Explainer: Fixed-Rate Loans

With interest rates at an all-time low, and many lender’s fixed rates lower than their variable options, locking in an interest rate on your home loan to guard against possible future fluctuation may be attractive. However, it pays to know the ins and outs of fixed-rate loans before committing to one.

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Fixed Rate Home Loans

When purchasing a property, refinancing or just renegotiating with your current lender, borrowers can generally decide between fixed-interest loans that maintain the same interest rate over a specific period of time, or variable-rate loans that charge interest according to market rate fluctuations.

Fixed-rate loans usually come with a few provisos: borrowers may be restricted to maximum payments during the fixed term and can face hefty break fees for paying off the loan early, selling the property or switching to variable interest during the fixed rate period.

However, locking in the interest rate on your home loan can offer stability.

“For those conscious of a budget and who want to take a medium-to-long term position on a fixed rate, they can protect themselves from the volatility of potential rate movement,” a finance broker says.

Fixed rates are locked in for an amount of time that is prearranged between you and your lender.

“There are some lenders that offer seven-year or 10-year fixed terms, but generally one to five years are the most popular,” the finance broker says. “The three and five-year terms are generally the most popular for customers because a lot can change in that time.”

Further to this, fixed-rate loans can also be pre-approved. This means that you can apply for the fixed-rate loan before you find the property you want to buy.

“When you apply for a fixed rate, you can pay a fixed rate lock-in fee also known as a ‘rate lock’, which will, depending on the lender, give you between 60 and 90 days from the time of application to settle the loan at that fixed rate,” the broker explains.

“It will also depend on the lender as to whether the rate lock will be applied on application or approval,” added the broker. “It is important to be clear on this issue as it has been known to be a common point of error”.

Pre-approval helps you to discern how much money you are likely to have approved on official application. Knowing that your potential lender will offer a fixed-term fixed interest loan gives further peace of mind for those borrowers looking to budget precisely rather than be susceptible to rate fluctuations.

In addition, borrowers should consider the possibility of arranging a ‘split’ loan. This option allows you to split your loan between fixed and variable rates – either 50/50 or at some other ratio. This can allow you to ‘lock in’ a fixed interest rate for up to 5 years on a portion of your loan, while the remainder is on a variable rate which may give you more flexibility when interest rates change and potentially minimise the risks associated with interest rate movements. Also, be aware that at the end of the fixed-rate term, your loan agreement will include information about how the loan will then be managed by the lender, usually to a ‘revert’ variable rate – which may not be the lowest the lender offers.

Lenders Mortgage Insurance (LMI)

While some view LMI as being exclusively beneficial for lenders, we explore the value for first home buyers.

Not to be confused with mortgage protection insurance (which is designed to protect the borrower), LMI is insurance that covers the lender’s risk within a residential mortgage transaction should the loan go into arrears and the borrower is unable to resolve the situation satisfactorily. LMI is a fairly common practice within the industry, particularly for new home buyers who may struggle to save a deposit. It allows an additional fee to be paid by the borrower and usually applies when the loan is more than 80 percent of the purchase property’s price.

The purpose of LMI is to ensure security for the lender in case the borrower fails to make loan repayments. Even though the actual house acts as security, the nature of the property market, like any investment class, means there is a chance that its value could decline, resulting in a financial loss for the lender.

The cost of the premium is dependent on several factors, such as the loan size and property value, and most insurers are flexible when it comes to the method of payment. It can either be a one-off upfront premium payment or that premium could be included in the overall cost of the loan and included in monthly repayments. It is not transferable, which means a new loan may require a new fee depending on how much equity the borrower has.

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Lenders Mortgage Insurance (LMI)

What’s in it for me?

While it may appear that it is exclusively favourable to the lender, there is value to borrowers in paying the premium. Opting for LMI means it allows a borrower to independently purchase a property sooner than they otherwise might. LMI is the alternative to using a guarantor or having to save for a bigger deposit, both of which are not feasible options for many first home buyers.

A deposit of at least 20 per cent of the desired loan amount is required for a borrower not to be deemed ‘high-risk’. If you consider that the average price of a home in Sydney is $650,000, that would mean a deposit of around $130,000 is required. The beauty of LMI is that it buys time, which means borrowers with smaller deposits are able to enter the market sooner rather than later. The major benefit of LMI is that it allows the dream of homeownership to become a reality for a lot of first home buyers.

How to compare home loans and features

Which home loan is right for you? How can you tell when there’s so many different lenders, loan types and features to choose from? How can you compare loans properly when you’re not sure what you should be comparing?

