RBA Announcement – July 2021

The first RBA board meeting of the new financial year was one of the most eagerly anticipated in some time. Not because of what might happen with interest rates – which incidentally were left on hold at 0.1% for the eighth consecutive month – but because the RBA was expected to begin winding back parts of its quantitative easing program as the economy continues to recover from coronavirus ahead of schedule.

Since Australia first went into lockdown in 2020, the RBA has splashed out hundreds of billions of dollar on government bonds and kept the yield on three-year government debt under control in order to offer cheap loans to banks…who would then pass more affordable money onto borrowers.

But is all that still necessary?

Three main goals

There has been plenty of speculation that the RBA will raise official interest rates earlier than its repeated promise of “not before 2024”.

In order to consider moving rates away from the historic low of 0.1% and back up towards longer term averages, the RBA wants to see the unemployment rate keep travelling down, wages growth begin to grow again and inflation to get back to a target bracket of 2 to 3%.

And at least one of those boxes is ticked, with unemployment now down to 5.1%, a 17 month low, even as we head into another series of lockdowns in various parts of the country. There are more people employed than before the pandemic kicked off; which is also partly due to the decline in overseas worker arrivals with international borders closed.

However, the RBA statement from today noted that “despite the strong recovery in jobs and reports of labour shortages, inflation and wage outcomes remain subdued”. The statement added that the RBA expects a gradual and modest pick-up in inflation and wages growth, with inflation likely to only reach 2% by mid-2023, after a short term bounce to 3.5% over the next year due to the reversal of Covid-related price reductions from the previous year.

RBA takes cautious first steps

The anticipated first step to take in getting things back to some kind of normal was to end the targeting of a yield of 0.1 per cent on three-year government bonds. The RBA today however announced it would continue to maintain the current target to “keep interest rates low at the short end of the yield curve and support low funding costs in Australia”.

The next thing to do would be to wind back the level of spending on government debt. The $100 billion quantitative easing program announced in November last year will finish in September.

The RBA today confirmed that it would continue to purchase government bonds after September, but would respond to the strengthening economy by adjusting its weekly spend to $4 billion, down from the current spend of around $5 billion. The new spend will be in place until at least mid-November, at which stage the RBA can take stock of the situation again.

So will official rates rise sooner than expected?

The RBA continues to stand firm and say it won’t be in a position to raise rates until at least 2024.

Even though the housing market is strong across major markets, with value growth, housing credit growth and increased borrowing from owner-occupiers and investors, the central bank says it will not increase the cash rate “until inflation is sustainably within the 2 to 3% target range”.

What about the unofficial rates?

As we’ve reported in recent months, Australian lenders are already increasing their rates independently of the central bank.

They began by raising rates on five and four-year fixed rate mortgage products but have since begun to target three and even two-year loans.

A recent analysis found that in the last month, 19 lenders increased a three-year fixed rate, including Westpac and NAB, while 17 increased a two-year fixed rate.

This was the first month that the number of lenders hiking a two-year fixed rate outnumbered those cutting (albeit only by one, 17-16). Meanwhile, for one-year fixed rates, 13 lenders cut, while 11 hiked.

There are still close to 200 loan products out there in the market for below 2%. So if you are worried you’re not on the best deal, remember to regularly see what’s out there and refinance when necessary.

 

 

Introduction-to-the-family-home-guarantee

Introduction To The Family Home Guarantee

The year has been a tough one so far for first home buyers trying to get into the property market, with asking prices headed for double digit growth in multiple capital city and regional markets around Australia.

If you are a single income loan applicant, it has been even tougher, so imagine being a single parent on top of that.

But there was good news in the recent federal budget announcement, with single income earners with dependents to be eligible to borrow to buy a home with only a 2% deposit.

So here’s what you need to know about the Family Home Guarantee.

Are you eligible?

From July 1, single income parents will be able to apply for a loan under the scheme. To do so, you will need to have a household income of under $125,000. After your 2% deposit, the government will guarantee up to a maximum of the remaining 18% of a regular 20% deposit usually required by lenders to avoid lenders mortgage insurance (LMI).

As a single parent with at least one dependent, you will need to demonstrate you are legally responsible for the day-to-day care, welfare and development of the child and that they are in your care. You must be the sole applicant on the form and intending to live in the home you purchase.

It doesn’t necessarily have to be your first home, but you won’t be eligible if you currently own a home already, including an investment property, commercial property or land holding.

