Home Loans 101: Understanding loan options

Loan options can be confusing to those new to mortgages, or sometimes even those that have had home loans for years.

Here’s a 101 to get you up to speed on loan types:

1) Basic home loans

Basic home loans or ‘no frills’ loans offer borrowers a loan with a low interest rate. This interest and principal repayment loan can be popular with first home buyers. A basic home loan’s interest rate can be half to one per cent below the standard variable rate, which is sometimes combined with minimal ongoing fees. Potential drawbacks can include limited features, less flexibility, and additional charges if you decide to switch loans or pay the loan off sooner.

2) Fixed-rate home loans

Worried about rising interest rates? A fixed-rate home loan will allow you to fix your interest rate for a specific period, usually from one to five years. It can be a sound option when interest rates are on the rise, or in times of economic uncertainty. Should interest rates plummet, however, you’ll still have to pay off your mortgage at the fixed-rate until the end of the agreed fixed-rate period. Additionally, keep in mind that you may be charged a fee commonly called a break cost or economic cost, should you decide to break your fixed term or switch to another product. You may also be limited in making extra repayments.

3) Standard variable-rate home loans

A popular mainstream choice, standard variable-rate interest and principal home loans allow you to borrow money for a set period of time, during which you make regular repayments. The interest rate can vary depending on fluctuations in the official cash rate, so it is likely to go up or down depending on the market cycle.

4) Split-rate home loans

Want the best of both worlds? A split-rate home loan offers both flexibility and security. A good product for both first time and existing borrowers, split loans allow you to customise your loan’s interest rate as you see fit: fixing a portion of your interest rate to give certainty to your monthly repayments during the fixed-rate term should rates increase, but also flexibility through taking out a variable-rate portion.

5) Interest-only home loans

Interest-only loans offer borrowers lower repayment options, while maintaining many of a traditional loan’s features. This type of loan allows you to pay only the interest component on a mortgage; it does not reduce the principal component. They are a popular choice for investors seeking good capital appreciation on their investments.

6) Low-doc home loans

If you’re self-employed, a contractor or a seasonal worker and do not have a regular income, a low-doc loan may best suit your situation.

 

Different home loan options may or may not suit you depending on your circumstances. It may also be a matter of personal choice, whether you prefer to fix in your rates for certainty, or prefer to stick with the market rate with a standard variable loan.

If you have any questions about loan types don’t hesitate to ask.

 

Want trusted advice on which loan type best suits your needs and circumstances? You can contact Doug at (e) douglas.piening@choicehomeloans.com.au or (m)  0408 671 524.

Douglas Piening is a Mortgage and Finance Broker with Choice Home Loans and is passionate about providing advice you can trust. Whether it’s buying a home, refinancing a loan, investing, building or renovating, Doug brings a wealth of knowledge and expertise to assist with your lending needs. 

Want to hear what clients have said about working with Doug? Take a look at these reviews from LinkedIn and Facebook.

This information is of a general nature only and does not constitute professional advice. You should always seek professional advice in relation to your particular circumstances.

 

Will interest rates increase in 2017?

Interest rates have been at historical lows for such a long time, home owners could be forgiven for forgetting what it is like for rates to rise.

 

In recent weeks though, major lenders have increased their fixed term rates, across several loan terms (two, three and five year terms). A rise in fixed rates usually signals a rise in the cost of funding, which may translate into rises in variable interest rates as well. Westpac, Bank of Melbourne, Ubank and Commonwealth have all increased some of their fixed loan products, some up to 60 bases points higher.

 

While you probably need a crystal ball to accurately predict if rates will rises or fall, there is increasing noise from some industry experts that variable interest rates will rise in the back half of 2017.*

If this the case, it will be the first time the market will have had a rate rise since November 2010.

Predicting whether the RBA will change the official interest rate requires complex consideration of the Australian economy in terms of inflation, industry sector growth or decline and unemployment or wages growth and the impact of the global economy. Against this backdrop though, there is the school of thought that there is significant risk in a continued lending boom which fuels housing growth and negatively impacts housing affordability.

 

So if interest rates rise what does it mean for you?

 

The impact of rate rises really comes down to your individual circumstances. Some of the things you could do to prepare for possible interest rate rises:

 

 Mini house with money on blue

Build yourself a buffer

One of the best things you can do to minimise the impact of a rate rise, is to pay off your mortgage faster than your required repayments and build yourself a buffer. That way if rates rise, you are paying less interest from either a reduced principle, or the impact of more money in your offset account. And if you find yourself in need of extra cash to make repayments, you have this available to you. It also gets you used to paying at a higher rate so you don’t feel the impact of any rate rises.

