change according to the market movement and sometimes you might pay a lower interest and in other times you might have to pay a higher rate of interest. The interest is charged in the monthly payments.

Fixed rate home loan

Fixed rate home loans are considered a safer bet by many industry experts due to the fixed interest rate that never changes throughout the life of the loan. The pros of a fixed rate home loan are:

• The interest rate will never change even when the market is volatile
• The payment amount, which includes the principal and the interest, will not be affected by the market conditions.
• There is a sense of security as well as the stability offered by fixed rate especially because you are aware of the amount you need to pay at the end of each month. This will help you to keep the amount aside each month out of your monthly budget.

Variable rate home loan

The variable rate home loan is more popular in Australia. This loan comes with a variable interest rate, which basically means that the interest you pay will be depend on the market condition. Interest rates in this type of loan can and will fluctuate. You will be charged an interest rate that is dependent on the financial index rate listed in the Reserve Bank of Australia. For example: If the current index is 3.5% then the lender will add another 0.5% to make the interest rate 4%.

A no deposit home loan is now available in Australia to assist new home buyers priced out of the market through the difficulty of saving an adequate deposit. The old standard was that you had to save at least 5 percent of the purchase price, plus have more to pay for the other costs like legal fees, Bank, and Government charges.

Not any more. Banks and lenders have come to the aid of these struggling borrowers with a raft of new products including a no deposit home loan.

The no deposit home loan needs to be explained in a little more detail however, before you get too excited. The fact remains that you will probably still have to have some savings, but with the assistance of the First Home Owners Grant, it all becomes much easier.

Let’s take some examples. Say you are looking to buy a home valued at $400,000 or $300000. Now, for borrowers wanting to borrow the maximum 100%, the costs would be as follows. Please bear in mind that Stamp Duties vary from State to State and the following applies to Queensland first home buyers only. All figures are approximate and have been rounded, and not to be interpreted as a binding quote or advice:

Purchase Price $400000

Purchase Stamp Duty $ 2800

Legals (approx) $ 1500

Mortgage Stamp Duty $ 1271

Lenders Mortgage Insurance $ 10545

Government Transfers $ 634

Registration fees $ 112

TOTAL $416862

– OR –

Purchase Price $300000

Purchase Stamp Duty $ NIL

Legals (approx) $ 1500

Mortgage Stamp Duty $ 860

Lenders Mortgage Insurance $ 6126

Government Transfers $ 396

Registration fees $ 112

TOTAL $308994

So, the ‘real’ price you pay for your new $400000 home is actually closer to $416900. So where will your money come from?

The no deposit home loan means the bank will advance you $400,000. The First Home Owners Grant will give you $7000 which means you will have to find about $10,000 of your own money. Some people choose to borrow this from parents, family or as a personal bank loan.

In the case of a $300000 purchase, the figures are different. In this scenario, the ‘real’ cost is $309000. With a no deposit home loan of $300000 and the First Home Owners Grant of $7000, you will only have to save $2000.

After you have taken care of the cash side all that’s left is to satisfy the bank that you can repay the loan and away you go!

Remember that each bank has their own special criteria for assessing loans and you can expect to find wide variance in how much they will lend you. You need access to special software to get the comparisons right, and to make sure you get the loan options you require to suit your personal circumstances.

Mortgage managers, banks, credit unions, brokers, insurance groups all offer a seemingly endless choice of loan options – introductory rates, standard variable rates, fixed rates, redraw facilities, lines of credit loans and interest only loans, the list goes on. But with choice comes confusion. How do you determine what the best type of home loan is for you?

First, set your financial goals, determine your budget and work out how long you want to pay a mortgage for. You can do this yourself or with your financial advisor or accountant.

Second, ensure the organization or person you choose to obtain your mortgage from is a member of the Mortgage Finance Association of Australia (MFAA). The MFAA Member logo ensures you are working with a professional who is bound by a strict industry code of practice.

Third, research the types of loans available so you can explore all options available to you with your mortgage provider. Some home loan choices are:

Basic Home Loan

This loan is considered a no-frills loan and usually offers a very low variable interest rate with little or no regular fees. Be aware they usually don’t offer additional extras or flexibility in paying of extra on the loan or varying your repayments.

These loans are suited to people who don’t foresee a dramatic change in personal circumstances and thus will not need to adapt the loan in accordance with any lifestyle changes, or people who are happy to pay a set amount each month for the duration of the loan.

Introductory Rate or ‘Honeymoon’ Loan

This loan is attractive as it offers lower interest rates than the standard fixed or variable rates for the initial (honeymoon) period of the loan (i.e. six to 12 months)

before rolling over to the standard rates. The length of the honeymoon depends on the lender, as too does the rate you pay once the honeymoon is over. This loan usually allows flexibility by allowing you to pay extra off the loan. Be aware of any caps on additional repayments in the initial period, of any exit fees at any time of the loan (usually high if you change immediately after the honeymoon), and what your repayments will be after the loan rolls over to the standard interest rate.

These loans are suited to people who want to minimise their initial repayments (whilst perhaps doing renovations) or to those who wish to make a large dent in their loan through extra repayments while benefiting from the lower rate of interest.