Depending on existing custody arrangements, two separated parents of the same child may be eligible to apply in some cases.

What properties are eligible?

As with most government grants and concessions, there are limits around the values of the properties that apply to the scheme. These differ by state and territory, so it’s important to check what price caps apply to you.

NSW has the highest price caps, with $700,000 for an established property and $950,000 for a new build in the metro and major regional centres, and $450,000 (established) and $600,000 (new build) for the rest of the state.

VIC is next with $600,000 (established) and $850,000 (new) in major centres; and $375,000 (established) and $550,000 (new) in the rest of the state.

In QLD, it’s $475,000/$650,000 and $400,000/$500,000, while in WA, it’s $400,000/$550,000 and $300,000/$400,000.

In SA, it’s $400,000/$550,000 and $250,000/$400,000, while in TAS it’s $400,000/$550,000 and $300,000/$400,000.

In the ACT, it’s $500,000 for established and $600,000 for new properties all over the territory and in the Northern Territory $375,000 (established) and $550,000 (new).

Spaces are limited

Right now the government estimates 125,000 single parents who may be eligible. Around 80% of these are single mothers.

But not everyone who is eligible will get a look in, as the government plans to grant just 10,000 applications over the next four financial years.

How do I apply?

Applications will need to be made via one of 27 participating lenders across Australia, so check with a mortgage broker or potential lender before applying.

Applications will open on July 1 and the scheme is being administered by the National Housing Finance and Investment Corporation.

Still not sure if you qualify for assistance?

If you are unsure if you are eligible to apply for the Family Home Guarantee, or wish to know more about the other first home buyer grants or concessions you may have access to, please reach out to the team at Zinger Finance.

Our Mortgage Strategists can help you understand your options and make an informed choice moving forward.

how-brokers-can-screw-you-over

How Brokers Can Screw You Over

If you want to build the best property portfolio to get you where you need to be, you need to make sure everyone you are relying on is on the same page as you.

Your accountant, legal team, buyer’s agent and, most importantly when it comes to loans, your mortgage broker.

Your average mortgage brokers out there may not be interested in your whole property journey. Often, they focus on one job only, getting a loan approved for the one property you are currently looking to purchase, and in doing so, secure their commission.

They are not thinking ahead and getting you the right loan that will allow you to purchase your next one, two or even 10 properties.

Here are a few common ways you can get screwed over by a mortgage broker who may be focusing more on their commission than your portfolio.

Cross securitization

Cross securitization is a common one. When you are building a portfolio, you don’t want one under-performing property to drag down the rest.

Say you have three loans for three different properties. Loan 1 is worth $100,000, Loan 2 is worth $200,000 and Loan 3 is worth $300,000. You may think they are all their own entities, but let’s just say that unbeknownst to you, your mortgage broker has cross securitized them.

That means that there is a total loan of $600,000, secured against all three properties and you can’t sell or refinance one of the properties without the other two also being taken into account by the lender.

This situation can present a couple of nightmare scenarios.

Say you want to sell or refinance

Imagine the property attached to Loan 1 is in a market that has seen some growth and you decide you want to sell that property and access the capital. The bank might say ‘OK, but first we need to do a valuation on the other properties, because between them they need to be able to service the remaining $500,000 of that original $600,000 loan’.

If properties 2 and 3 have gone down in value, this may mean you will have to make up the difference to the bank.

Say you’ve paid down some of the loan and you only owe $400,000, but now properties 2 and 3 are only valued at $400,000, having lost $50,000 each in value. This means your loan to value ratio would now be 100%, which the bank won’t allow. The bank may require you to pay $80,000 to get your loan down to $320,000 and 80% of the value of the properties. You’ve now lost any of the gain you may have realised by selling property number 1.

The same applies for refinancing. Want to access some equity, or get a better interest rate on one loan? Well this won’t be easy if the two other properties and their loans must be taken into account and they are holding you back.

And if they weren’t cross securitized?

If the three loans were each stand alone, you could sell the top performing property, keep the money you make and continue servicing the loans of the two underperforming properties as long as you can make the repayments.

Inexperienced or unaccredited

Another trap with mortgage brokers is that you may end up with a higher interest rate than you should be paying or with a lack of flexibility in your loan product. This could be because your broker isn’t accredited to deal with the best lenders.

It’s important to realise that not all brokers have access to all the deals that are out there. They may be unqualified or inexperienced.

