How your spending habits affect your borrowing ability

Figuring out how much you can borrow for a home loan isn't just you telling the bank you can afford the repayments. It's a detailed process where every aspect of your financial life can be scrutinised. They'll want to know all the standard stuff about you like your household income, and other income such as rental or investment. But there's more to the equation than just the basics.

Your existing debts play a crucial role. Car loans, buy-now-pay-later, HECS, credit cards… these will all chip away at your maximum borrowing power. Credit cards in particular can bring your maximum down. Lenders will look at the card limits – not the balance – when assessing your borrowing power.

If you have non-mortgage debt and are thinking about a home loan you can consider paying down your debts and reducing credit card limits or closing credit cards. Speak to us first – if you’re using your saved deposit to close other credit you want to make sure you don’t leave yourself short.

What about my Uber Eats addiction?

Yes, banks care about how you spend. Particularly if you have a smaller deposit, the lender will want to see your spending habits to make sure you aren’t putting half your pay on race 4 at Flemington every Saturday. If you’re an Uber Eats fan and have excessive transactions on your statement this could hint to the lender that you aren’t super responsible with your spending. It’s beneficial to your bank statement regularly to see where your money is going. Uber Eats, Afterpay, Streaming Services, and eating out can quietly accumulate over time. Even if you aren’t applying for a loan, reviewing your spending is a good financial habit to be in.

In the end, getting a mortgage isn't just about numbers on a page. Part of it is proving to the bank that you're financially responsible and ready to take on the challenge. So, get wise, tighten your budget, and talk to us for advice on how to get into your home sooner.

Practical tips for a household budget

A good household budget is cornerstone of financial stability and wealth creation. Wherever you are in your life – starting a career or business, raising a family, or preparing for retirement - creating and maintaining a budget is a fundamental skill that can help you achieve your financial goals. In this article we share practical tips to help you master this essential financial skill.

The Significance of Household Budgeting

A household budget is a blueprint for your financial life. It helps you allocate your income wisely and curbs unnecessary spending. This discipline ensures you live within your means, avoid debt, and save for your future.

Having a budget and financial goals can help you keep on track as you save towards your next significant purchase.  Tracking expenses can allow you to see waste and provide encouragement to cut discretionary spending when needed.

A budget will allow you to build a cushion for unexpected expenses. When you have an emergency fund in place, you're better prepared to manage life's curveballs without going into financial turmoil.

Creating Your Household Budget

• Calculate Your Income: Start by determining your total monthly income. Include all sources, such as your salary, rental income, and any side gigs.

• List Your Expenses: Divide your expenses into those which are consistent and those which vary. Consistent expenses are those that remain fixed each month such as rent or mortgage repayments.  /mortgage, utilities, and insurance. Variable expenses include groceries, entertainment, dining out, and transportation.

• Set Financial Goals: Prioritize your financial goals. Do you want to save for a vacation, pay off debt, or build an emergency fund? Allocate a portion of your income to each goal.

• Create Categories: Organize your budget into categories like housing, transportation, food, entertainment, and savings. Assign a specific amount to each category based on your income and goals.

• Track Your Spending: Record every expense. Use a budgeting app or spreadsheet to monitor your spending and ensure you stay within your allocated amounts for each category.

Budgeting Tips for Success

1.      Start Simple: If you're new to budgeting, begin with a basic budget. Over time, you can refine it to suit your needs and goals.

2.      Be Realistic: When setting your budget, make sure it's achievable. Unrealistic expectations can lead to frustration and budget abandonment.

3.      Emergency Fund: Make building an emergency fund a priority. Aim for at least three to six months' worth of living expenses.

4.      Review and Adjust: Regularly review your budget and adjust it as needed. Life changes, and so should your budget.

5.      Avoid Impulse Purchases: Give yourself a "cooling-off" period before making non-essential purchases. This can help you differentiate between wants and needs.

6.      Negotiate Bills: Don't be afraid to negotiate with service providers for better rates on utilities, insurance, and other fixed expenses.

7.      Save Automatically: Set up automatic transfers to your savings accounts. This ensures you save consistently without the temptation to spend.