Tip: If you start paying off this loan at the post-honeymoon rate, you are paying off extra and will not have to make a lifestyle change when the introductory offer has finished.

Redraw Facility

This loan allows you to put additional funds into the loan in order to bring down the principal amount and reduce interest charges, plus it gives the option to redraw the additional funds you put in at any time. Simply put, rather than earning (taxable) interest from your savings, putting your savings into the loan saves you money on your interest charges and helps you pay off your loan faster. Meanwhile, you are still saving for the future. The benefit of this type of loan is the interest charged is normally cheaper than the standard variable rate and it doesn’t incur regular fees. Be aware there may be an activation fee to obtain a redraw facility, there may be a fee for each time you redraw, and it may have a minimum redraw amount.

These loans are suited to low to medium income earners who can put away that little extra each month.

Line of Credit/Equity Line

This is a pre-approved limit of money you can borrow either in its entirety or in bits at a time. The popularity of these loans is due to its flexibility and ability to reduce mortgages quickly. However, they usually require the borrower to offer their house as security for the loan. A line of credit can be set to a negotiated time (normally 1-5 years) or be classed as revolving (longer terms) and you only have to pay interest on the money you use (or ‘draw down’). Interest rates are variable and due to the level of flexibility are often higher than the standard variable rate. Some lines of credit will allow you to capitalise the interest until you reach your credit limit i.e. use your line of credit to pay off the interest on your line of credit. Most of these loans have a monthly, half yearly or annual fee attached.

These loans are suited to people who are financially responsible and already have property and wish to use their property or equity in their property for renovations, investments or personal use.

All In One Accounts

This is a loan which works as an account where all income is deposited in the account and all expenses come out of the account. The benefit of the All In One Account is its ability to reduce the amount owed and thus the interest payments while providing a one-stop finance shop where your loan, cheque, credit and savings accounts are combined into one. Normally these loans will be at the standard variable rate or slightly higher and may incur monthly fees. Be aware that if the account is split into the loan account, with credit, cheque and ATM facilities placed into satellite accounts, you will need to check your access to funds, how many free transactions you receive, and what associated fees the loan may have.

These loans are suited to medium to high income earners.

100% Offset Account

This loan is similar to an All In One Account however the money is paid into an account which is linked to the loan – this account is called an Offset Account. Income is deposited into the Offset Account and you use the Offset Account for all your EFTPOS, cheque, internet banking, credit transactions. Whatever is in the Offset Account then comes directly off the loan, or ‘offsets’ the loan amount for interest. Effectively you are not earning interest on your savings, but are benefiting as what would be interest on savings is calculated on a reduction on your loan. The advantages are similar to the All In One Account. These loans normally have a higher interest rate and higher fees due to their flexibility.

These loans are suited to people on medium to high income earners, and to disciplined spenders as the more money kept in the offset account the faster you pay-off your loan.

Partial offset account and an interest offset account are also available.

Split Loans

This is a loan where the overall money borrowed is split into different segments where each segment has a different loan structure i.e. part fixed, part varied and part line of credit. Often called designer loans, you benefit from one or more types of loans. Splitting the loan offers a saving on stamp duty and other charges.

These loans are suited to people who want minimize risk and hedge their bets against interest rate changes while maintaining a good degree of flexibility.

Professional Package

This loan is available at a minimum amount to people on higher incomes or people of a specific profession if they meet certain requirements. The benefit of this loan is being able to borrow higher amounts with a high degree of flexibility and a discount on the standard variable interest rate. The level of discount is dependent on the size of the loan, and the duration of the discount depends on what’s negotiated and can sometimes apply for the life of the loan. Generally these products combine all fees into the one annual fee. Lenders of this product usually provide a lot of added values such as credit cards, discounts on their insurance and investment products.

Tip: If you don’t need the additional extras other loan types may offer a better interest rate.

Non Conforming Loan

These loans are only available from non-bank lenders where interest rates are higher due to the greater risk and shorter life of the loan. The advantage is they are available to people who don’t fill the traditional lending institution criteria. There are two types of Non Confirming loans:

1. A Low Doc Loan usually has a slightly higher interest rate and fees than the standard interest rate and will have a maximum borrowing amount and/or will usually only lend 70% of the value of the property. After demonstrating the ability to meet the payments the interest rate will often revert to the standard rate.

   These loans are suited to people who do not wish to disclose their income or have the inability to show a true income i.e. if you are self employed.

2. Sub-Prime Loans usually have a much higher interest rate and fees than the standard rate and usually require you to use an asset as security. They are based on a sliding scale in accordance to the level of risk of loaning the money. Refinancing is available once the borrower can establish a good payment record.

   These loans are suited to people with poor credit histories.

Other Loans and Products in the Market Include:

Construction Loans: For those building a home when you don’t need the entire amount from the start – you only pay interest on what you’ve spent over the stages of construction.

Bridging Loans: For when the sale of an existing property takes place after the settlement of a new property – when you want to buy a new home before selling the old one, where the funds from selling the old home are paid straight into the loan for the new home.