You need to ask a broker how many lenders are on their books and what commissions do they get from what lenders. The broker may have access to only a handful of options for you and may be steering you towards the loans that get him or her the best commissions.

Want to cut through the confusion?

The team at Zinger Finance has the best knowledge when it comes to structuring finance for maximum flexibility and growth and can make sure you are getting access to the loans most likely to help you through your whole property journey. If you need help building a finance structure strategy, reach out to us.

 

 

RBA cash rate remains on hold at 0.1%

The RBA has left its cash rate on hold at 0.1% during its May meeting today, which came as no surprise to analysts.

The decision marked the sixth straight month the rate has remained unchanged, after Australia’s central bank lowered it to 0.1% in November 2020.

RBA Governor Philip Lowe has repeatedly stated in recent months that the rate would remain unchanged until at least 2024, as the bank attempts to maintain its commitments on interest rates and market expectations.

One of these commitments is the three-year government bond yield target of 10 basis points. The initial $100 billion government bond purchase wound up last month and the next $100 billion program is underway.

More jobs but wages stagnant

As Australia’s post-pandemic economic recovery continues, unemployment is on a downward trajectory from its 5.8% level in February, but still remains too high for the RBA’s liking and wage and price pressure remain subdued.

There had been speculation from some corners that rates could fall into negative territory since the November rate cut, which saw the RBA move away from the traditional 25 basis point reduction that would have taken the official rate all the way to 0%, and instead lowered by 15 basis points. But so far the RBA has remained firm.

Most analysts predicted the hold decision, with AMP economist Shane Oliver saying that while he believes a rate rise will come before 2024, now was not the time to make a move.

“While the economy is recovering faster than expected, the RBA is still a long way away from seeing its stated requirements for a rate hike… a tight jobs market, wages growth well above 3 per cent and actual inflation sustainably within the 2 to 3 per cent target range,” he said.

Fellow economist Saul Eslake agreed that a hike may come before 2024, but that wages growth needed a major boost first.

“It will take some time for unemployment to fall to a sufficiently low level to trigger wages growth fast enough to ensure price inflation sustainably within the RBA’s 2 to 3% target range – but I suspect that situation may be reached before ‘2024 at the earliest’,” Eslake wrote in his forecast.

Banks looking four years ahead

Meanwhile in a sign that major banks think official rates have bottomed out and will rise after 2024, lenders have begun increasing rates on long term fixed products.

Last week Westpac and its subsidiaries increased rates on their four and five-year fixed loan offerings.

Westpac’s four-year rate of 1.89% was previously the lowest on the market, but the 30 basis point hike now sees the new rate at 2.19%. Westpac also raised its five-year fixed loan rate from 2.19% to 2.49%.

The last two months have seen 24 Australian lenders hike at least one four-year fixed rate, leaving just six now offering rates below 2%. NAB is the only big four bank to offer less than 2%.

Rate City research director Sally Tindall said Westpac’s 1.89% four-year rate was consigned to the history books.

“With a cash rate hike on the cards in 2024 and the RNA’s term funding facility wrapping up in a couple of months, the bank’s record-low four-year fixed rate was unsustainable,” she said. “It’s hard to see a major bank dropping its four-year fixed rate this low for a very long time, if ever.

“While the majority of banks’ three-year fixed rate changes are still cuts, rather than hikes, the tide could turn later this year as the economy continues to recover.

“The cost of funding is likely to increase in coming years, so it’s no surprise lenders are starting to factor this in.”

Any future rate hike would be a momentous occasion, however, as the RBA has not raised rates for over a decade. The last rate hike was all the way back in 2010, when Australia was still experiencing the fallout from the GFC.

 

 

Eligibility-criteria

Eligibility Criteria

Thinking of applying for a home loan? Lenders have a lot of eligibility criteria that you need to meet before they will lend you money. Here’s what you need to know.

Who are you?

You will need to be:

  • An Australian citizen, or a permanent resident, or married to one or a temporary resident visa holder may qualify.
  • Aged 18 or older
  • Be financially reliable when it comes to income, spending habits and history.

Where does your money come from?

You can have a deposit ready to go and plenty of savings, but that won’t matter if your serviceability isn’t up to scratch. Serviceability looks at whether the money you are earning is enough to make your monthly loan repayments and other financial commitments without going into mortgage stress.