Household budgeting is not a one-size-fits-all approach. Your budget should reflect your unique financial situation and goals. The key to success is consistency, discipline, and adaptability. By creating and sticking to a budget, you can take control of your finances, reduce financial stress, and work towards your dreams and goals. Remember, budgeting is a lifelong skill that can lead to a brighter financial future. Start today, and you'll be on the path to financial well-being.

How to maximise your mortgage offset

When it comes to managing your mortgage, one of the most effective financial tools at your disposal is the mortgage offset account. A mortgage offset account can help you save thousands of dollars in interest payments and potentially shave years off your mortgage term.

What is a mortgage offset account?

A mortgage offset account is a savings or transaction account linked to your home loan. The key feature of this account is that the balance in the offset account is offset against your outstanding mortgage principal when calculating interest. This means you only pay interest on the difference between your mortgage balance and the balance in your offset account.

How Does It Work?

Let's say you have a mortgage of $300,000, and you have $50,000 in your offset account. Instead of paying interest on the full $300,000, you'll only pay interest on $250,000 ($300,000 - $50,000). This reduces the interest expense, ultimately allowing you to pay off your mortgage faster.

How to maximise your offset

Maintain a High Balance: The more money you keep in your offset account, the greater the interest savings. Consider using your savings, bonuses, or windfalls to bolster your offset account. Every dollar in the account is working to reduce your interest payments.

Consolidate Your Finances: If you have multiple accounts, consolidate them into your offset account. This way, you'll maximise the balance and reduce interest costs effectively.

Salary Deposits: Arrange with your employer to have your salary deposited directly into your offset account. This ensures that your income immediately starts reducing your interest costs.

Consider a credit card: If you use a credit card for your regular expenses and pay it off in full each month before any interest is charged, you will have the added benefit of your money sitting in the offset longer, up to the day of the card repayment.  You may also get an added benefit of credit card points, depending on your credit card features.

Use Windfalls Wisely: If you receive a tax refund, bonus, or any unexpected financial windfall, depositing it straight into your offset is a great way to put extra money to work in reducing your mortgage interest.

A mortgage offset account is a powerful tool that can help you save money and pay off your mortgage faster. By maintaining a high balance, consolidating your finances, and making strategic financial decisions, you can maximize the benefits of your mortgage offset account. Remember that while this tool is valuable, it's just one part of a comprehensive financial strategy. If you would like to understand more about how to benefit from an offset please get in touch.

Home loans for older borrowers

There is no such thing as “too old” to get a home loan, however older borrowers should know that they may be subject to more scrutiny and other restrictions.

If you’re in your 50s or thereabouts and thinking about taking out a mortgage you may have some questions.  A typical mortgage is 30 years, and unless you plan on work beyond 80 you will need a plan! Below are some things to take into account if you are an older borrower considering a loan.

1. The easiest approach, if you can afford it, is to shorten the loan term.  For instance, if you are 55 years old and planning on retiring at 70, taking out a 15 year loan term rather than a 30 year loan term will be seen favourably by most lenders. Having a shorter loan term will mean higher repayments, so you will need to show that you can manage higher repayments. 

2. If you have a strong asset position including superannuation this can help show the lender that you can manage the loan at retirement. If there are assets that can be sold at retirement to clear the loan, or income generating assets that can help you manage repayments post-retirement this will all be considered.

3. You might consider buying with a family member.  Dual occupancy homes are increasingly popular for this type of scenario, particularly where older borrowers live in the same property as their adult children. With combined incomes it can be easier to show the lender your ability to repay.

4. Ensure you have clearly thought through how you intend on manage exiting the loan at retirement, if your planned retirement age is prior to the loan term. If you can demonstrate a clear plan to the lender it will give them comfort that they won’t be left exposed as you approach your retirement age.

Remember also, the bigger the deposit the lower the risk from the lender point of view.

A good mortgage broker like Blackwattle Finance will help you to understand what is achievable, which lenders are best suited to your needs, and how to show the lender how you will manage retirement. Get in touch with us to learn more.

How to pay off your home loan faster

Paying off your mortgage early is the dream of everyone with a home loan.  Paying off early will saving you money, and the removal of one of the largest financial burdens we face will bring great relief to you and your family.  Here are some ways to get rid of your mortgage sooner.

