Australia’s household debt to income ratio is currently at 190% which is among the highest in the world. This number is a far cry from the debt to income ratio from nearly 30 years ago which stood at around 56%. The rapid increase of household debts can be attributed to a rise in mortgage debt which has been brought on by Australian’s looking to purchase their own home or investment property. Other reasons as to why we have seen a sharp increase in the debt to income ratio is that over the last decade we have been given easier access to credit, built a reliance on credit cards and experienced lower mortgage interest rates.

Facts About Australia’s Debt to Income Crisis

The recent property market boom has resulted in many Australians borrowing higher amounts with wage growth not keeping up with rising housing and living costs.

• Lower interest rates have been a key factor in growing debt. When credit is offered at a lower rate, borrowers want more of it.
• Whilst some developed countries have seen a decrease of debt to income ratios since the Global Financial Crisis, Australia’s debt levels have increased to record levels.
• The Reserve Bank of Australia is carefully monitoring the levels of residential lending, and the risks associated with high household debt. Further cash rate cuts may be required as the outlook for household consumption has slowed.

Managing Your Debt

If you are having difficulties managing your debt, here’s a few tips to keep in mind:

• If you have multiple credit cards and other personal loans, you should consider consolidating your debts into one loan account. If you have equity in your home, you could consider refinancing the debts at a reduced interest rate.
• Create a budget and have the discipline to stick to it.
• Set up a savings account and try to contribute any surplus from your budget for upcoming expenses. This may assist you to avoid using a credit card or drawing down on other loans to cover expenses.
• Resist the urge to splurge on credit cards!

Please contact us today for a confidential, cost and obligation free discussion about your lending needs.  We would also be happy for you to refer your family or friends so we can assist them in creating a cost-effective home loan which suits their needs.

If one of your new financial year’s resolutions is to start paying off your home loan as quickly as possible, here’s a few tips to get you on your way.

1. Interest rates are at record lows due to the consecutive RBA cuts in June and July. Most lenders have passed on the reduction in their home loan rates.  One strategy to pay off your home loan faster would be to maintain the repayments which applied before your lender reduced their rates in June and July.

2. If your lender didn’t pass on the full rate reductions, contact us to refinance with an alternate provider with a lower rate/ongoing fees than your current loan. Some of the lenders on our panel are offering owner/occupier principal and interest rates as low as 3.29%.  If you are not considering refinancing, at a minimum, you can ask your lender if they will match the rate, or reduce your home loan interest rate and/or fees.  Your bank may be willing to reduce your home loan rate and ongoing costs as an alternative to losing your loan to another lender.

3. On a principal and interest loan, in the first five or so years, most of your payments go towards paying off the interest. If you are able to make additional payments during this period, or at any time during the loan term, this will reduce the interest payable, and decrease the lifespan of the loan.   If you receive a bonus payment from your employment, or a tax refund, resist the temptation to splurge and put it to work for you by making an additional repayment on your mortgage.  If you are able to increase your regular repayments, this will save you thousands over the life of your home loan.  For example, by paying an extra $100 a month, a typical $400,000 home loan could be reduced by nearly 3 years, with a saving of almost $30,000.  Before making additional repayments, check if there are any conditions or limits on extra payments.

4. One of the quickest ways to save on your home loan is to make more frequent payments. If your home loan is on monthly repayment, switch to a fortnightly repayment.  Split your existing monthly repayment in two, and make these payments on a fortnightly frequency.  You won’t notice the difference in your cash flow, but it will save you time and money on your loan.  Repaying your home loan on a fortnightly basis means you are effectively making 13 monthly payments every year.

5. If you have an offset account with your home loan, ensure that your savings and ongoing salary are deposited into the account. An offset account can accelerate paying out your debt as the balance will reduce the interest payable on your home loan.