Here’s what to consider when you’re:

  • Employed full time: That’s good, but how long have you been in the role? If more than 12 months, great. But the bank may say no if you’re in a 3 or 6 month probation period. Some banks lend while you’re on probation, but may lend less than the standard 80%.
  • Part time: You’re permanently employed, but your borrowing power will be less than if you were full time. And you will require proof of your contractual hours.
  • Casual: How many hours do you work per week? Have you been getting regular hours for more than 6 months in the one job?
  • Self-employed: You will need to show consistent earnings. Lenders often require you to have been self-employed for at least 2 years, so they can compare your tax records to work out an average income.

Other income streams

Lenders may also consider:

  • Rental income from investment properties (usually up to 80%)
  • Share dividends (a portion)
  • Fringe benefits such as living or car allowance
  • Regular overtime pay (evidence required over 2 years)

Assets and liabilities

Lenders will consider your assets, such as other investment properties, shares, superannuation, your car or other items worth significant amounts

They then look at your liabilities. Do you owe money on a car, personal or student loan? These will affect your borrowing power. The biggest one is credit cards. Lenders look at the credit limits on your credit card rather than what you actually owe on them. So you might owe $200 on a credit card with a $10,000 credit card… that’s $10,000 as a liability then they look at the monthly commitment at an average 3% of your credit limit.

Where does your money go?

Now let’s look at your saving and spending habits.

Saving:

You’re going to need genuine savings in the bank, not just for your deposit, but also to show you’re capable of setting money aside. Genuine savings is money that has been in your account for at least three months. Gifts and guarantees can be considered part of your deposit, but lenders want genuine savings of at least 5% of the value of the loan. Especially if your mortgage is going to require Lenders Mortgage Insurance (LMI).

If you are renting a property, some banks may look at your rental ledger and consider your payments as an alternative to genuine savings.

Spending:

Lenders often use the Household Expenditure Measure (HEM) when calculating your monthly expenses. Lender’s HEM is used for loan serviceability if it’s higher than your declared expenses vice versa if your expenses are higher than the lender’s HEM.

People have been shocked in recent times to be asked by lenders about individual expenses, such as shopping trips or holidays that have shown up in their transaction details.

Lenders are getting very forensic in the name of responsible lending and if they consider your application, they want to ensure that your declared expenses are sustainable.

Credit score

It’s important to be aware of your credit score or rating before applying for a loan. You can access your credit score for a fee from providers such as Equifax and Experian.

If you have payment defaults or black spots in your history, it’s best to know about these and see what action you can take to improve your credit score before attempting to borrow.

How the property you’re borrowing against might affect you

Once your personal finances are in order, consider the property you want to purchase; which will be the security for your loan.

One part of a bank’s due diligence is assessing the risk the property presents to their loan. You might find the lender has a postcode restriction, which may mean special rules for the suburb your new property is in.

That bank may have a lot of properties already in that area which have LMI attached. This heightens their exposure and they may need you to stump up a higher deposit, say 30% or more, to protect their money.

Then there’s the type of property. The bank might have more restrictions around buying a unit than a house, especially if it’s a smaller than average unit.

Also, the property should be on freehold or strata title without encumbrances. Finally, if you are buying the property as an investment property, you will face higher interest rates and lower LVR than an owner occupier.

 

 

Signing contract. Confident young man signing some document while sitting together with his wife and man in shirt and tie

Different Types Of Home Loans Explained

Before you get into individual loan types and their features, you first need to look at what type of overarching loan it is. For example, is it a residential home loan, or is it for a commercial property?

Is it for an individual borrower, or for a business?

There are so many different loan categories and types out there, but for the purpose of this article, let’s look at the most common, the residential loan.

When borrowing for residential property

There are two main types of residential loan; a home loan (as in, an owner-occupier loan for the home you live in), or an investment loan (when you borrow money to buy an investment property).

In both cases, you need to look at what features you require for the loan.

First, consider the type of repayments you will be making. They can be either principal and interest (P&I), where you’re paying down the principal value of the home and also paying interest on top; or interest only (IO), where you pay the interest on the loan only. You access equity when the property grows in value and get the rental income, but the principal amount that you owe the bank for the home stays the same.

In the majority of cases, a home loan for an owner-occupier property would require P&I. If you tried to borrow for an owner-occupier on an IO deal, the bank would require an explanation. But loans for investment properties are usually IO. This allows the investor to maximise cash flow, tax benefits and freedom to move money around.