1. Switching to fortnightly payments of half your monthly repayment will mean you make an extra repayment each year (as each year as 26 fortnights).

2. Linking an offset account can have a massive impact. An offset with a healthy balance can save thousands in interest which reduces the time to pay off.

3. Cutting back on expenses (if you can!) means you can direct more money to the mortgage.

4. Make extra payments. Tax returns, bonuses, flogging your unwanted garden tools on Marketplace... it all adds up.

5. Making higher repayments than the minimum repayment will all add up over time.

6. Switch to a loan with a lower interest rate, but keep your repayments at the higher amount.

If you would like to know more about how to optimise your finances to pay off your mortgage sooner please get in touch!

Living expenses

When a lender is determining how much they are willing to loan you on a home loan they will look at a number of factors. This short article covers off how your living expenses factor in to your borrowing power.

As part of the broader picture of your overall credit worthiness, the lender will want to verify your living expenses and will take your living expenses into account. Your living expenses, along with other factors including your overall income and types of income, will determine how much the lender is willing to lend you.  Under the NCCP responsible lending guidelines, a lender must satisfy themselves that you will be able to pay off the loan without falling into financial difficulty.

What are living expenses

Living expenses are what you spend in a typical week, month, or year in order to maintain a reasonable lifestyle.  They are usually categorised something like this:

• Groceries

• Utilities, rates, strata

• Entertainment

• Transport

• Health

• Insurances

• Personal care

• Clothing

A common misconception is that if you have some large but non-recurring expenses (such as an overseas holiday or purchasing a new bike) that they will be included in your living expenses and will impact your application.  This is not the case, and as part of your application we will explain any unusual or one-off expenses.

A lender will usually assess your living expenses using a self-assessment and declaration by you, or a review of your bank statements, or a combination of the two.  If your expenses are on the lower side, the lender may rely on the Household Expenditure Measure (HEM) which is a measurement tool used to estimate the average spending for households and is based on the income and location of a household.  

If you’re thinking of applying for a loan but are unsure about how your living expenses might impact your application, please get in touch with us and we will be happy to answer any questions you have.

Refinance case study: one conversation could save you $141,759

You might be surprised at the potential savings from refinancing your home loan. Emily and Jack bought their first home in Rozelle six years ago and had not reviewed their home loan since then. However, with recent changes to the market, they were now ready to discuss refinancing.

We looked at their financial position and discussed their goals. They were looking for a lower interest rate, better online services, to pay down their loan sooner and consolidate debts. Comparing over 30 lenders we were able to select a loan tailored to their needs and objectives.

We selected a loan with a lower interest rate, minimal fees, an offset account and redraw facility.  The offset account works for Emily and Jack as they both earn an annual bonus, and putting the bonus income in the offset will allow them to pay off their loan sooner by reducing the interest payable.

When we refinanced the mortgage, Emily and Jack also took the opportunity to consolidate their debts. By borrowing an additional $25,000 they were able to clear and close their credit card and car loan. This had the benefit of reducing their overall monthly loan repayments, and an additional benefit of streamlining their finances as they only had to manage the one monthly repayment. The lender we selected has an excellent online banking portal - something that was very important to Emily and Jack.

We selected a low interest rate with a $4,000 cash back incentive to maximise savings. With their $1,200,000 mortgage this refinance will save them an incredible $8,725.36 in the first 12 months, and a total savings of $144,759,000 over the life of the 30 year loan*. This savings, achieved purely by refinancing, allows Jack and Emily to pay off their mortgage sooner, a primary financial objective when we first spoke.

We are up to date with the latest market information and are committed to finding you the best possible rate. If you want to chat about the refinance options available to you, contact Garreth today on 0414 444 683.

*Interest rates are not fixed and will vary in accordance with the market.

Expert advice from a broker committed to finding the best solutions for your needs

Home loans when you’re self-employed

If you’re self-employed, getting a home loan can be less straightforward than for those with salaried employment.  An estimated 16 per cent of us are self-employed; a fair number of people whose businesses and circumstances are unique! 

Here are some tips to help you navigate the application process for self-employed borrowing.

Can I get a “normal” loan?