6. Be disciplined with your discretionary spending! Every dollar you save by cutting back on some of your luxuries can be put to work by making additional repayments on your mortgage, and saving you more in interest repayments over the life of the loan.  I’m not suggesting that you adopt a monastic existence and abandon all of your pleasures, but as an example, if you reduce your daily take away coffee consumption by 1 cup a day, you will easily achieve the previously mentioned saving of almost 3 years and $30,000 on a $400,000 mortgage!

Please note this article provides general advice only and has not taken your personal or financial circumstances into consideration. Please contact us today for a confidential, cost and obligation free discussion about your lending needs.  We would also be happy for you to refer your family or friends so we can also assist them to locate a cost-effective home loan which suits their needs.

As of 1^st July 2018, under Comprehensive Credit Reporting (CCR) it is mandatory for credit providers to provide positive credit data to credit reporting agencies.  Prior to July 2018, credit reporting agencies only obtained negative data such as defaults with utility providers, bankruptcies, and court judgements in order to compile your credit report, and determine your credit score.  CCR will ensure that additional information such as the type of credit applied for, amount of credit applied for and repayment history for the last two years will be included in your credit report.

Lenders use your credit score to assist in the assessment of a loan application or credit card.  Your credit score will help a lender decide the potential risk of lending to an applicant, and the likelihood of being repaid on time based on your credit history.   The higher the score, the better the credit risk you are to a provider.

Some of the key factors that impact your credit score include:

• Your total debt.
• Personal details.  Your score will take into account your age, time at current address and length of employment.
• Types/size of credit accounts and relationships, eg. Home loan, personal loan or credit card.  Mortgages have a different level of risk when compared to a credit card.
• If you have credit relationships with specialty finance providers such as debt collection agencies or payday lenders.
• The date your credit file was established.  A newer file may present a higher level of risk when compared to an older file.
• The number of credit enquiries made on your file.  This may have an impact on your score as credit enquiries remain on your file for up to 5 years.  If you’ve shopped around for credit and applied with several providers, you are seen as a higher risk.
• Late payments, defaults, serious credit infringements, court judgements and bankruptcies.

There are a number of ways you may be able to improve your credit score:

• Firstly, obtain a copy of your credit score.  You may be able to get a copy by opening an account via several providers such as:
  • www.finder.com.au/credit-score/verify
  • www.creditsavvy.com.au
  • www.mycreditfile.com.au
  • www.checkyourcredit.com.au
  • www.experian.com.au
• Once you have obtained the score, check which range your credit score falls under.  Typically your score will range from below average to excellent.  If you have a low score, consider reducing your credit card limits, and check for any incorrect negative listings.  You may be able to apply to remove an incorrect negative listing from your credit file.
• If you have multiple personal loans &/or credit cards, consider consolidating the debt under one loan.
• If you have overdue accounts >$150, pay them off as soon as possible.
• Limit the number of credit applications you make.
• Ensure that your loan repayments are always made on time.

Checking your score and getting your finances back on track will be an important step to improving your chances of being approved for a loan.  If you have a low credit score and you are looking to borrow, a rejected application will further reduce your score.

Please note this article provides general advice only and has not taken your personal or financial circumstances into consideration. If you would like more tailored credit advice, please contact us today for a confidential, cost and obligation free discussion about your lending needs.  We would also be happy for you to refer your family or friends so we can also assist them to locate a cost-effective home loan which suits their needs.

That is the question. As we are in a record low interest rate environment, many home loan borrowers are considering whether or not to fix the rate on the total amount owing on their mortgage.

Whilst there are lenders offering some very attractive rates on fixed loans, the following should be considered before obtaining a new loan, or changing an existing loan to a fixed rate:

• Many fixed rate home loan products will limit the extra repayments which can be made in addition to the minimum owing. Depending on the product, this could be on an annual basis, or for the fixed rate period selected.  The additional repayments could be capped on a percentage basis, or a dollar basis for each year, or the entire fixed rate period without penalty.  If you exceed the additional repayment cap, you could be penalised.  If your objective is to accelerate the repayments on your home loan, fixing the total loan amount may not be your preferred option.
• If the lender decreases their variable rate and your fixed rate is higher, your repayments will not reduce.
• Fixed rate loans may be less flexible, and offer less features such as redraws or offset accounts.
• If your circumstances change, and you need to switch to a different product, or if you wish to repay earlier than the fixed rate term, the lender may charge you with a break cost. The break cost is typically calculated to compensate the lender for the loss in profit that has been factored into the fixed rate period.
• When the fixed rate period expires, the loan may revert to a much higher variable rate.

