Should I fix my loan?

Many people want to know whether they should fix (or set) the rate on their home loan, rather than riding the wave of variable interest rate fluctuations. Interest rates fluctuate due to changes in the performance of the economy. The Reserve Bank of Australia meets every month to decide whether the Target Cash Rate or rate at which Lenders access money at Wholesale prices should rise or fall. Lenders then pass some or all of this change onto their customers through variable interest rates.

Fixed rate loans typically work like a long term contract. You fix in a rate for a certain time period, like 3 years, with a fixed monthly payment. There are usually substantial break penalties for ending the fixed loan term.

There are some benefits of a fixed rate loan:

Certainty of repayments

With Fixed Interest loans the repayment amount will not change for the period that it is fixed, allowing the customer to plan and budget with certainty.

Saving money when rates rise

When Interest rates rise (and history will say that eventually they do) then you will save money. With current rates at historical lows, many people are considering fixing their rates.

Case Study of Fixed Loan – Warren

Warren has been saving hard for a long time and has just bought the house of his dreams, using his savings and a 30 year loan for $600,000. He has also recently commenced work on a new IT project which will see his income stay the same for the next few years, so he has decided to enter into a fixed Interest rate home loan for the next 3 years.

The current Variable Interest Rate is 4.9% and Warren has been able to negotiate via his Broker a fixed interest rate over 3 years at 5.00%. 

His repayments will be $3,221 per month (whereas on a Variable Interest Rate the repayment would be $3,184 per month)

6 months later the economy has been booming and Interest Rates have risen so the variable rate is now 5.4%. Warren is still paying $3.221 every month, whilst he would have been paying $3,369 if he was on variable rates, so in this case although he was paying more at the outset now is $148 better off every month.

So in this situation, Warren has done well out of fixing interest rates. On the flip side though, there are of course, potential pitfalls.

You won’t benefit from rate decreases

If interest rates continue to fall, you won’t benefit in the same way as if you had stayed variable. The arrangement is like a long term contract, which you can’t get out of easily or without incurring break costs. There are people who have fixed loans right now that are effectively ‘missing out’ on the latest round of rate cuts.

Less ability to move around

Banks like offering fixed term rate contracts, because they lock customers in. For astute borrowers who may want to shop around at a later date for a better deal, or whose circumstances change, fixing your rate will not provide the flexibility to move without incurring costs.

If you really want to hedge your bets, you can have part of your loan fixed and part of your loan variable. Then you get the best of both worlds, sort of.  If you’re unsure have a chat to your Broker.

 telephone Call Douglas today on 0408 671 524

 

Direct to the bank? Or through a Broker?

Research has revealed that 53% of Australian’s now engage a mortgage broker, up from 35% ten years ago.

So why is it that Australian’s are increasingly turning to the services of a broker over going direct to lenders?

 

To save Time

With today’s increasingly busy lifestyles people don’t have hours and hours to devote to shopping around to find the best loan. With an extensive panel of lenders, brokers are able to compare hundreds of loans to find a loan that suits your needs, saving you from having to do all that groundwork yourself.

 

Industry expertise

Mortgage brokers are the experts in financing options, with an in depth understanding of the overwhelming array of loan options available. Many loans seem to offer a great deal, but they could have penalties, fees and charges you may not be aware of, or they may not offer the flexibility you require in the future. Mortgage brokers are there to ensure that you find the best loan for your specific requirements, now and into the future.

 

A smoother process

A broker will help you source the most appropriate type of mortgage, manage the paperwork and keep you updated during the whole mortgage process. They navigate you through the whole mortgage process and beyond, providing you with one single centralised contact point along the way. They will meet with you at a time and a place that is convenient to you, wherever and whenever that may be. 

 

There is no cost

Whether you go directly to a lender, or through a broker, there is no additional cost to you for the services of a broker. Lenders pay brokers commission for the loans they write, but the rate to you will be the same whether your loan is through a broker, or direct.

 

Accreditation

MFAA approved mortgage brokers are bound by strict standards of professionalism, ethics and education. They are required to undergo continuous professional development and adhere to a professional code of conduct. Dealing with an approved, registered broker brings peace of mind.

All in all, it is easy to see why so many Australian’s are opting to use a mortgage broker.

Next time you are in the market to refinance your existing loans, for a new home loan, investment loan or a ‘home health check’, please don’t hesitate to get in touch for a no obligation discussion.