The loans available for self employed are not typically any tighter or more restricted than for salaried employees – the rates, costs, required deposit, and range of lenders are usually the same.  Lender policies can vary greatly, so matching your circumstances to the right lender will ensure your objectives are met and your borrowing power is maximised.  

What to prepare

A lender will want to see that your business is trading profitably over a good period of time.  Typically you will want to have been in business (and GST registered) for at least two years, and be able to produce two years of accountant prepared financials and tax returns showing that the business has earned consistent income over that time.

If there are big variances from one year to the next you need to be able to explain them – these variances could be anything in your profit and loss statements – the lender will go through line by line and want to understand anything that’s out of the ordinary.

How your income is calculated

Different lenders will have different ways of deciding how much of your income is usable to service loan repayments.  Some will look at the average of the last two years, some will use the lower of the last two years, others will be different again.  In addition to your net profit before tax and any wages you pay yourself, different lenders will let you add back some or all of:

• Depreciation

• Interest paid on loans

• Large one off expenses

• Additional superannuation contributions

Speak to your accountant

It’s important to consider how your financial statements would impact your borrowing potential.  Speaking to your accountant about your plans, and getting their advice on how to structure your taxable income, will help put you in good stead.

“Alt doc” lending

Not every self-employed person fits the standard criteria.  There are options for people who are self-employed but don’t have the business track record and/or documentation required to fit into standard lending policy. 

Alternative doc lending uses different ways of assessing your income, and may consider your application based on business bank account statements and Business Activity Statements (BAS).  The trade off is usually that you may pay a higher interest rate and more fees, however there are very competitive options available.

If you are self-employed and thinking about a home loan in the near future, it’s worth sitting down with your broker now to figure out what’s possible.

Fixed versus variable - what's best for you?

A home loan is a big financial commitment – often the biggest one you will ever make – so getting the right loan is important.

If you want to make an informed choice, understanding the options available is a necessity.  One of the biggest choices to make is whether to go with a fixed rate or a variable rate.  There is no right and wrong when it comes to choosing fixed or variable rate; the choice is determined by your own preferences and personal circumstances.

Variable rate

A variable rate loan is one where the interest rate can fluctuate up or down at any time.  Rate changes can be driven by a complex mix of economic factors.  The Reserve Bank official cash rate is one main factor, but other things like wholesale funding and competitiveness of the home loan market will also have an impact.  Variable rate loans are historically more popular than fixed rate loans.

Fixed rate

A fixed rate loan is one where for a period of time (usually between 1-5 years) the interest rate is locked in.  During the fixed rate period you are at no risk of your repayments changing, regardless of what happens with the Reserve Bank cash rate or the broader economy.  At the end of the fixed rate period the loan will automatically revert to a variable rate one.

The pros and cons

Variable - The biggest advantage of variable rate loans is flexibility.  Variable rate loans will allow you to make unlimited extra payments, allow you to redraw any surplus payments, and will often have an offset facility.  And if rates come down you will reap the benefits of the lower rate.  On the flipside, if rates go up so will the amount that you pay.

Fixed - If rates start to rise while you’re in a fixed rate loan you won’t suffer from an increase in repayments.  It’s the confidence this brings that makes fixed rates attractive for borrowers.  Budgeting and managing cash flow is easy when you know that your repayments are fixed.  Fixed rate loans typically offer less flexibility that variable rate loans, with restrictions on being able to make extra payments being a big one.  If you wanted to refinance or sell your property during the fixed rate period there is usually a break cost fee.

Split loans

Splitting your borrowing into separate fixed and variable portions is a way to hedge your bets.  This way you can get the peace of mind that a fixed rate offers while still maintaining a degree of flexibility with the variable portion.  Split loans with an offset on the variable portion are a popular choice with borrowers.

When recommending an option we will take into account all of your circumstances.  We will explain everything in detail so you are making informed choices.  Everyone’s circumstances are unique and having quality broker like Blackwattle Finance in your corner will mean that you get the best option for you.

Why use a mortgage broker?

Currently 60% of all home loans are originated through mortgage brokers.  To some, this might seem surprising.  The role of a broker is sometimes misunderstood - particularly by those who haven’t used one before.  There are lots of good reasons why so many people use a broker to secure a home loan.

