The RBA board elected to keep the official cash rate on hold at 2.50% p.a. this week, which was a widely expected decision.
What is not so widely known is that the RBA is still leaning toward a cut rather than a rise.
The bias toward a cut is due to three key factors:
1. increasing unemployment rates (low interest rates theoretically stimulate the economy and employment)
2. relatively low inflation rates (normally low interest rates generate higher inflation) and
3. the stubbornly high Australian dollar (low interest rates should act as a disincentive to buy the Aussie dollar and drive up its value) .
As you can see from the chart below, the ASX futures market is not expecting any change to the cash rate over the next 12 months.
The purple line in our chart below shows that variable home loan rates are reflective of the stable RBA cash rate. There has been little change over the last 5 months.
You will however note that both types of fixed rates have slightly increased over the last 2 months. Having said that, they are both still at historically low levels.
There are a number of highly competitive offers available out there. Specials abound.
Some banks are even happy to pay your refinance costs from the outgoing bank. Competition is alive and well.Read more
The humble “upgrader” is the biggest segment of the Australian property buying market.
So much of our media attention is focused on first home buyers, investors, renovators and even downgraders. Little attention seems to be paid to those people that aspire to simply owning a better home. A better Australian dream.
Anyone who is thinking of upgrading to a more expensive property should take a good look at the following comparison. A 10% market increase will cost you a large amount of money if you delay.
Our first table involves selling a $500,000 home and buying a $750,000 home in today’s market.
The second table below demonstrates the cost of upgrading if the market increases by just 10%.
The total cost of delaying if property market prices increase by 10% is $30,500 in this example.
Upgrading can be tricky when it comes to finance. There are a range of options that need to be considered and calculated. Some will “sell first and buy later”, others will try to keep both properties and some will go for the bridging loan option.Read more
Every quarter we receive a housing affordability report that is commissioned by Adelaide Bank and the Real Estate Institute of Australia.
As mortgage advisers we particularly like this document because it details the total number of loans taken out in each state. However, from your perspective we thought a summary of the affordability data would be useful.
There were a number of other interesting observations that came out of this report:
1. Over the last 12 months median family incomes increased in every state and territory.
2. The average loan size increased by less than 5% in every state and territory (except Queensland with a very small decline).
3. The number of loans to first home buyers increased in every state except QLD & NSW where substantial reductions occurred.
4. Australian Capital Territory remains the most affordable state or territory in which to buy a home.
The current low interest rate environment is obviously having a significant impact on housing affordability and many investors are entering into the market as a result.
We are also finding that many investors are fixing their interest rates in order to prolong these historically low levels.Read more
As you no doubt know, the RBA held its cash rate at 2.50% p.a. this week, but the big news in the world of home loans is that fixed rates are on the rise.
You will note that three out of the five big banks illustrated in the chart below have recently increased their “3 year fixed” rates. Whilst this is not an indication of future rate movements it is a significant change.
As always, if you would like to discuss your property or finance ideas, please feel free to contact me.Read more
We have noticed an interesting pattern in one of our recent interest rate charts.
This is slightly dangerous territory because the past is obviously not a prediction of future rate directions. However, this pattern does seem to apply at least since the beginning of 2009 (when we commenced this data series).
The 3 year fixed rate seems to be around three to six months ahead of the variable rate.
In other words, if the 3 year fixed rate line in this chart was to be moved forward by around four or five months you would see both lines almost overlapping.
In consideration of this pattern, you will note that the 3 year fixed rate has been flat lining for five months.
However, two of the second tier lenders on our panel have recently increased their 3 year fixed rates.
Hopefully this is not the start of that upward cycle.
The current average 3 year fixed rate for the big four banks (see above) is 4.97% p.a. Consider this against one of our non major lender that is currently offering 4.69% p.a.Read more
The RBA have now hinted that they are unlikely to cut the cash rate below 3.00%.
One could now logically assume that we will not be seeing further cuts to our home loan rates. However, we think that future rate cuts might come from the retail banks rather than the RBA.
We have two reasons to think that there might be some good news from our banks in the near future:
1. The cost of bank funding is on the decline. We all remember those frustrating times when the RBA would drop by 0.25% and the banks would only drop home loan rates by 0.15%. People were outraged but the justification for not passing on the full RBA cut was always that the cost of funding was going up. Which is fair enough, if your costs are rising then you must increase your prices. However, when costs drop, so should prices.
2. Mortgage brokers now represent around 50% of the market. The mortgage broking channel is a tough place for a bank. The moment a lender decides to offer a special rate they get inundated with broker loan submissions, however, the moment they end that special the volumes disappear.
We think these two points will compliment each other.
As the banks find their costs reducing they will be tempted to go for greater market share. They will achieve this growth via discounted products and the broker channel will deliver that growth because they best represent their clients interests.
As you can see from our chart below, the average basic variable interest rate amongst the big four banks is around 5.60%. We have eight non major lenders that are offering headline variable rates that are lower than the cheapest major bank. These lenders are already proving our theory.
Competition is alive and well (for mortgage broker clients).Read more
Auction clearance rates in Melbourne were up to 59% over the weekend, a slight improvement on 55% form last weekend. However the real test will come in Spring when the number of properties listed will significantly increase.
My experience over the last few weeks has been that sellers are frequently being forced to accept less than their reserves if they want to sell. This is a good opportunity for buyers, but it’s not all bad news for sellers.