Releasing Equity

Most people who have owned property for a period of time have accumulated quite a bit of equity in their homes, through disciplined repayments coupled with asset growth over time.  Equity is the difference between the value of an asset (i.e. your home) and any outstanding debt against that asset (i.e. your mortgage).

Equity = Asset Value – Debt linked to Asset

Financial advisers will tell you that you should diversify your investments to manage risk and reduce your exposure to a single asset type.

Home Equity release products act as a line of credit, secured by the equity in your home. This mean that you will be pay lower interest rates, which are tax deductible as long as you invest in income producing assets such as shares. (See your Accountant to make sure)

The way it works is simple, take the following example.

Larry and Helen

Larry and Helen bought their house in Melbourne’s East for $240,000 in the year 2000. At that time they put down a 20% deposit and borrowed $192,000 from the bank, to be paid back over 25 years. Fast forward 15 years and Larry and Helen have had their property valued at $630,000 (which is in line with the growth in Melbourne over that period). They have kept up with their repayments over the years and now have a mortgage of $100,000.

The Equity in their home is calculated by subtracting the outstanding loan balance from the value of the property ($630,000 – $100,000 = $530,000 Equity).

Larry and Helen could refinance up to 80% of the value of their home without incurring Lenders Mortgage Insurance – 80% of $630,000 is $504,000. This means that they can access an additional $404,000 secured by their home to invest as they wish.

Note that for this example the suggested approach would be a split loan, with the $100,000 continuing to be paid down and the $404,000 investment component being interest only.

Equity release such as the example above doesn’t have to be for investment purposes – it could be to renovate, extend or to pay the kids expensive school fees. What the money is used for will impact the tax deductibility of the extra interest payments, so be sure to consult your Accountant to make sure it’s right for you.

The ASIC Moneysmart website is a great resource for useful advice on this topic

Is Negative Gearing for me?

Negative Gearing can be described as an approach to investment whereby losses recognised against one investment can be offset against other income, with the effect of reducing one’s overall tax. In Australia, it generally refers to residential property investors who can offset losses on an investment property (or properties) against their regular PAYG income.

Negative gearing is most valuable to taxpayers in the highest tax bracket, as their allowable tax deductions are worth more cents in every dollar.  Take the following examples:

Example – Anthony

Anthony is an Engineer, earning a gross annual salary of $75,000. He decides to purchase an investment property with the following estimated financial results:

Rent Received                                 $20,000

Interest Payable                              $18,000

Repairs & Maintenance                 $2,000

Management Fees                          $1,000

Depreciation                                    $2,000

Total                                                  ($3,000)

Anthony can offset the $3,000 loss on his investment property against his $75,000 income, meaning his Taxable income for this purposes would be $72,000 (leaving aside Medicare and any other allowable deductions). With his marginal tax rate of 32.5c in the dollar, Anthony can reduce his tax bill by $975. Thus he is out of pocket $2,025 in that year.

 

A person on the highest marginal tax rate will benefit more from the same scenario as the following example shows.

Example – Darrell

Anthony’s boss Darrell earns $200,000 per year and has also decided to purchase an identical investment property to Anthony, with the financial results exactly the same:

Rent Received                                 $20,000

Interest Payable                              $18,000

Repairs & Maintenance                 $2,000

Management Fees                          $1,000

Depreciation                                    $2,000

Total                                                  ($3,000)

Darrell can offset the $3,000 loss against his taxable income (again leaving aside Medicare, levies and other allowable deductions). With his marginal tax rate (highest tax rate) of 0.45c in the dollar he reduces his tax payable by $1,350. Darrell is therefore out of pocket $1,650 on the same investment.

Opponents of Negative Gearing will argue that the additional tax benefits available to investors (versus owner occupiers) such as the ones outlined above mean they cannot afford to compete in the marketplace for the same properties.

Supporters of Negative Gearing argue that the tax deductibility of losses means they as landlords can charge lower amounts of rent, therefore making that housing more affordable to tenants. Developers contend that without investors they would lose demand for their properties and consequently supply would slow down supply, perversely resulting in higher prices anyway!

Whatever your position Negative Gearing is currently an effective and legal way to invest in property, however incurring a loss on property should not be your primary reason to invest. The tax effect of investing in property should be a consideration, but not the only one.

Speak to your Accountant to determine whether negative gearing can work for you. If it is, get in touch to arrange the necessary finance, I can help with determining your borrowing capacity and pre-approvals before you start looking for an investment property.