Probably the most important one that is that brokers work for you, not the banks. Brokers are an agent for you to make sure you get the best possible loan and at the best possible cost.  Brokers help you decide on the best approach, help you with choosing which option to take, and then manage the application process right through to settlement and beyond.

WHAT DOES A MORTGAGE BROKER DO?

A broker is an intermediary between you and lenders.  The broker’s role is to understand your needs and objectives, and then use their expertise of the mortgage market to find the best option for you.  A broker will have access to a range of lenders and hundreds of products and will be able to match you with the best loan product for your individual circumstances.  They will manage the application process on your behalf and liaise with the bank all the way through to settlement.  They will also negotiate on your behalf to get the best possible deal on your loan. 

For a lot of people, the process of applying for a loan can be overwhelming.  Others may be time poor and find it easier to allow a trusted advisor to manage the process.  Most like the comfort of knowing that a professional is in their corner when they are making such a big commitment.

HOW DO BROKERS GET PAID?

Most finance brokers do not charge you a fee for a standard mortgage loan.  Brokers receive a commission from the lender you choose for referring your business to them.  Banks and lenders across Australia pay very similar commission fees.  There is also usually an ongoing small fee that lender pays to the broker – this is for the broker to continue to assist and support you for the life of your loan. 

There is no premium or penalty for using a mortgage broker.  There are no additional fees, charges, or interest for taking a loan that was introduced to the lender via a broker. 

PROFESSIONAL CREDIT ASSISTANCE

The broking industry is regulated by ASIC and any consumer credit assistance under the National Consumer Credit Protection Act (NCCP).  Brokers are bound to act in the best interests of their customers under Best Interest Duties legislation.  They are required to either hold a credit licence or be a representative of a licensee.  Brokers must complete minimum education requirements, must be insured, and must be a member of one of the industry bodies to operate. 

BLACKWATTLE FINANCE – WHY CHOOSE US?

We pride ourselves on going above and beyond.  We will research all avenues to ensure you receive the best possible credit advice.  We make things as simple as we can and as easy for you as possible.  We’ll provide you with updates and advice and ensure you are aware of each step of the loan process so you are informed.

When you get your approval, or when you pick up the keys on your new place, we are just as excited as you.  We love to build lasting relationships and enjoy the process with our customers.  We hope you choose us to help with your next purchase!

Case study – purchase of first investment property

Eliza and Mark are a young couple I have known since helping them with their first home purchase in 2017.  They are both keen on creating wealth through property, having been inspired by Eliza’s parents who retired early thanks to building a six-property-strong investment portfolio. 

In the four years since buying for $700,000, Eliza and Mark have managed to increase the value of their Campsie home to close to $1m.  The increase is thanks to a combination of capital growth and home improvements.  Eliza and Mark have spent their spare time on restoration and renovations.  They have managed to chip a fair bit off the mortgage at the same time, reducing the loan from $650,000 to $600,000.  This is how they used their equity to by an investment:

1. They refinanced their home and freed up some of the accumulated equity, accessing an extra $150k on top of the existing $600k loan, increasing the loan to $750k

2. They bought an apartment in nearby Canterbury for $600k, and used the $150k withdrawn from their owner occupied loan for a 20% deposit, stamp duty, and costs

Their new situation looks like this:

1. The family home valued at $1m with a loan of $750,000

2. An investment property valued at $600,000 with a loan of $480,000, earning rent of $420 per week

3. The repayments on their interest only investment loan are $340 per week, meaning that the loan repayments and most of the ongoing costs are covered by the rental income

Insights from a buyer's agent

One interesting facet of my work is learning from other professionals in my network.  I often cross paths with lawyers, accountants, real estate agents etc and when I do, I take the opportunity to learn what I can about their view of the world.  Often my clients will ask questions that aren’t in my field of expertise, so it is great to be able to share what I know and to connect my clients to other experts. 

I caught up recently with Hamada Alameddine of BuyerX.  Hamada is a buyer’s agent specialising in Sydney’s inner west and is a wealth of knowledge and advice on buying and on property in general.  Buyers agents have become an important resource for many buyers who are looking to save time and money on a property purchase.  Hamada was kind enough to answer some questions for me and to share his insights. 

Is trying to time your entry into the market possible? And does it even matter?