 

Interest Rates

Lock in a fixed rate

This may be an option for you if you want certainty and to hedge your bets against any rises. There are some disadvantages to locking in a fixed rate which you need to be aware of though, you can read more here on fixing loans. Given that fixed rates have already gone up though for many lenders, the horse may have already bolted. I am not the biggest fan of fixed rates but they can provide certainty for a locked in period of time.

 

Plan ahead

It can help to plan ahead to determine the impact on you if rates were to rise on your current loan. Look for an online calculator to see the impact on your repayments if interest rates were to go up, or ask your broker to calculate this for you. Would this amount cause issues with your current budget? Or are there are things that are changing for you in the future that might impact on your ability to pay your mortgage, like a new baby, or a change to your work circumstances? If you think there are things that might impact on your ability to service your mortgage you might want to look at possible strategies, like restructuring your loan.

 

We will have to wait and see if the predictions are true on rate rises. If you have any questions or need any information on current rates, please get in touch.

 

You can contact Doug at (e) douglas.piening@choicehomeloans.com.au or (m)  0408 671 524.

Douglas Piening is a Mortgage and Finance Broker with Choice Home Loans and is passionate about providing advice you can trust. Whether it’s buying a home, refinancing a loan, investing, building or renovating, Doug brings a wealth of knowledge and expertise to assist with your lending needs. 

Want to hear what clients have said about working with Doug? Take a look at these reviews from LinkedIn and Facebook.

This information is of a general nature only and does not constitute professional advice. You should always seek professional advice in relation to your particular circumstances.

 

Sources:

  1. http://www.domain.com.au/news/the-five-things-on-the-agenda-for-sydneys-property-market-in-2017-20161211-gt8v8g/
  2. http://www.afr.com/news/economy/get-ready-for-2017-reserve-bank-of-australia-rate-hikes-says-oecd-20161128-gsz5k4
  3. http://www.afr.com/real-estate/residential/syd-melb-house-prices-to-rise-but-building-boom-to-end-hsbc-20170110-gtopcs
  4. http://www.abc.net.au/news/2016-12-09/interest-rates-on-mortgages-likely-to-rise/8106180

What is a good interest rate? How do you know if you have one?

Your mortgage is likely to be your single biggest monthly expense and yet you might (like many people) struggle to know what interest rate you are paying, let alone whether or not you are getting a ‘good deal’.

The difference in interest rates can be significant. The best rate in the market at the moment (after the recent rate cut) is around 3.8% and the highest rate (for low doc loans) are over 6.0%. A whopping variation of 2.4% ($12,000 in interest per year on a $500,000 loan – cash you would much rather have in your back pocket!!).

What impacts on the interest rate of your home loan?

There are several factors that will impact on the interest rate you have from your lender;

  1. The features you want
  2. The total amount you are borrowing
  3. The Loan to Value Ratio (LVR)
  4. Principle and Interest or Interest Only
  5. Owner Occupied or Investor

 

1) Features

As with many things in life, when it comes to a Home Loan you generally get what you pay for. If you want to buy a new car, you can choose to pay a little extra for DVD players, leather seats, carpet and window tint. With a Home Loan, it is no different except the sort of features that you will be looking at include Offset, Redraw and Fee Free Credit Cards.

And the reality of Home Loan pricing is that consumers tend to pay a premium for convenience. If you want to have all of your banking within the same institution, seamlessly linked as much as possible you will generally be getting a Home Loan package and this may come with a slightly higher interest rate to cover these features.

For example, a no frills home loan only available through a broker could be as low as 3.88% and a full package loan through the big lenders will be somewhat more expensive, anywhere from 4.2% upwards.

 

2) Total borrowing amount

Generally the higher the amount of money you are borrowing, the larger the discount the big banks will be willing to offer you off their standard variable rates (subject to their other criteria, more on that later). The non-bank lenders don’t tend to offer these same discounts as their advertised rates already incorporate a discounted rate. 

For example, with a recent home loan over $1.0 m, I negotiated a discount of 1.3% off the standard variable rate, reducing the standard variable rate down to 4.26%. Another client, with a total borrowing of $400,000 the discount negotiated was 1.1%, taking the standard variable rate down to 4.38%.

 

3) The Loan to Value Ratio (LVR)

The smaller the loan in relation to the value of the property the better the price generally available. The best discounts will be available for LVR’s that are 80% or below. The higher your LVR gets, the higher the risk to the lender, so the lower the discount. And in some cases, if the LVR is too high (over 95%) the banks won’t lend at all, let alone offer discount.

