Home Loan Rate – Australia

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

Home Loans Australia may or may not be a company but it’s the most common search term used by Australians who are looking for information on the best home loans Australia has to offer.

In fact the best home loans Australia has on offer changes almost daily. Banks continually change their product line up and tweak their offers to attract different segments of the market all the time. In order to find the best home loans Australia has at any one time you need to locate a favourite web site that continually updates the information and provides links to various unbiased information sites.

It’s all a matter of choice but as a guide to what to look out for here are some tips on choosing your best sources of information as you search for the best home loans Australia has on offer.

1. Individual Banks and Lenders sites will only contain information about their own products. Sometimes the information may say things like ‘Winner of Best Home Mortgage 2006’ or something similar. This may be misleading, simply because the category of the award may not suit your circumstances or needs. Also it does not mean that it is the best rate. Awards are judged on different criteria and you need to know what these are before you can judge the products they are claiming to be the ‘best’.
2. Not all banks or lenders have sites that fully explain how their products work. It is a simple fact that home loans are very complex and each individual applicant will have special differences. It is these differences that make choosing the best home loan from web site information almost impossible.
3. Generic information sites like infochoice and Cannex have an amazing amount of information that may point you in the right direction. They also offer an unbiased approach. However, they also have so much information that it is difficult to fathom your way through the information which is relevant to you.
4. Mortgage Brokers often have the most relevant information to make your decision making easier. This is because they can filter out the less pertinent products and information and narrow your choice. This certainly makes life easier for you, provided you choose the right Broker.
5. Most Mortgage brokers sites are difficult to find and often they fall into the same category as the banks, ie a lot of information but nothing specific to your needs.
6. Look for Blog sites where you can see how up to date the information is. Anything more than a week or so old may indicate stale information.

Don’t despair however. Once you find a Mortgage Broker you can trust, either through a recommendation from a friend, or simply calling a few and comparing their approaches, you will be well on the way to finding the best home loan Australia has for you.

You can ask the same questions and see what answers you get. Hopefully the information you receive will be consistent and your choice will then probably be based on how comfortable you felt during the discussion.