A common strategy to reduce the impact of the above disadvantages with fixed rate loans is to ‘split’ your home loan by making it part fixed and part variable.  The fixed component of your loan will provide the ability to budget for the repayments over the fixed rate period.  The fixed portion of the loan will mitigate the risk of future interest rate increases, and ensure your repayments are set over the fixed rate period.  The remainder of the loan balance can be held at a variable rate so you can make unlimited repayments, and enjoy the benefits of access to redraws, and a linked offset account.

When obtaining a new loan or refinancing an existing loan, there are several options to consider.

Please not this article provides general advice only and has not taken your personal or financial needs into consideration. If you would like more tailored mortgage or financial advice, please contact us today for a confidential, cost and obligation free discussion.

If you are looking to buy your first home, here are some things to consider to improve your chances of finding the right property, securing the funding, and realising your dreams.

Watch your spending

Due to recent pressure from Australian Prudential Regulation Authority (APRA), and the fallout from the banking royal commission, lenders are under increased pressure to tighten credit eligibility guidelines and ensure stricter adherence to responsible lending practices. The lender will need to assess that an applicant can more easily afford to service the debt by applying actual living expenses, as opposed to the Household Expenditure Measure used until recently.

The lender will scrutinise your usual living expenses, check your spending habits and financial discipline by obtaining your transaction account(s) and credit card statements.

You could be jeopardising your chances of getting approval for a home loan if you are overspending on discretionary items such as entertainment or holidays. There have been recent headlines in the Australian Financial Review about lenders reviewing spending patterns on Netflix, Afterpay and Uber Eats. Set a budget and minimise your discretionary spending. Most importantly, make sure you have the discipline to stick to it!

Check your credit rating

A key part of your success in obtaining a home loan will be your credit score. A lender will lodge an enquiry on your credit file to check your credit history, and to confirm if you have had any history of late payments or defaults with other providers.

Credit reporting agencies such as Experian, Equifax and Illion (previously known as Dunn & Bradstreet) obtain information from banks, credit providers and utility companies to calculate a credit score. Your credit rating is based on the amount of credit you have borrowed, the number of applications you have previously made, if you have any overdue or unpaid debts, and if you have any history of bankruptcy or insolvency agreements.

Lenders use your credit rating to determine if you are suitable for a loan. Understanding what makes up and affects your credit rating is important for any homebuyer. You can obtain your own credit rating – including any defaults listed against your name by registering online. There can be mistakes on your report – if you pick up on them you can request they get altered. This could be the difference between a loan application being approved or declined!

The Australian Securities and Investments Commission (ASIC) MoneySmart website provides links to the credit reporting agencies which offer an online credit score check.

Reduce your credit and store card limits and minimise other debt

If you have larger credit card limits or other debt, you may not be able to borrow as much, or be eligible for a home loan approval. Reduce your credit card limits and decrease/pay off any existing debts you may have before you apply for a home loan, especially high-interest debts such as credit cards and store cards.

Due to credit policy changes in line with the tightening of responsible lending guidelines, lenders have increased the assessment rate on the servicing of existing credit card limits when reviewing a loan application. This may affect your eligibility for approval on a home loan at the required amount. Reducing debt or lowering your existing card limits will increase the likelihood of your loan being approved.

Higher deposit, better outcome

If you’ve saved less than 20% of the purchase price, there are a limited number of lenders who can offer a loan. Deposits of less than 20% may require Lenders Mortgage Insurance (LMI) to qualify for the loan, and the rate offered and fees may be higher to offset the increased risk to the credit provider.

