Can variable rates drop further?
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).
Current Property Market Is Not All Bad For Sellers
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 moreBank Exit Fees…do the offers to pay them really stack up?
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 | |
| Exit Fee | $0 |
| 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 moreRBA has decided to keep the cash rate on hold
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:
ANZ (+0.75%)
CBA (+0.75%)
St.George (+0.75%)
Westpac (+0.25%)
NAB (+0.50%)
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.
Relocate or Renovate
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.
| Selling Price | $400,000 | $700,000 | $1,000,000 |
| 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 |
| $9,500 | $15,500 | $21,500 | |
| Buying Price | $600,000 | $1,000,000 | $1,500,000 |
| Stamp Duty | $23,745 | $43,968 | $70,748 |
| Titles Office Fee | $918 | $1,394 | $1,990 |
| Solicitor Fee & Disbursements | $1,000 | $1,000 | $1,000 |
| Bank Fees & Mortgage Registration | $ 500 | $500 | $500 |
| $26,163 | $46,862 | $74,238 | |
| Removalist | $1,000 | $1,000 | $ 1,000 |
| 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.
Be smart with your finances when buying and selling
If your family is expanding and running out of bedrooms or the kids have left home and you have too many bedrooms, then you may be considering your next home.
I’m often asked how to deal with old and new home loans through the transition period of selling and buying.
When moving homes you will put plenty of thought into what and where to buy, but you also need to consider how the move will be financed.
A common dilemma is whether to sell your current home before buying or whether to find your new home first.
Here are three of the most common options I give people advice on:
- 1. Sell before you buy
The benefit of selling your current home first is that you will know exactly how much money you have made from the sale, which will enable you to structure your finances more definitively and set an accurate budget for the new place.
It should also mean that you won’t need bridging finance as the sale of your current home will most likely settle first. However this situation will potentially leave you without a roof over your head for a period of time.
So you do need to consider your arrangements for alternate accommodation if going down this path, as it is quite likely to be a reality. Hopefully you have some understanding family nearby with a large house.
You may choose to rent for a period of time. This is a sound strategy as it removes the pressure to buy and will possibly stop you from settling for a property that is not ideal. Renting will buy you some all important time.
- 2. Line up Simultaneous Settlements
Arranging for settlement to take place on the same date for both properties is the ideal outcome as you won’t find yourself without a home and you won’t require bridging finance.
If buying before selling you will need to negotiate long settlement terms on the property being purchased so you have time to buy another property. I would suggest settlement terms of at least three months. Then when buying you will need to negotiate the settlement to take place on the same date.
If you are buying at auction the settlement terms may not be as negotiable, but something can usually be arranged. Note that these negotiations need to take place well before the auction.
Alternately you could sell first. In this situation you would want to sell on long settlement terms and buy on relatively short terms.
If you manage to line up settlement dates and you still have a home loan on the property being sold, it may be possible to retain your current loan and simply substitute the security on this loan to the new property. If it can be arranged, this strategy could potentially save you a few dollars.
- 3. Take Bridging Finance
If you do buy first and don’t manage to sell your current home before settlement is due on the new home, then you will most likely need bridging finance. This is not the ideal outcome as it can become quite expensive if required for an extended period.
Most banks offer bridging loans for periods ranging from three months to a year. In most cases you will only need to demonstrate that you have the capacity to service the residual loan after the bridging, not the peak loan whilst bridging, as long as the total loan to value ratio (LVR) is below 80% This LVR takes into account the value of both properties.
Interest on a Bridging Loan is usually at standard variable rates. However it is important to remember that the loan will be a relatively large amount of money, so the interest bill will build up pretty quickly.
If your LVR is well below 80% some banks will allow you to capitalise the repayments, meaning they are added to your loan rather than paid from your cash flow; whilst others may require you to make the interest repayments each month.
So before you get started there are a number of things to consider around your finances when upsizing or downsizing your home, but there are also a range of different strategies that can be used to see you through this period. The most important thing is to consider the issues and get some good advice before putting your hand up at an auction.
Read moreRBA Announcement
As expected, the RBA has kept its official cash rate at 4.50%. However, it is not all “steady as she goes” in the world of mortgages.
Three year fixed rates are on the slide and the major banks are starting to compete aggressively for your business. Many people mistakenly believe that “all banks are the same”, but as you can see below, they’re not.
The gap between the cheapest major bank variable rate and the cheapest major bank 3 year fixed rate is now only around 0.70%. Less than 12 months ago the average gap was greater than 2.00%. The chart below demonstrates the narrowing gap.
Food for thought.
A Great Result For Smartline
I wanted to share some fantastic news.
An independent survey conducted by research company 10,000 Feet compared over 170 of Australia’s franchise systems across a wide range of industries and Smartline ranked No.1 in Australia. The survey covers criteria such as support provided, passion for the business, rewards and overall satisfaction.
A Current Affair did a franchising feature last week that covered the award – click here to see it.
| These are the top 10 overall franchises. |
| Ranking | Rating | Franchise System | Units/Locations | Participation |
| 01. | 80 | Smartline | 200+ | 69% |
| 02. | 77 | Mortgage Choice | 300+ | 52% |
| 03. | 76 | Mrs Fields | 21 | 50% |
| 04. | 74 | Signwave | 19 | 74% |
| 05. | 70 | Mr Rental | 60 | 63% |
| 06. | 66 | Snap-on Tools | 150+ | 48% |
| 07. | 66 | Xpresso Delight | 125 | 51% |
| 08. | 64 | Chooks fresh & tasty | 37 | 81% |
| 09. | 64 | Bakers Delight | 650+ | 35% |
| 10. | 60 | Snooze | 70+ | 47% |
| These are the top 10 overall franchises. |
| Ranking | Rating | Franchise System | Units/Locations | Participation |
| 01. | 80 | Smartline | 200+ | 69% |
| 02. | 77 | Mortgage Choice | 300+ | 52% |
| 03. | 76 | Mrs Fields | 21 | 50% |
| 04. | 74 | Signwave | 19 | 74% |
| 05. | 70 | Mr Rental | 60 | 63% |
| 06. | 66 | Snap-on Tools | 150+ | 48% |
| 07. | 66 | Xpresso Delight | 125 | 51% |
| 08. | 64 | Chooks fresh & tasty | 37 | 81% |
| 09. | 64 | Bakers Delight | 650+ | 35% |
| 10. | 60 | Snooze | 70+ | 47% |