Harv Eker famously said: ““Don’t wait to buy real estate, buy real estate and wait”.  

Timing the market is nearly impossible, by the time you think you have timed it right you’re more than likely behind.  The best time to buy is when you’re financially comfortable and have enough cash flow.   

If the property you’re buying is for long term primary residence the time you own it will likely show appreciation because if we look back historically, the data will show us that property will grow in  value over 10-15-20 years.

For investment purposes, you need to make sure you’re buying with the a few key fundamentals guiding you.  Buy close to public transport, schools, shops and other amenities.  Vacancy rates is also a great indicator as to what the property market is doing.

In short, timing the market is irrelevant but being in the market long term is key!

How long does it typically take for someone to find and buy a property?

Prior to engaging me as a buyer’s agent, on average my clients have been searching for a property for over 4 months.  Some clients have been at it for well over 12 months.

On average it takes me 4-8 weeks to find the ideal home for my clients.  There are of course instances when we identify the right property in less time. It’s is really important for me to understand exactly what my clients are looking for so I can then guide them in the right direction.  I am also able to take non-emotional approach to help clients see the home for what is and not be swept away by the pretty shiny bits!

Most people take a few bites of the cherry because they don't have the experience to identify a property’s true value: they are being guided solely by what the sales agent is pushing.  By identifying what they are after, understanding the non-negotiable aspects of their future home and the aspects clients are willing to be flexible on, I am able to weed out the homes that aren’t suitable ensuring we are keeping our eye on their prize.

Auction or private treaty – which is best?

Private treaty is the best way to buy a property.  It somewhat gives the buyer more clarity around price and hence makes negotiations simpler. In the current market (inner west) auctions are absolutely going wild with pent up emotional buyer’s sick of missing out. 

What should be your “no compromise” features when looking for a home or an investment?

The price! You need to make sure you can identify what the property is worth; you don’t want to get caught out over-paying. 

Stamp duty reform in NSW

This month’s big news - stamp duty reform in NSW
 

For the longest time (155 years in fact) stamp duty has been payable upon purchase of a property in NSW. The experts consider it a very inefficient way of collecting tax. There are two main criticisms:

1. It fluctuates wildly based on the amount of buying and selling activity. Years like 2020 where the number of properties changing hands has slowed to a trickle means no tax revenue is being generated, leaving a budget hole, and

2. It also disincentivises people from moving house. This is particularly problematic when you have older owners/empty nesters living in huge empty family homes, creating a housing shortage.

Last week the NSW government announced reforms to the way tax is paid on property. The proposal is that we will move to land tax, where instead of paying a massive lump sum when buying ($40k on a million dollar house) home owners will pay an annual tax based on the value of the land. By doing this the government aims to create a more consistent revenue scheme and to make it cheaper and easier to move house. Makes a lot of sense, right?

It gets a bit tricky though. To soften the blow for those of us who have recently paid a king’s ransom in stamp duty they will make it an opt-in – if you’ve paid stamp duty you can choose not to pay the land tax and not be subject to double taxation. This approach is politically safe but wrought with other challenges – a potential revenue gap for years to come being the main one.

And what does it mean for property prices? In my humble opinion nothing in the short term. Those first home buyers who might now be able to access the market more readily will still have to contend with land tax reducing their loan servicing capacity so that will offset things. In the longer term it may put some downward pressure on prices - when property changes hands more frequently the whole system becomes more efficient and buyers will not have to pay desperation prices especially for big family homes.

What is home equity and how can you use it?

Accessing the equity in your house can help you with your next major purchase.

Using the equity built up in your home can be a smart way to use your wealth to make a major purchase.  If you are looking to buy a car, renovate your home, or buy an investment property you can use your home equity to make such a purchase.

Equity is very simply the difference between your home’s value and the amount you have outstanding on your mortgage.  If you have a million-dollar home and owe $500,000 on the mortgage, then your equity is $500,000.  People usually build equity in their home by paying down the initial mortgage and through rising home values over time. 

Equity can be accessed for many different purposes: consolidation of credit cards, paying for a holiday, buying a car/boat/caravan, home improvements, or even to pay for a wedding. 

Along with those purposes listed above, using equity to buy an investment property is a very popular way of using your accumulated wealth to invest and create more wealth. 