While some lenders offer lower deposit loans, if you have saved a deposit of 20% or more, you may be eligible for a loan with a wider range of lenders with reduced rates/fees, and you will save the cost of an LMI premium.

Be aware of purchase costs and your eligibility for first home buyer grants and/or stamp duty concessions in your state

Buying a home incurs costs in addition to the purchase price. Allow for property inspection fees, loan application costs, mortgage registration fees and stamp duty. Loan establishment costs, mortgage registration and stamp duty can be covered via the lender if you qualify for the amount required. You may be eligible for the First Home Owners Grant (FHOG) or stamp duty exemptions/concessions. If you’re eligible, you’ll save thousands of dollars. Check online with your state revenue office to see if you qualify.

Check the features and options available with the lender

The interest rate is not the only thing to consider with a home loan. Make sure you understand the fees payable, product features/options available and how they work to suit your needs.
Some loan products include redraw facilities, offsets via linked transaction accounts, the ability to split the loan into several accounts on a fixed or variable rate, and greater repayment flexibility.

Be wary of discounted first home buyer specials

Lenders may offer a special discounted introductory rate for first home buyers. Check the terms and conditions carefully as the initial rate may default to a much higher rate at the expiry of the introductory period. These products may also incur higher establishment costs and ongoing fees.

Know the market in your target area

Thoroughly research the property market where you want to buy. Get an understanding of the average prices, supply/demand, local facilities, market activity/trends and recent auction results. This will ensure that your market knowledge will increase, and that your target area has what you need in terms of both lifestyle now and future growth opportunity.
Often the difference between getting value or paying a premium price is the buyer’s level of market knowledge.

Get pre-approval

Obtain a pre-approval from your lender. This will ensure that you know your borrowing capacity in advance, and you can negotiate your purchase price.
Typically, there’s no cooling-off period at auctions, once you’ve made an accepted bid that’s it. Bidders without finance approval can find themselves in deep water if they sign a sale contract. You cannot make the contract subject to any conditions such as obtaining finance unless the seller agrees to the provision.

Get advice

You can get advice with any stage of the home buying process.

Buyers’ agents can assist in locating, evaluating and negotiating the purchase on behalf of the buyer.

A conveyancer will ensure that the buyer is meeting their legal obligations during the purchase and make certain that the title transfers smoothly.

A mortgage broker can review the thousands of products available to source the most appropriate loan solution for your needs, and assist with the finance process from application right through to settlement.

Please note this article provides general advice only and has not taken your personal or financial circumstances into consideration. If you would like more tailored advice please contact us today, or refer your family and friends, for a confidential, cost and obligation free discussion about your lending needs.

The word mortgage originated in England during the middle ages from the old French “death pledge.”   This pledge refers to a contract which ends (dies) when the debt is repaid, or possession of the property is taken by the lender in the event that the borrower cannot repay.

In more recent times, a mortgage involves a loan contract offered by a credit provider at interest, secured against the borrower’s property, with scheduled repayments over an agreed term.

Whilst there are many lenders, and there is an abundance of products and features available with a mortgage, the following may assist newcomers to clarify how a mortgage works:

Deposit

Most lenders will require you to save at least 20% of the value of the property as a deposit.  There are some providers who will offer a loan to borrowers with a reduced deposit, but traditionally, lenders will offer funds up to a maximum Loan to Valuation Ratio (LVR) of 80%.

Lenders Mortgage Insurance

In the event that your deposit is below the minimum required by the lender, you will be required to purchase Lenders’ Mortgage Insurance (LMI).  LMI is an insurance policy which protects the lender in the event that you are unable to repay the loan.  The cost of cover is paid by the borrower via a one off premium.  The LMI premium can be financed (up to limits) via the loan, which means it will be added to the interest you pay over the life of the mortgage.