Variable or fixed interest

 Now the type of interest, is it variable? Or fixed?

On a variable rate, the interest you pay will change when the bank decides to change its interest rate.

If it’s fixed, you can lock in the interest you pay at a certain rate for a particular term…usually 1, 2, 3, 4, or 5 years.

Variable rates are good when interest rates are low and potentially still on the way down. Fixed rates are good for people who want to lock in a rate that they are happy with and have certainty over their repayments for a certain time.

The loan features you need

There are various features available with variable loans. You might get 100% offset, where the savings you have offset the interest you pay on your loan. Other features are redraw facilities and the ability to make lump sum repayments. Some loans have a switch feature, where you can switch from variable to fixed.

A lot of banks offer package loans, where you pay an annual fee and that may cover the bank’s valuation fee, the application fee and the monthly fee. Some banks allow you to pay the one annual fee that then covers a number of different loans. Some have an unlimited number, while others cap the number of loans covered by the annual fee.

Basic versus standard variable

When you are looking at variable loans, there is also a difference between a basic variable and a standard variable product.

Say your variable loan option is a package, you might be able to negotiate discounts off the interest rate you pay. Or you may be a great saver and you have $200,000 in savings. You want the offset feature because you want to keep your savings but also be able to use it to offset the amount you owe and reduce the principal amount that you are paying interest on. You can negotiate these things in package loans.

Basic loans on the other hand are different. They are no frills types of loans. They are cheap because they don’t have many features apart from a redraw facility. The bonus is that they often don’t have application fees, or monthly fees. They don’t have an offset, but if your loan is less than $250,000, a basic loan will still be cheaper than a package loan.

 

 

Low-rates-what-does-this-mean-for-you?

Low rates – what does this mean for you?

The RBA decided to once again leave interest rates on hold at 0.1% at its recent March meeting, which means yet another month at the lowest interest rates ever.

In fact, if you have been paying off a mortgage at any stage over the past few years, you have been doing so in a historically low interest rate environment.

The RBA does this to stimulate the economy. The lower the interest rates are, the less money you spend on your debt, which means you have more to spend elsewhere. This extra spending helps prop up the economy.

But how you put that money to use is up to you. Recent research has shown the pandemic changed many of our spending habits, with Australian households saving an estimated extra $120 billion between April and December last year, due to restrictions on travel, hospitality and more. We seem to be more cautious about spending on material goods and luxuries and now choose to funnel extra cashflow back into our homes.

First things first

In order to take advantage of low interest rates, you need to make sure you’re paying the lowest that you can be.

Get online and check out loan comparison websites to see what else is out there. If there are better deals, you can consider refinancing with another lender; or, if you don’t want to leave your current bank, give them a call and ask them to match the better rate.

It’s a competitive market for lenders and they are keen to retain customers, so banks will often grant you a better deal if you pick up the phone and make them think you are ready to take your debt elsewhere.

Pay your own mortgage off sooner?

Now that you’re happy with your interest rate, where to next? One option is to keep making the same mortgage repayments, or even increase them and pay down your mortgage as soon as you can. Traditionally, people would want to pay their house off ASAP. Paying a bit extra when you can manage can shave years off your repayment term and save you tens of thousands of dollars over the life of the loan. You own your own house and any money that comes in. But is that still the best option?

Conditions have changed

Paying off your house early used to be beneficial when interest rates were much higher. For example, when banks were offering an average of around 7% on standard variable products, the accumulative effect of compound interest meant you would end up paying more than the purchase price of the property in interest alone over a 30-year loan term.

Now though, it’s a different story. You can get much better returns by focusing on acquiring new, quality debt rather than paying off existing debt which is attracting very small interest. Investing in property with plenty of upside for growth and good rental return can be a great way to take advantage of low interest rates.

Make lower repayments?

An option is to make lower repayments on your mortgage and free up more cash for your day to day life. That extra cash could be used to pay for something you need, or again, to invest in shares or property.

Making minimum repayments on your owner-occupier mortgage will free up even more cash to leverage into as much quality debt as you can manage.

You might use that cashflow to acquire multiple investment properties, which pay a rental income and appreciate in value throughout the rest of your own mortgage term.

Then, later down the track, you have the option to sell off some of your assets and use the capital gains to pay off your remaining debt, while keeping remaining properties for further income and equity. Or, simply keep holding the assets and benefiting from their growth and returns for as long as possible.