Often when accessing equity to buy an investment property there is the opportunity to borrow enough that your out of pocket expenses with a property purchase are covered.  This means that you don’t have to tap into your savings for things like stamp duty.  You might also be able to balance out so that the rental returns cover your outgoings, creating passive income. 

Typically, I would not recommend borrowing more than 80% of the property’s value, but there can be exceptions. 

Things to consider:

• You will need to be able to show that you can afford the repayments on the extra amount owing (and any investment loan if that is the loan purpose)

• The lender will assess your situation and want to understand what the equity is to be used for, and will sometimes want to see proof

• If you are using equity to purchase, for instance, a car, you should understand the cost differences between adding debt to your 25 year mortgage as opposed to taking out a six year car loan

There are a few simple steps to accessing home equity:

1.       Work out how much equity you have. 

This can be done simply by establishing the value of your home and subtracting the amount owing on the mortgage.

2.       Calculate the equity you can realistically access. 

You will need to be able to service the repayments on the extra loan amount and this will impact the amount of equity you can access.

3.       Review the options available to you. 

We can help you to research suitable lenders and products, comparing features, rates and costs to find the loan that best suits you.

4.       Work out the costs and fees. 

If you switch lenders there may be additional fees with government fees, application fees, and break costs on your existing loan.

5.       Apply for the loan and proceeding to settlement. 

We will work with you to apply for the loan and to see you through to settlement.

If you want to understand more about home equity and how is can be accessed, please speak to us.  We would love to hear from you!

How will the federal budget affect property and lending?

October 2020 update from Blackwattle Finance

Economic news

The federal budget is the big news this month. The government has outlined their path away from recession, with tax cuts the lead story. There are three major property related measures highlighted: extension of the first home buyers deposit scheme for new homes (10,000 new places), more low-cost financing for affordable housing through NHFIC, and additional funds for the Indigenous Home Ownership Program.

There are also big plans for credit regulations which I will touch on further down.

At Citi’s 12th annual investment conference RBA Governor Philip Lowe hinted at another interest rate cut. Lowe said that “As the economy opens up… it is reasonable to expect that further monetary easing would get more traction than was the case earlier”. He also confirmed that an increase in the cash rate is as least two or three years away – something for mortgage holders to keep in mind when making decisions on loan options.

Property news

September saw a boost in the national housing market, with prices and new listings increasing in all capital cities except for Sydney and Melbourne. Given the size of the Sydney and Melbourne markets (more than half in terms of value) the overall average value came down ever so slightly. This has meant five straight months of decline overall, however the rate of decline has decreased.

Predictions are that October will continue to improve, with Victorian lockdowns easing and the seasonal spring activity driving more activity.  Experts are highlighting "clear optimism" generally.

Lending update

As touched on earlier, there is quite big news.  As part of the federal budget announcement Treasurer Frydenberg has flagged plans to simplify the regulations around lending with the aim to free up credit.  If Parliament agrees to the proposal, we will see the changes come into play in March 2021.  Ostensibly this will make getting a loan more straightforward, with the onus for accurate application information shifting back from the lender towards the borrower. 

My two cents?  Banks will be given a huge task to update processes and policies to fit the reforms.  The size of the task will mean it will take an eon to implement fully and properly, and won’t have the economic impact hoped for.  Still, simplification will be welcomed by many who have found the process of obtaining credit bordering on ridiculous in recent times.  

About half of the 500,000 home loans under deferral of repayments have now recommenced payments.  This is a welcome development which means that the finances of Australian homes are returning to normal.  People who have been unable to refinance into the low rates now available should soon be able to demonstrate repayments and allow them to switch.  Once again, let me know if this is you.

FIRST HOME BUYERS – NOW IS YOUR TIME.  Another 10,000 spots have opened for new dwellings in the federal government’s first home loan deposit scheme.  In short, borrowers who save a 5% deposit will have their loan guaranteed by the government which means no lenders mortgage insurance (LMI) payable.  Combined with stamp duty concessions this means big savings for those of you who have been trying to break into the market.  If you want to see if you’re eligible please let me know.