Finding the right home loan for your situation is a process that can be confusing, particularly for first timers. In this article, we give you a basic guide for making home loan comparisons and tell you more about the features you may need with your home loan.

Interest rates and comparison rates

Interest rates are one of the factors which determine the cost of your mortgage and how much your repayments will be. Even a small difference in interest rates can make a significant impact on the amount of interest you’ll have to pay over the term of the loan. However, the loan with the lowest interest rate may not necessarily be the cheapest, as there could be additional fees to factor in. This is where the comparison rate comes in.

The comparison rate is an indication of the true cost of a loan, once the interest rate and fees are included. It’s usually expressed as a percentage, which makes it easier for you to compare the real cost of different loan products. When choosing a home loan, it’s important to look at both the comparison rate and the features that come with the loan.

Loan Types

Principal and Interest

This type of home loan requires you to make repayments that cover both the principal (or the amount you borrowed) and the interest at the same time. People buying their own home usually use a principal and interest loan, as you pay down your loan with every repayment until you eventually own the property.

Interest-only

An interest-only loan allows you to only pay the interest you owe on the loan for a fixed period – usually from one-to five years – so the monthly repayment is lower than it would be under a principal and interest loan. At the end of the fixed period, the loan usually reverts to a principal and interest loan, but it is possible to refinance to another interest-only period. People buying an investment property often start off with an interest-only loan because the interest (and therefore the entire repayment) is tax deductible for themHowever, they are not considered ideal if you are buying your own home to live in as you will likely end up paying more in interest over the term of the loan and your repayments don’t pay off the original loan amount.

Variable Home Loan

With a variable rate home loan, the amount of interest you pay may go up or down in response to changes in interest rates. This can be a good thing if interest rates go down, as the interest you pay will be less and your repayments will decrease. Another positive is that you can often make extra repayments on a variable home loan, which may help you to pay off your home loan sooner and save some interest over the term of the loan.

Fixed Home Loan

A fixed rate home loan lets you lock in your interest rate for a period (usually 1 to 5 years). The benefit is that you know exactly how much your repayments will be during that time, which can be beneficial if you’re on a tight budget or a fixed income. You’ll also escape any interest rate rises that may happen during the fixed period.

However, if interest rates fall, you won’t be cracking open the bubbly because your home loan interest rate will stay the same and so will your repayments. There may also be restrictions on making additional repayments with a fixed rate home loan.

Split Home Loan

One option that appeals to some homeowners is to fix the interest rate on a portion of their loan and keep the rest variable. This offers the certainty of knowing what your repayments will be on the fixed part of the loan, while you can make extra repayments and enjoy any interest rate drops on the variable part of the loan. It’s a way to get the best of both worlds!


Loan Features

Offset Account

An offset account is a transaction account that’s attached to your home loan. It can save you money on the interest on your home loan and help you pay off your loan sooner because the money in your transaction account is offset daily against your loan balance, and you only pay interest on the difference. For example, if you owe $300,000 on your home loan and there’s $50,000 in your offset account, you’ll only pay interest on $250,000.

Redraw Facility

A redraw facility allows you to make extra repayments on your home loan and then take out the extra repayments you’ve made later if you need to use the money for a different purpose.


What’s right for you?

The right home loan choice is different for everyone. It all depends on your personal financial circumstances and goals. We’re here to help you decide what is right for you and will make recommendations based on what you tell us about your situation and what you want to achieve. Then we’ll compare the choices from the different lenders and offer you a selection of cost-effective options.

Don’t wait to find out what’s right for you. Contact us today for a chat about your plans.

July 2021 RBA Decision

As expected, the Reserve Bank of Australia (RBA) has held the official cash rate at 0.10 per cent, retaining a record low streak. To view the official RBA statement from today, please visit the Reserve Bank’s website.

This decision was what most experts were predicting, in line with the RBA’s forecast that it would likely hold the cash rate until at least 2024 to allow the labour market to tighten enough to generate wage growth.

The RBA said at its June meeting that it would not increase the cash rate until actual inflation was sustainably within the 2 to 3 per cent target range.

With record low interest rates, rising prices across major markets and strong demand from owner-occupiers, the competition is fierce in the Australian property market. So if you’re considering buying soon, get in touch with us now to arrange your pre-approval, so you can act fast and negotiate with confidence when you find the right property.

July Property Market Snapshot

If you’d like to know more about this announcement and what it means for you, talk yo us today!

A homeowner’s guide to refinancing

With a home loan it’s easy to just ‘set and forget’. But it’s sensible to review your home loan every two to three years or so. We’re living in a world of rapid change, where interest rates can go up and down, new lenders emerge, and more competitive products become available so keeping the same home loan for 30 years could cost you more money than you need to spend!