Using your property as collateral

Banks love security and seek to minimise the risk in lending funds to a home buyer.  The security property can be used as protection by the lender in the event that you default on your mortgage.  If you cannot repay, or if you suffer from financial difficulties, the lender can take possession of the property (foreclose).  The lender will then sell the security property to clear the debt.

Types of loans available

When obtaining a loan there are several options to consider.

Variable Rate:  The interest rate and therefore the minimum repayments on a variable rate loan will move up or down with the rates set by the lender.  This may be due to movement in the official cash rate set by the Reserve Bank of Australia (RBA), or at the discretion of the lender.  Variable rate loans allow more flexibility in repayments and usually do not incur penalties for early repayment.

Fixed Rate:  The interest rate and minimum repayments will remain the same during the fixed rate term of your loan.  A fixed rate loan will provide certainty in your repayments over the period, however, there are often restrictions in repaying above the minimum, and penalties may apply for early repayment of the debt.  If interest rates fall, you are locked into the fixed rate.  If interest rates rise, your repayments and rate will remain the same.

Split loans:  A split loan allows you to lock in a fixed rate amount, and a variable rate amount.  You may wish to reduce the risk of future interest rate increases, and ensure your repayments are set over the fixed rate period by obtaining a portion of your loan at a fixed rate.  The remainder of the loan balance can be held at a variable rate so you can make unlimited repayments.  A split loan will allow you to ‘hedge your bets!’

Principal and Interest:  A Principal and Interest (P & I) loan is divided into two portions.  The principal owing is the amount you borrowed, less repayments.  Interest is the amount charged in addition to the principal, and is based on the interest rate and the principal balance.  The lender has worked out how much you will need to repay at each instalment to pay your loan off in the loan term you have elected.  This is known as the amortisation schedule and shows how much of your repayment goes towards interest and the amount that goes towards paying off the principal.  With a P & I loan, most of your repayment will go towards paying interest at the beginning.  As the loan progresses, the amount paid off the principal will increase.

Interest only:  As the name suggests, an interest only loan provides a facility whereby the borrower only pays the lender the interest component owing.  These loans are available with various interest only period options and will revert to a P & I loan at the end of the interest only term.  Interest only loans have been a popular choice for investors and for home owners looking to reduce the repayments on their property.

Repayments

Lenders will usually offer the option to make repayments on a weekly, fortnightly or monthly basis.  Loan terms are usually 25 or 30 years.

Redraw facility

If you make loan repayments in addition to the minimum payable, you can access these surplus funds at a later date.  A redraw facility allows you to withdraw money that you’ve already contributed on your home loan.  A redraw provides the benefit of paying more off your home loan, and not locking away the extra repayments.

The interest rate on your home loan will be higher than the interest rate offered in a typical cash management account.  The interest saved on your home loan by making additional repayments over the term of the loan will be substantial, and the redraw may come in handy in the event of needing to access funds in an emergency.

NB. A redraw facility may include fees and restrictions on the amount and frequency of withdrawals you can make each year.

Offset account(s)

An offset account is a savings or transaction account which is linked to your home loan balance.  The balance held in your offset account will reduce the amount you owe on your mortgage, and can be up to 100% depending on the loan product.  With an offset facility, the interest payable on your home loan is reduced by the difference between your loan balance and the offset account balance.

Please contact us today for a confidential, cost and obligation free discussion about your lending needs. Please note that this article provides general advice and has not taken your personal or financial circumstances into consideration. If you would like more tailored mortgage broking or financial advice, please contact us today.

Read more articles in our Financial Literacy series. 

You’ve no doubt heard the news that 3 of the ‘big 4’ banks have increased their variable home loan rates.  Westpac was the first to increase their rates, despite the RBA keeping rates on hold at 1.5% since August 2016.  Westpac announced on 30^th August that their variable home loan rates will increase by 0.14% effective 19^th September due to the increase of costs to source funding on the wholesale markets.

The major banks have been making the usual noises about absorbing these higher funding costs in the hope that they would ease over time, and the need to pass on these costs to customers.