 

 

Package-loans-VS-basic-loans-under-variable-rates

Package Loans VS Basic Loans Under Variable Rates

The mortgage market is full of options as lenders try to attract business in a competitive landscape.
Getting advice from a mortgage broker can be a great way to get an idea of what type of home loan will suit your situation, but it’s also good to educate yourself on the types of products that are out there.
Let’s take a look at two main categories when considering a home loan product: package loans versus basic loans.

Do good things come in packages?

Package loans have become very popular in recent years and account for more than 50% of loans written by major lenders.
Package loans usually combine your home loan with other common financial products, which may include a mortgage offset account, transaction or savings account and credit card. They are eligible for interest rate discounts off the standard variable rate, fee waivers on loan approval and valuation fees.

Basic home loans are not packaged with anything. They are ‘no-frills’ loans where you save money on upfront and ongoing fees, because you don’t have the flexible features that cost more to administer but often allow you to save much more money long term.

What a fee-ling

In return for packaging products, lenders will make it worth your while by charging one annual fee for multiple loans, rather than separate fees for each product.
If considering a package loan, find out whether that one annual fee includes the other home loan fees you may not know about, such as an application fee, property valuation fees, redraw fees, switching fee (from variable to fixed and vice versa) and offset account keeping fees. Other fees to be aware of are the application or establishment fee, bank solicitor fee and settlement fee, when setting up your home loan.
These can vary in price, but average between $150 and $700. They are usually non-refundable but major banks are often happy to waive these fees, so make sure you ask ahead or negotiate, as this could be the difference between choosing a package or basic.

Rate expectations

Banks will often give you a discounted rate for package loans. Market comparison platforms generally find that interest on average package loan products is between 0.25% and 0.5% lower than average standard variable rate loans.

That saving alone is more than enough to make up for the annual fees which can be higher than what you would be charged for a basic loan.

Unique borrowers can benefit

Flexibility is the key for borrowers such as property investors or the self-employed who want to free up cash flow and maximise future borrowing power. Features such as interest only repayments, line of credit and others will appeal to investors as long as they choose the package that suits their strategy, while credit cards and transaction accounts are useful to small business owners.

Break it down to the basics

So when would it be better to shun a package for a basic home loan? You may just want a simple, no frills home loan that you can quietly pay off. 

Basic loan products will likely offer you the low interest rates you want, but there may be loan features and loan flexibility that you may not realise you need.

 

 

Refinance-cash-rebates-What-you-need-to-know

Refinance Cash Rebates – What You Need to Know

A lot of banks seem to be offering cash incentives at the moment to tempt you to jump ship from your current lender and refinance with them.

Sums of between $1000 and $4000 are being offered up for borrowers that could use some extra funds in their account, with the added bonus of switching to (at least what they think) will be a better deal.

But just because they throw you a wad of cash, it doesn’t mean you’ll be better off over the long term… or even the short term.

Why do banks offer cash?

These incentive deals, nicknamed ‘cashback loans’, but actually known as refinance cash rebates, usually pop up in a competitive market for lenders. Banks need your money on their books and in times like these, when interest rates are so low, more people than ever want to be paying off a mortgage. It is also a time of unprecedented disruption in the mortgage space. Online only banks, second tier lenders and financial startups are emerging for a slice of the market. So banks need to stand out from their competitors.

At some point, banks came to the conclusion that offering cash was a good incentive. Maybe borrowers would be low on funds at the moment due to the strains of COVID, or would like the opportunity to pay off a bit of debt, or even buy something they need without having to use credit.

The survey says yes… sometimes

A recent study found that one in three borrowers were planning to refinance in the coming months. Of these, one in four surveyed would choose a cashback offer over a low interest rate. One in three millennials would opt for cash, but just one in 10 baby boomers.

Overall though, nearly half of the borrowers surveyed (46%) would opt for the lower interest rate over a cash rebate.

The good news for borrowers at the moment is that you may not have to choose one option or the other, because you can now get cash rebates on loans that already have super low interest rates.

What you should use the rebate for

The whole point of a rebate is that it is there to cover the costs of moving loans to another bank.

And there are quite a few costs involved. You will incur such expenses as government fees for discharge of title, discharge of mortgage, title registration, costs of title searches, settlement fees and solicitor documentation fees. If you go ahead and break a fixed rate mortgage term, you will also incur early exit fees.