In this article, we provide the process to refinancing your home loan, breaking it down into simple layman’s terms. But before we get into that, let us clear up a few common questions about refinancing.

WHY should you consider refinancing?

Generally speaking, there are four main reasons to consider refinancing.

  1. Your loan may be less competitive, and you could potentially get a lower interest rate.
  2. Different home loan features and benefits could work better for you.
  3. Your financial situation may have changed.
  4. You want to access some of the equity you’ve built up in your current home.

WHEN should you consider refinancing?

We’re currently experiencing a low interest rate period, so there are many competitive home loan products available. Generally speaking, it’s a good idea to review your home loan every two to three years.

WHO should you use to refinance?

You should always talk to a mortgage broker because our opinion is not biased towards any particular lender or product. (Unlike a bank which will push whatever loans they have to sell at the time.) And we won’t suggest that you refinance if it isn’t the right move for you.

WHAT is the process to refinance?

We’ve explained the when, who and what of refinancing, but what’s the actual process involved? Here’s a simple step-by-step guide.

Step 1: Speak to us

Before we begin exploring your loan options, it’s important for us to have a sound understanding of where you’re at financially and what you’d like to achieve. We’ll start by reviewing your current home loan and compare it with others in the market. We’ll be here to help you decide if it’s the right time to refinance your home loan and what features will work best for you.

Step 2: Choose your mortgage and apply

You may opt to stay with your current lender by negotiating for a better rate or changing to an alternative product; or refinance by switching to another lender offering a better rate or loan features to suit your current circumstances. We’re here to help you find the right home loan to fit your personal goals and objectives. Then we’ll submit your application.

Step 3: Get your valuation

Your new home loan provider will require a valuation on your property as part of the application process. Keep in mind that their valuation might be more conservative than the market value you estimate.

Step 4: Get approved

Within a few days of submitting your application, it’s likely your inbox will light up with that delightful email confirming you’ve been approved for your new home loan. Yay!

Step 5: Your old mortgage will be closed

Your broker will arrange for you to complete a ‘discharge authority’ form. Your current lender will then provide a payout figure. Your new lender will fund your loan to pay out your current loan provider. If you’re refinancing to consolidate other debts, for example, credit cards or personal loans, these will be finalised with the proceeds of your new loan at the same time.

Step 6: You start afresh!

Once you have your new home loan in place, you will begin making repayments. If you need any help managing your new home loan, we are always here to lend a hand.

We hope you’ll find this guide to refinancing handy, and we would love to help you decide whether refinancing is the right step for you. Whether you are looking to refinance for a better interest rate, to access equity, consolidate debt or for a property investment to build wealth for your future, we can help you to achieve your goals. Please get in touch today!

Get your budget under control

Getting your budget under control and your finances in order is essential to anyone looking to apply for a home loan, but it’s particularly important for first home buyers about to take the first step on the property ladder. Now the end of financial year has arrived and you’re getting all your paperwork together for your tax return, why not take stock of your financial situation and plan your budget for the year ahead at the same time? Here’s a few tips to get financially fit for a home loan application in the new financial year.

Reassess your budget and get serious about your savings

When you apply for a home loan, particularly as a first home buyer, it is important to have a thorough understanding of your financial situation and good savings habits. Lenders will want to see an established history of regular savings before they will give you their best rate on a home loan and for this reason, you should take a realistic look at your spending habits and create yourself a budget to ensure your savings will grow at a steady rate.

Work out how much deposit you’ll need and set yourself a savings target

If you set yourself a savings target, you may find it much easier to stick to your budget. To set your target, first you’ll need to work out how much you need for your deposit. The amount of deposit you will need will depend on the cost of the property you want to buy, but if you have an idea of the kind of property you want to purchase you’ll be able to set a goal. It’s recommended that you have a deposit of at least 5% of the purchase price, however if you can possibly save 20% of the purchase price you’ll avoid paying Lenders Mortgage Insurance.

Make an accurate assessment of any debts and ongoing expenses

Lenders assess your creditworthiness on the amount of money you already owe, your ability to repay your debts and your capacity to take on more debt. Paying down any credit card debts or personal loans prior to applying for your home loan will improve your borrowing capacity and give you the best chance of loan approval when you apply.

Even if you don’t have any debt on your credit cards, lenders take into consideration the credit limit on your credit cards and count this as potential debt. So if you have several credit cards, it may be a good idea to cancel some of them now if you are planning on applying for a home loan in the next financial year.