ANZ and Commonwealth Bank followed suit on 6^th September by announcing that their variable home loan rates will also increase.  ANZ will increase its variable home loan interest rates by 0.16% effective 27^th September in both owner occupier and investment mortgages.  However, ANZ will exclude customers in drought declared areas of regional Australia.  CBA will increase its rates by 0.15% from 4^th October.

The headline rates for Westpac, ANZ, and CBA are as follows:

WBC

Standard variable Owner occupier Principal and Interest rate to increase to 5.38% p.a.

Standard variable Owner occupier Interest only rate to increase to 5.97% p.a.

Standard variable Residential Investment Principal & Interest rate to increase to 5.93% p.a.

Standard variable Residential Investment Interest only rate to increase to 6.44% p.a.

ANZ

Standard variable Owner occupier Principal and Interest rate to increase to 5.36% p.a.

Standard variable Owner occupier Interest only rate to increase to 5.91% p.a.

Standard variable Residential Investment Principal & Interest rate to increase to 5.96% p.a.

Standard variable Residential Investment Interest only rate to increase to 6.42% p.a.

CBA

Standard variable Owner occupier Principal and Interest rate to increase to 5.37% p.a.

Standard variable Owner occupier Interest only rate to increase to 5.92% p.a.

Standard variable Residential Investment Principal & Interest rate to increase to 5.95% p.a.

Standard variable Residential Investment Interest only rate to increase to 6.39% p.a.

NAB is yet to increase their rates, but many industry experts suggest that it is only a matter of time.

If you, or your friends or family have a home loan via one of the major banks, it would be well and truly worth the time spent to review your arrangements to ensure that the loan offers a competitive rate with low fees.

Banks traditionally rely on “inertia” in the event of raising home loan rates.  It is estimated that approximately 80% of home loan customers won’t do anything and will continue to pay the higher repayments.  This is simply a ‘Lazy Tax.’  For example, the ANZ rate increases will add about $40 a month to a $400,000 home loan.

Just to provide an indication of the rates available via some of our lenders, here are some comparisons for you to consider:

Standard variable Owner occupier Principal and Interest rate 3.68% p.a.

Standard variable Owner occupier Interest only rate 3.99% p.a.

Standard variable Residential Investment Principal & Interest rate 3.97% p.a.

Standard variable Residential Investment Interest only rate 4.29% p.a.

These reduced rates could save you THOUSANDS of dollars over the life of your home loan.

Please contact us today for a confidential, cost and obligation free discussion about your home loan.  We would also be happy for you to refer your family or friends so we can also assist them to locate a cost-effective home loan which suits their needs.

Please note that this article provides general advice, it has not taken into consideration your personal or financial circumstances. If you would like more tailored advice relating to mortgage broking or other financial services, please contact us today.

Interest only loans have been a popular choice for property investors for tax purposes, and first home buyers and other borrowers looking to minimise the repayments on their debt.  Many purchasers use Interest only loans to ease the financial burden of servicing their loan.

Due to the growth of the property market in recent years, the average loan size has increased, and Interest only loans can be a short-term option to reduce the repayments and improve affordability.  This type of loan is a popular choice for property investors to lower the repayments, while hopefully the value of the property increases in value over the longer term.  Many lenders offer Interest only options on their products for up to 5 years.

On a loan of $300,000, the monthly repayment on an interest loan would be approximately $500 less per month than an equivalent Principal and Interest product at the same rate.  There can be significant savings on repayments for an Interest only loan in the shorter term, but there are also some longer-term issues:

• As the name suggests, you are only paying back the interest on the debt. You are not making any progress on your mortgage!  At the end of the Interest only term based on the example above, you still owe $300,000.  If you selected a Principal and Interest loan (at the same rate), you would have reduced your loan by nearly $30,000.
• Property investors and homeowners expect that the property will increase in value over time. With an Interest only loan, you will have equity in the property without paying any principal.  However, if your property doesn’t substantially increase in value over the Interest only term, you will not have gained any equity in the property.
• At the end of the Interest only period, the loan repayments will ‘rollover’ to an increased Principal and Interest repayment. Many borrowers may be unprepared for the additional financial commitment, and will experience ‘Mortgage Stress’.  If the borrower’s circumstances have changed since the loan was established, and they cannot extend the Interest only period, it may be difficult to refinance to another Interest only loan.  The only option may be to sell the property.