 

4) Principle and Interest or Interest Only

Principle and Interest loans will attract higher discounts than Interest Only Loans. The regulator (APRA) sees interest only loans as somewhat risky and fueling speculative investment. They want to see borrowers paying down loans and have put pressure on lenders in recent years to reduce the availability of interest only loans.

For example, a client recently wanted to change over their investment loan from Interest Only to Principle and Interest in order to reduce interest payments and the discount increased by 0.2%. 

 

5) Owner Occupied or Investor

In July 2015, the regulator (APRA) imposed guidelines on lenders to take the heat out of the property market by restricting the growth in investor lending to under 10% a year. This now means that borrowing for investment purposes now attracts a premium, and most lenders have separate rates for investment loans to owner occupied loans.

For example, the current standard variable rate for ANZ is 5.56% for Owner Occupied and 5.83% for Investors (a difference of 0.27%).

 

 And the impact of set and forget!

And a final word – borrowers who don’t regularly review their lending will also pay a premium as discounts offered years earlier may now be well below that available in the market today. Banks have relied on people to ‘set and forget’ and it’s the age old saying “don’t ask, don’t get”.

One of my clients had been paying 4.93% on an investment loan (with a discount of 0.9% that had been put in place 3 years ago). With additional negotiation I was able to reduce the rate to 4.58% (a total discount of 1.25%) saving over $3,000 per year in interest.

What rate do you have currently? Do you think it is a ‘good rate’?

If you aren’t sure, the best way to know if you have a ‘good rate’ is to get in touch for a free, no obligation, 30 minute home loan health check. 

You can contact Doug at (e) douglas.piening@choicehomeloans.com.au or (m)  0408 671 524.

 

Douglas Piening is a Mortgage and Finance Broker with Choice Home Loans and is passionate about providing clients with lending advice they can trust. Whether it’s re-financing an existing property, buying a new or next home, or investing, he brings a wealth of knowledge and expertise to assisting clients with their lending needs. 

 

Want to hear what clients have said about working with Doug? Take a look at these reviews from LinkedIn and Facebook.

This information is of a general nature only and does not constitute professional advice. You should always seek professional advice in relation to your particular circumstances.

Case Study: Investing in property

Craig works as a Brand Manager at Lion Dairy and Drinks and I recently worked with him to gain pre approval for the purchase of his second investment property.

I asked him if he could share his experiences with investing in property.

 

Tell us a bit about your first investment property?

I purchased my first investment property in June 2014 in Frankston for $361k. Since then the property has been rented out to a reliable tenant and giving me regular cash flow.

The property is negatively geared but the shortfall is only around $100 per week (less after tax!) and I’m hoping 5 years down the track it’ll be paying for itself.

Since I bought the property I’d estimate it’s gone up in value by $30-40k, Frankston had a great growth spurt in the first quarter of this year.

 

Tell us about why you are looking at a second investment property?

I see property as a great vehicle for wealth creation.  It has potentially great returns for (relatively) low risk.  You just need to choose well and do your research!

This time the circumstances are a bit different as I’m looking to find a property that is in need of renovation and I’m planning to do the renovation myself.

I’m looking at older houses that I can modernise and add value to which I’ll either sell or rent.

 

How did you choose the type of investment property and the suburb it’s in?

I’d read a lot about Frankston being a potential future hotspot and the median value is still quite low, so it’s affordable to buy into.  There is a bit of a stigma around the suburb but it’s slowly gentrifying, the local council is pouring money into infrastructure and of course it’s beachside!

I’m looking at buying my second property in Reservoir as it’s an area that’s growing in value and one where older style houses that are renovated are in demand and fetching a premium to those that aren’t renovated.

My preference is to buy houses with a land component which in the long run will appreciate in value and can give you options down the track to subdivide / develop.

 

Do you have any advice for other property investors?

Be careful about fixed rates! I fixed my rates in for 3 years at 5.14% with Bankwest. At the time it was a great deal and it gave me certainty over repayments, but it has reduced my flexibility to change and of course rates have gone down.

In all seriousness though, investing in property has has worked really well for me so far and I’m looking to build my portfolio slowly over time.  But how bigger portfolio only time will tell!

I guess though it depends on your particular circumstances, but of course you need to take action to start building wealth and not get in the trap of suffering from analysis paralysis!

 

A big thanks to Craig for sharing his experiences.

 

Interested in Property Investing and want to discuss finance?

telephone Call Douglas today on 0408 671 524

 

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Is Negative Gearing for me? 

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