If you have a lot of debts, think about consolidating them

If you take stock of your debts and realise you won’t be able to pay them all off anytime soon, it’s a good idea to look at ways to reduce your interest liability. Credit cards, store cards, short-term personal loans and cash advances all carry high interest rates and this can make them quite difficult to pay down. Getting your finances in order may mean it’s time to consolidate your debts.

Consolidating your debts means rolling all your debts into one, usually using a loan that has a lower interest rate. If you have quite a few expensive debts it may be possible to roll these into your home loan if you have one, or perhaps a personal loan that carries a lower interest rate overall. This may save you a great deal of money on interest payments, which is money you could use to pay off your debts faster. It could also allow you to spread your repayments over time, making them more affordable. If you want to be eligible to apply for a home loan in the next financial year, consolidating your debts sooner rather than later may be a good idea.

The end of financial year is a great time to get your finances in order and you never know, you may get a tax refund that could really give a boost to your savings efforts for a deposit for your home! Remember, we’re here to help you get your finances under control so you can save your deposit and get into your new home sooner. If you’re planning on applying for a home loan in the next financial year, don’t hesitate to give us a call today.

Five ways to fund a Renovation

Considering transforming your home from ‘banal’ to ‘brilliant’, but lack the funds to support your makeover? Never fear, we’ve rounded up five home renovation finance options that could help turn your dream into reality.

1 Equity Release / Top Up Home Loan

This is probably the most common way people borrow money when they want to renovate. It involves borrowing against the current value of your home, before any value-adding renovations and in most cases allows you to obtain the funds upfront. You won’t be able to borrow the full value of your home but, without mortgage insurance, you can usually borrow up to 80 per cent of its value if you own it outright. One potential problem is that the cost of your renovations may actually be higher than the equity you have available. If you run out of funds mid-construction, and if the property is then not in sound, lock up condition, you may have an issue obtaining extra funds down the track.

2 Construction Loan

If you’re planning to completely transform your home and undergo a major makeover, this may be a good option as you can spread the cost over a long period of time. You could even possibly borrow up to 90 per cent of the end value of your home and take advantage of mortgage rates which tend to be lower than credit card and personal loan rates. With a construction loan, the lender will assess the value of your home after the renovation based on the building plans and you can typically borrow against that value.  You won’t be given the full loan amount upfront, but usually in staggered amounts over a period of time – this is called ‘progress payments’ and is linked to a fixed price building contract which will be from your builder.

3 Line of Credit

When you apply, you can establish a revolving credit line that you can access whenever you want to up to your approved limit. You only pay interest on the funds you use and, as you pay off your balance, you can re-borrow the unused funds without reapplying if that becomes necessary.  However, care must be taken not to get in over your head in terms of serviceability. Make sure you can make repayments on the line of credit that will reduce the principle because your minimum repayment only pays the interest, it will not reduce the loan. Rates on this product are typically much higher than a construction loan or top up loan. This product feature is great if managed well, but can also be a trap if not seriously considered as your limit will never change.

4 Personal Loan

If you’re only making minor renovations – personal loans are usually capped at around $30,000 – this might be suitable, but interest rates on personal loans are higher than on home equity loans and payments need to be made usually over a maximum of seven years.

5 Credit Cards

This option should only be considered if you want to undertake really small renovation projects. The interest rates are usually much higher than on mortgages, but for a very small project, that extra interest might actually total less than loan establishment fees.

One thing you must do

There are very few exceptions to the rule that your renovations should add more value to your home than they will cost to carry out. Think about how the money you spend on a renovation will increase the value of your property. For example, consider making changes that would appeal to the majority of potential buyers to help you sell your house faster and at a higher price.

Welcome to our June Newsletter

As the winter property season and end of financial year (EOFY) are upon us, the Australian property market would usually slow down during the cooler months, but experts say with current buyer demand and low interest rates, we are in for a stronger-than-usual winter season.

Interest rate news

The Reserve Bank of Australia (RBA) decided to keep the official cash rate unchanged at 0.10 per cent at its meeting on 1 June. This decision is in line with the RBA’s position on leaving rates unchanged until 2024.

RBA Governor Dr Phillip Lowe stated that the board decided to maintain current policy settings. This included the yield on the 3-year Australian Government bond, targets of 10 basis points for the cash rate, parameters of the government bond purchase program, and the rate of zero per cent on Exchange Settlement Balances.

Mr Lowe said “The board is committed to maintaining highly supportive monetary conditions to support a return to full employment in Australia and inflation consistent with the target. It will not increase the cash rate until actual inflation is sustainably within the 2.0 to 3.0 per cent target range.”