As of 2015, Interest only home loans represented approximately 40% of the residential loans in Australia.  From March 2017, the lending regulator, Australian Prudential Regulation Authority (APRA) introduced restrictions on new Interest only loan business.  APRA has limited Interest only lending to less than 30% of new loans written.  The restrictions were imposed In order to limit riskier forms of lending practices, which allow borrowers to pay for escalating property prices, while not reducing their debt.

The restrictions introduced by APRA have led to rate increases on Interest only loans, and tougher requirements for customers applying for Interest only loans.  Interest only loan applicants may be subject to increased scrutiny such as more thorough income verification and higher loan servicing standards.

There have been several headlines recently in relation to the issues with Interest only home loans ‘rolling over’ to Principal and Interest loans after the interest-only period expires.  The Reserve Bank of Australia has estimated that over the next 3 years, approximately $360 billion of Interest only loans will convert to Principal and Interest Loans.  This will increase the repayments by approximately 1/3 or $7,000 p.a. on average for a $400,000 loan.

The rollover to Principal and Interest repayments may leave many borrowers struggling to meet higher repayments.  The most vulnerable will be homeowners with a high Loan to Valuation Ratio (LVR) who will find it harder to refinance or sell the property to extinguish the debt.

If you need assistance with your home loan or lending needs, please contact one of our lending specialists to determine the costs and benefits, and to discuss your options.

Please note that the above has been provided as general advice. It has not taken into account your personal or financial circumstances. If you would like more tailored advice, please contact us today, one of our friendly advisers would love to speak with you.

In the April meeting, the Reserve Bank of Australia (RBA) kept the cash rate on hold for the 20^th consecutive month, at the record low of 1.5%.  The cash rate was reduced from 1.75% to 1.5% in August 2016, and there has not been an increase in the cash rate since November 2010.

Most of the ‘experts’ predict that rates won’t rise until next year due to slow wages growth, and general economic conditions.  Although some of the banks have increased their rates outside of the RBA cycles, many borrowers have taken advantage of the competitive home loan market to access lower rates and save on their mortgage repayments.

Given that we are currently in a record low-interest rate environment, and logic would dictate that rates are most likely to go up, does it make sense to fix your home loan?  Well, as with most financial decisions, there are pros and cons to consider with fixed rate vs variable rate mortgages.

Some of the key features of fixed rate and variable rate loans are shown below:

Fixed rate loans

• Fixed rate loans can provide peace of mind and avoid the risk of rising interest rates. If interest rates increase above your fixed rate, you will enjoy the savings as your repayments are locked in.
• At the end of the fixed rate period, the loan may revert to a much higher variable interest rate.
• If interest rates fall, you will miss out on any savings, as your fixed rate is locked in until the end of the term selected.
• Fixed rate loans are typically higher than variable rate loans, and charge break costs if you repay the loan early, wish to switch providers, or change to a variable rate before the expiry of the fixed rate term. The break costs are to compensate the lender for the loss of projected earnings on the loan and can be several thousands of dollars.
• Fixed rate loans may limit the amount of additional payments you can make above the minimum repayment amount. A penalty may be charged for exceeding the maximum repayments allowed each year, or in the fixed rate term.
• Fixed rate loans offer less flexibility, and do not provide full offset accounts. Some providers offer partial offset accounts, and depending on the provider, you may not have the ability to redraw.