Consolidation Loans: Enables you to use your mortgage to consolidate other debts such as credit cards, personal loans, car loans etc. – interest rates on the mortgage are usually cheaper than personal loans.

Rising housing prices in recent years have made it very difficult for many homebuyers to save the deposit. Lenders have recognized this and have created the no deposit loan product.

No deposit home loans are generally available for new and established buildings, owner occupied, as well as for investors. To qualify for a no – deposit loan you need to be an Australian Citizen or permanent resident and currently living in Australia.

Borrowers often need to acquire lender’s mortgage insurance where the Loan to Value Ratio (LVR) exceeds 80%. Generally, the higher the LVR, the higher the premiums. Hence the premiums on a no deposit loan can be large.

Combining stamp duty exemptions and first homeowner grants, no deposit loans allow borrowers to gain a foothold in the market based on their ability to service the mortgage rather than having the savings required to qualify for a more mainstream loan with deposit.

No deposit loans can also be a useful tool for investors wanting to take maximum advantage of leveraging.

While no deposit loans can be secured for similar rates to standard home loans, you should be aware that there is the risk of ending up in negative equity. For example, you purchase a house for $300,000 borrowing the full amount and the property market falls by 10%, you now owe $300,000 for a property that is worth $270,000 – that’s a shortfall of $30,000 you need to recover.

As with all loans, make sure that you borrow within your means. Work out a budget, stick to it, and do not borrow more than you planned just because it is available. Also, consider the property market that you are buying into: are the prices rising or falling?

Plan to repay the loan as quickly as possible; take advantage of redraw and offset facilities and make additional repayments where possible. Remember, you pay interest on every dollar owed, every day. The faster you reduce your loan the less exposed you are to the danger of a market dip.

All organizations in the mortgage industry require a prospective borrower to fulfill their selection criteria before they will approve a home loan. Traditional lenders tend to have more stringent criteria; the non-conforming lenders are a lot more flexible, and the mortgage managers are somewhere in between.

How interest rates are determined…

The Reserve Bank of Australia (RBA) sets the official interest rate, according to how the economy is performing at the time. In its monthly meetings, the RBA considers the inflation rate and such key economic indicators as unemployment, the consumer price index (CPI), producer price index (PPI) and retail sales. After analyzing this information, the board determines whether the existing rate should be held or changed.

The RBA sets the cash rate – the rate at which banks borrow money. Banks then add their own margin – the fee you pay for the use of the money – to set their mortgage rate.
The RBA uses interest rates as a tool for controlling monetary policy. For example, if economic activity is deemed too strong, it may try to slow things by raising the official cash rate. This flows on to higher mortgage rates and so higher repayments. More money repaying the mortgage means less to spend on other things, so economic activity slows.

Interest rates on home loans…

There are two types of interest rates that apply to home loans – variable and fixed. You can choose whether you’d like a variable or fixed-interest rate, or a combination of both, depending on the type of loan product you decide on.

Variable interest rates. The majority of home loans in Australia have been taken at a variable interest rate. As the name implies, variable loan rates will fluctuate with the market and the official cash rate. Therefore, if the official cash rate rises, your loan interest rate rises and so do your repayments, and vice versa. Loans with variable interest rates tend to offer more flexibility in payment options.

Fixed interest rates. This type of interest rate allows you to fix the interest rate you borrow at for a certain period within the overall loan term. Fixed terms tend to be from one to three years, however some lenders may offer 10-15 year terms. With a fixed interest rate you have the certainty of set monthly repayments, which are not affected by changes in the official cash rate. This works in your favor when the official cash rate rises because your repayments will not increase; but you cannot enjoy lower repayments when the official cash rate falls. With a fixed-interest rate, your loan provider is taking the risk on the market, which is based on their assumptions about future interest rate movements.

What’s been happening in the market?

Interest rates have been decreasing for more than a decade, and for the past few years Australians have enjoyed low interest rates. January 23, 1990, the official cash rate was 17-17.5%; on July 2, 2004, it was 5.25%. As a result, household borrowings are at a record high: in June 1997, Australians owed $202.8 billion in housing and in May 2004, this figure has increased to $577.1 billion.

What Interest Rate is best for you…?

• Your loan decision should be based on a mortgage product suited to your individual needs not on a type of interest rate.
• Do not borrow so much that a rise in interest rates would leave you in trouble. Factor in possible rises so you are not left short.
• You should be able to switch between interest rates over the loan term without having to refinance.

Speak to your mortgage provider, who should also be a member of the MFAA. Under of code of practice MFAA members are encouraged to continually improve their industry knowledge by keeping abreast of economic trends and undertaking MFAA-approved and run courses and industry seminars.

For more information on interest rates, most newspapers, television and radio news broadcasts contain information on interest rates, official cash rates and the housing market in their financial and property sections. Additional information can be found on banking and financial institution websites. You can also visit the Reserve Bank of Australia website at www.rba.gov.au and the Australian Bureau of Statistics website at www.abs.gov.au

Figures from the Australian Bureau of Statistics Website – www.rba.gov.au