So if you do opt for a loan with a cash rebate, don’t start planning your next holiday or big retail purchase without first covering off those costs.

Of course, putting that rebate straight back into your loan will save you even more when interest is taken into account.

For your consideration

While the rebates are usually enough to cover the costs of switching lenders, the savings made could dry up quickly if the loan is less flexible than your previous one, or if it doesn’t suit your specific needs.

Lower interest rates add up to significant savings over the life of a loan, usually much more than a few thousand dollars’ worth.

Of course, not many people these days choose a loan and stick with it for the full term – you may change homes a number of times – so if you refinance regularly, you can make good use of the incentives on offer at any given time.

Before you do take the plunge however, make sure you read the fine print. Most lenders will have a minimum loan amount that qualifies for the rebate. If you have a relatively small remaining balance on your loan, you may not qualify as it may not be worth their while to get you on board for a small amount only. Also, many of these deals are restricted to owner occupiers only, so if you are building an investment portfolio, you may not be eligible.

Independent financial advice will help you decide your best option.

 

 

Home-Expenditure-Measure-(HEM)-explained

Home Expenditure Measure (HEM) explained

There have been stories emerging in recent years about banks getting a little too familiar when assessing home loan applications. “Why did you spend all that money on duty free at the airport a few months back?”
“That was a big bill at that fancy restaurant, how often do you dine out at the top end of town?

These may not be exact quotes, but they are the types of questions people are being asked when applying for home loans these days. Don’t worry, the bank’s loan assessment team aren’t following you on flights or spying from adjacent restaurant tables, but they do have a forensic level of access to your expenditure.

It’s a far cry from the days of banks just approving loans that are around five times your yearly income, give or take a 2.25% repayment buffer in case of a rate rise or rainy day.

Times have changed

A decade of events like the GFC and royal commission on banking have forced banks to get serious about responsible lending. Regulations have been put in place so stop borrowers being approved for finance they are unable to cope with.

Meanwhile the ready availability of more and more consumer behavior data makes it easier to predict if you will be unable to service a loan. One feature of this brave new lending world is that lifestyle expenses are now taken into account when assessing loan applications.

You might say “I work hard, I can afford a mortgage, what I spend my spare money on is my business”. Well that’s true, but who a bank lends money to is their business too, and they now have to make snap judgements on whether it’s wise – and legal – to lend money to you. So, like it or not, your lifestyle spending habits go hand in hand with your loan serviceability. And that’s where the Home Expenditure measure (HEM) comes into play.

OK, so what is it?

Dreamt up by an economic think tank a number of years back, the HEM is a standard guide that lenders use to estimate what a potential borrower might spend on annual living expenses. That figure may then be added to whatever algorithm a lender uses to assess a loan application. The HEM is believed to be used for the great majority of home loans applied for each year.

The HEM takes into account the borrower’s location, their dependents, their total income (some lenders include rental income as part of the total gross income) and the type of lifestyle they live. Most borrowers fall into the ‘basic’ lifestyle category, estimated to spend just over $32,000 a year, while those considered ‘lavish’ spend closer to $60,000.

Items considered ‘absolute basics’ include food and supermarket, coffee, lunches and takeaway, entertainment (includes cigarettes and alcohol), domestic and international holidays, hairdressing and grooming, media streaming and subscription services, phone, internet and pay TV, utilities, transport, communication, kid’s clothing, while ‘discretionary basics’ may be gifts, private health fund, private education, fashion and childcare.

The HEM calculates the median spend on absolute basics, plus the 25th percentile spend on discretionary basics.

How do banks use it?

Ordinarily, if you apply for a loan, the bank will ask you to estimate your weekly or monthly spend on various expenses. They then compare your estimation to what the HEM tells them about people with a similar profile to you (those living in your neighbourhood, with the same number of kids, similar income, etc).
To be conservative, the lender will often use the higher of the two estimated spends when figuring out whether you can afford the loan. 

Is it accurate?

Banks have been criticised for relying too heavily on the HEM because it is often deemed to underestimate what people spend on lifestyle and may therefore leave them stuck, unable to pay off a loan. Banks have therefore been pressured to take extra steps in conducting their due diligence in verifying spending.

That is where some of those questions about your big one-off splurges may be asked. You may “conveniently forget” to include some of your more frivolous spending habits in your own estimations, but be called to answer for them anyway, which may make you seem untrustworthy. Honesty is the best policy when applying for a loan.

 

 

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