Variable rate loans

• Variable rate loans typically allow greater flexibility. You may be able to make unlimited repayments without penalty, and redraw the funds as required.
• Variable rate loans can offer more comprehensive features such as a full offset account(s). An offset account will allow you to reduce interest costs by linking a savings/transaction account.  The balance held in the account will offset your home-loan and allow you to have access to that money as required.
• If interest rates fall, your lender may reduce the rate so you can take advantage of reduced repayments.
• If interest rates rise, your repayments will increase to the rate set by your lender.
• Variable rate loans usually allow you repay the loan before the end of the loan contract without break costs or penalties. A standard discharge fee would apply.
• If interest rates start to rise unexpectedly, you can convert the loan to a fixed rate. An additional application fee would apply.

Unfortunately, no one has a crystal ball and it can be difficult to predict when rates may rise.  Another option may be to split your loan.

Split loans

A split loan facility allows you fix part of your loan and leave part of the loan on a variable rate.  By splitting your loan, you have protection against increasing interest rates on the fixed portion, and you will have the flexibility of making extra repayments, and the features available on the variable portion.

There are many issues to consider before making any changes to your home loan.  Before you decide on what option would suit your needs, take the time to understand the pros and cons of fixing your home loan.   One of our friendly mortgage brokers might be able to save you thousands over the life of your home loan/s.

Please note that the above is given as general advice. It has not taken your personal circumstances into account. If you would like more tailored advice, or to learn more, please contact one of our lending specialists to determine the costs and benefits, and to discuss your options.

By now, you would have received your credit card statement following the spending spree of Christmas, and the impulse purchases made during the Boxing Day/New Year’s sales. Maybe you overindulged in online shopping over the holiday period.

Credit cards offer a quick and convenient way to purchase goods and services; however, it may be more difficult to keep track of your spending when compared to using cash. If you have substantially increased your credit card balance, or reached your limit, you may be struggling to keep your repayments up to date within the interest-free period.

When paying via credit card we often believe that we will repay the balance within the interest-free days, but that may not always be the case! When you exceed the interest-free period, the purchase interest rate can be around 20% per annum or higher (22%+ p.a.) for a store card.

What are your options to get your credit card debt under control? Here are some alternatives to consider:

BALANCE TRANSFER CREDIT CARD

Most providers offer a balance transfer facility to attract new business. The debt from the existing card can be transferred to a new credit card which offers a reduced interest rate (as low as 0%), for a fixed period. The balance transfer rate can apply for 6 – 24 months depending on the provider; however, any additional spending will incur the standard interest rate of the new card. The key to this strategy is to be disciplined by not clocking up more debt, and to take advantage of the ‘honeymoon’ period to focus on repayments, and ensure that you clear your credit card balance on time. Once the balance transfer period has ended, the rate will default to the provider’s purchase interest rate, which may be higher than the rate on your old card! It is important to check if there are any balance transfer fees, and what other terms/conditions and charges will apply after the introductory period has ended.

LOAN CONSOLIDATION – PERSONAL LOAN

Obtaining a personal loan to consolidate the debt on your credit card(s) may be an option. Many providers offer the ability to consolidate several credit cards, with a lower fixed or variable interest rate, over a loan term of several years. Consolidating your debt should make it easier to manage your repayments, and you may be able to clear the debt earlier by paying more than the minimum amount.

REFINANCE/CONSOLIDATION – HOME LOAN

If you have sufficient equity in your home, you could consider refinancing your mortgage to consolidate your credit card debt. We are currently in a record low-interest rate environment, with some providers offering rates of >4% p.a. With or without credit card debt, if you haven’t reviewed your home loan for a few years, you may be paying too much on your current mortgage!
Consolidating credit card or personal loans into your home loan will allow you to clear these debts sooner if you have the ability to pay above the minimum home loan repayment.

There may be many issues to consider before consolidating debt, or deciding to refinance your home loan. Please contact one of our lending specialists to determine the costs and benefits, and to discuss your options.

Please note that the above has been provided as general advice. It has not taken into account your personal or financial circumstances. If you would like more tailored advice, please contact us today, one of our friendly advisers would love to speak with you.