The date for final drawings under the Term Funding Facility is 30 June 2021. The facility is supporting low borrowing costs until 2024 through low-cost fixed rate funding for three years. “Given that financial markets in Australia are operating well, the Board is not considering a further extension of this facility,” stated Mr Lowe.

At the July meeting, the board will consider whether to retain the April 2024 bond as the target bond for the 3-year yield target or to shift to the next maturity, the November 2024 bond. The board will also consider future bond purchases following the second $100 billion of purchases under the government bond purchase program in September.

Home value movements

CoreLogic’s national Home Value Index saw prices increase by 2.2% in May. This rise was a stronger result compared with April (1.8%), but weaker than the 32-year high recorded in March when prices grew by 2.8%.

The combined capital city index rose 2.3% in May compared with a 2.0% rise across the combined regional areas. This is the second time in three months growth conditions in capital city home values continue to outpace regional markets.

Hobart (3.22 per cent), Sydney (2.97per cent) and Darwin (2.66 per cent) were the strongest performing markets where dwelling values increased by more than 2.5 per cent in May. The dwelling values for the rest of the capital cities also increased: Brisbane (2.00 per cent), Adelaide (1.87 per cent), Canberra (1.75 per cent), Melbourne (1.75 per cent), and Perth (1.10 per cent).

Along with record low mortgage rates and increase in sales, CoreLogic recorded the number of new listings added to the housing market as 15% above the 5-year average.

CoreLogic’s research director, Tim Lawless, explains what is driving the housing market to remain in place. “The combination of improving economic conditions and low interest rates is continuing to support consumer confidence which, in turn has created persistently strong demand for housing. At the same time, advertised supply remains well below average. This imbalance between demand and supply is continuing to create urgency amongst buyers, contributing to the upwards pressure on housing prices.” Mr. Lawless stated that, “This rapid rate of absorption is keeping advertised inventory levels extremely low, despite the rise in new listings.”

Given the low interest rates, the competition for the limited supply of Australian homes is heating up. If you’re considering buying soon, it is important to get in touch with us to arrange a pre-approval for a home loan. A pre-approval will help you move quickly when you find the right property and the ability to negotiate with confidence. Speak to us about your plans today.

Additional sources
https://rba.gov.au/media-releases/2021/mr-21-09.html
https://www.corelogic.com.au/news/australias-housing-boom-rolls-national-home-values-lifting-another-22-may
https://www.realestate.com.au/news/australias-property-boom-set-to-continue-in-exceptional-winter-season/
https://www.theadviser.com.au/breaking-news/41628-rba-announces-june-rate-decision

Government Incentives

The federal government has made an announcement that could help you achieve your home ownership goals sooner than you thought.

Here’s some useful information about the latest updates.

First Home Loan Deposit Scheme expansion and increased price caps
10,000 additional places will be available under the FHLDS from 1 July 2021. The federal government have also increased the maximum purchase price by an additional $150,000 in some states and territories. Click here to see the updated property price caps.

New Home Guarantee construction extension
The New Home Guarantee has been expanded with an additional 10,000 places available and will now have a construction commencement timeframe of 12 months.

Eligible first home buyers can use the New Home Guarantee in conjunction with other government programs like the First Home Super Saver SchemeHomeBuilder grant or state and territory First Home Owner Grants and stamp duty concessions. Find out more here.
As your broker, I can help you find a loan to suit your financial situation and talk you through government initiatives that you might be eligible for.  

Get in touch to find out more.

June 2021 RBA Cash Rate

The Reserve Bank of Australia (RBA) decided to keep the official cash rate unchanged at 0.10 per cent at its meeting today. To view the official RBA statement, please visit the Reserve Bank’s website.

At its previous meeting, the RBA confirmed that the final date for drawings under the Term Funding Facility is 30 June 2021. “Given that financial markets in Australia are operating well, the Board is not considering a further extension of this facility,” RBA governor Philip Lowe said.

The RBA has upgraded its inflation and economic growth forecast but insists that the record low interest rates will remain for another three years to generate wages growth. The Board will consider whether to extend its government bond purchases at their July meeting. Mr Lowe said the Board is prepared to undertake further bond purchases to assist with progress towards the employment and inflation goals.

Given the low interest rates, the competition for the limited supply of Australian homes is heating up. If you’re considering buying soon, it is important to get in touch with us to arrange a pre-approval for a home loan. A pre-approval will help you move quickly when you find the right property and the ability to negotiate with confidence. Speak to us about your plans today.

 If you’d like to know more about this announcement and what it means for you, talk to us today!