If you are looking to upgrade your family home this is actually a positive property environment. As the selling and buying prices are both lower, the extra amount you need to contribute (that will most likely be borrowed) will actually be less now than it would have been a year ago.Read more
Bank Exit Fees have been a hot topic over the last couple of month. So……are the offers to refund exit fees really value for money? What are the other hidden charges?
As with any deal many things need to be taken into account. Exit fees are certainly a key consideration in switching banks, but there are plenty of other fees that will also apply.
Don’t be fooled into thinking that an offer to refund exit fees will definitely benefit you. Such deals are potentially good value, but only if your current loan actually has an exit fee.
Exit fees, or deferred entry fees as most banks like to call them, usually expire after 4 or 5 years; meaning that if your loan is older than this, it is unlikely to still have an exit fee.
Although it may be possible avoid an exit fee, the bank you are departing will most likely still charge a discharge fee, which is separate to an exit fee.
Switching banks will also necessitate your mortgage being discharged at the Titles Office and the new mortgage to be registered. It is also quite likely that you will incur an application fee from the new bank.
If considering switching banks the first thing you need to do is find a better deal.
Let’s assume your home loan is $300,000, your current variable interest rate is 7.26% pa and you have been offered 6.90% pa with a different bank. This saving of 0.36% equates to an interest saving of $1,080 pa. This is money that’s better in your pocket than the banks profits, but at what cost?
|Cost of Switching Banks|
|Bank Discharge Fee||$250 – $350|
|Titles Office Discharge Fee||$100 approx|
|Titles Office Registration Fee||$100 approx|
|Application Fee||$0 – $1,000|
|Total||$500 – $1,500|
All tallied, the cost to switch banks is likely to be in the range of $500 – $1,500, without an exit fee. So you need to determine if the cost of switching represents value for money.
If the cost is only $500 and savings are $1,080 in the first year, I would suggest this is good value as you break even after only 6 months. If the cost was likely to closer to $1,500 then I think it is questionable as it will take around 18 months to break even.
As you can see, it’s important to weigh up all the costs associated with switching banks before making a rash decision based on an offer to refund exit fees. Conducting an accurate cost benefit analysis can be quite involved and it is worth obtaining some expert advice.
Competition between banks is great for borrowers, as long as you are fully informed about the decision you make. If you don’t think your current bank is giving you a great deal then give me a call or send an email to discuss your options.Read more
The RBA has decided to keep the cash rate on hold at 4.75% which should see most variable home loan rates remain at around 7.10%.
Interestingly, the following major banks are forecasting the RBA to start lifting rates in the second half of this year:
This could see our variable home loan rates increase to levels between 7.35% and 7.85% (assuming the banks do not lift their rates above the RBA guide).
As you can see from our chart below, the only recent interest rate change is an upswing for the average 3 yr fixed interest rate.
The average basic variable and the average five year fixed rates remain relatively unchanged.Read more
The increases we have seen in property prices in recent years are great if you are selling, but not so great if you are buying.
To further compound the challenge of buying, State Government Stamp Duty is becoming a bigger and bigger burden as property prices rise.
When combined with other costs of moving such as Real Estate Agent fees, legal fees, removalists and so on; you might think twice as to whether it’s really worth it.
If you are settled and like the area that you currently live, then you should consider renovating, rather than relocating.
The cost of moving increases significantly as the value of the properties increases. The following table demonstrates these costs when buying a new home that is approximately 50% more expensive than the home being sold.
|Agent Fees @ 2%||$8,000||$14,000||$20,000|
|Solicitor Fee & Disbursements||$1,000||$1,000||$1,000|
|Bank Fees & Mortgage Discharge||$500||$500||$500|
|Titles Office Fee||$918||$1,394||$1,990|
|Solicitor Fee & Disbursements||$1,000||$1,000||$1,000|
|Bank Fees & Mortgage Registration||$ 500||$500||$500|
|Cost of Moving||$36,663||$63,362||$96,738|
At the cheaper end these expenses may be acceptable, but as the property concerned becomes more expensive it is worth considering if moving house is actually the best option.
I have made some approximations around costs and used averages for Stamp Duty and Titles Office Fees. However it is worth noting that these expenses do vary dramatically between the States. The following chart illustrates the variance in these State Government fees and duties.
The cost of buying a $1,500,000 property is $28,580 more expensive in the dearest State (South Australia at $86,261) compared to the cheapest State (Tasmania at $57,681). It’s also worth noting that Victoria and the ACT are not far behind South Australia.
Taking these differences into account, it will cost around $110,000 to relocate from a $1,000,000 property to a $1.500,000 property in the more expensive States.
So, is relocating the best option?
You may really enjoy living at your current location or be established in the local community and have no desire to move. In his situation it’s worth considering the potential of renovating your current home.
This will require a site that has the scope to extend, but presuming this is the case, $110,000 will make a significant contribution to your building costs.
$110,000 will only cover a relatively minor renovation, but $300,000 – $400,000 should cover quite substantial renovations.
If you were to spend $400,000 extending your current home, you are likely to be around $200,000 better off than if you were to sell for $1 million and buy for $1.5 million.
This will most likely necessitate borrowing some additional money. In most cases a construction loan would be required, but if you have sufficient equity in your home already, there may be a simpler solution. We are happy to discuss the options with you.
Any comments are welcome via Twitter or email.