Case study - guarantor/family pledge loan

Jack and Amy are a couple in their early 30s.  They had been renting together for a couple of years and approached me to discuss options.  They were convinced that buying a home was out of reach, but a mutual connection had recommended they speak to me anyway.

Both Jack and Amy are established in their careers and earning good money.  The issue for them was not whether they could afford loan repayments, but rather that they did not have much in savings.  A large portion of their income was going to rent and they were taking longer than they wanted to get a deposit together.  They had $30,000 between them and wanted to buy an $800,000 property. 

Amy’s parents are retired and own their home outright.  They were just as keen for Jack and Amy to be able to buy a home as Jack and Amy themselves.  They had previously assisted Amy’s brother and wanted to do the same for Amy and Jack.

With the assistance of Amy’s parents, we were able to get what is known as a guarantor loan or a family pledge loan.  This is how is worked out:

• Jack and Amy found a house for $800,000

• Jack and Amy borrowed $810,000 which was about 101% of the value of the house

• Amy’s parents put their home up as security to cover part of the loan

• Jack and Amy used their $30k in savings to cover stamp duty and other costs on the purchase

Amy’s parents guaranteed part of the borrowings using the equity in their own house.  By allowing Jack and Amy to use their home’s equity they could:

• Borrow enough money to get the home they were after without saving a larger deposit

• Avoid paying lenders mortgage insurance (LMI), saving thousands of dollars

The way a guarantor/family pledge works is that there are two loans – in this instance there was one for $640,000 and a second one for $170,000 (total $810,000).  The second loan was guaranteed by Amy’s parents with their property as security.  Jack and Amy are responsible for repayments on both loans, with Amy’s parents guarantee coming into effect if Jack and Amy fail to make their repayments.  Over the next couple of years, Jack and Amy will pay down the loans and hopefully the property value will rise.  Once the loan to property ratio comes down sufficiently Amy’s parents will be released from their guarantee.

Guarantor/family pledge loans are usually not the first option I recommend: there are risks that need to be understood by all parties.  In this instance it was suitable as Amy’s parents were experienced and comfortable with the process.  This was a great outcome that brought forward home ownership for Jack and Amy by a couple of years at least.

What’s the difference between offset and redraw?

The difference between offset and redraw is not always understood.  So, what is the difference between offset and redraw?  Does it matter?  And how could it affect you?

Some of you who were following the news over the last couple of months may remember this story where ME Bank made some changes to their redraw policy.  Effectively what happened was that customers who had paid in advance on redraw loans had their advance payment taken away, meaning that they couldn’t access the advance payments.  There was instant outrage from their customers and the decision was quickly reversed.

What is redraw and how does it differ from an offset account?

On a redraw loan, the customer makes payments over and above the minimum monthly loan repayment.  This is an effective way to minimise the interest charged and to reduce the overall cost of the loan.  If needed you can “redraw” the advance payments to use for other purposes.

An offset by comparison is a separate account to the loan account, and any money sitting in this separate account “offsets” the balance upon which interest is charged on the loan.  If you had a $500,000 loan with $100,000 in your offset account you will only be charged interest on $400,000. 

Whilst a redraw loan lets you access your advance payments there’s a risk that the lender will take the redraw away.  There is often limits on the amount you can redraw and the number of times a year you are able to redraw.  Sometimes there is a fee for redrawing.

Offset accounts typically work like any other transaction account: you can access them at any time for any amount, you can have your pay paid into it etc. Loans with offset features often have an annual fee attached and can have a slightly higher interest rate.

Choosing what is right for you

So, which is better?  The decision between redraw and offset is ultimately one of personal preference.  Offset has greater flexibility but may have more costs and a higher rate.  Redraw is simple and usually cheaper, but you may run the risk of not being able to access the advance funds if and when you need it. 

Understanding the pros and cons of each will allow you to make an informed choice.  You as the consumer should think about your needs and objectives to make a call on what is best suited to you.

Why now could be a great time to review your mortgage

Reviewing your home loan regularly is sensible, and never more so than now where things are changing so fast.  We’ve recently seen the official cash rate slashed, and this has created a very competitive mortgage landscape.  There is plenty to consider before taking the step, and you should make sure you understand all the pros and cons.

One of the main benefits to refinancing is to take advantage of lower rates at a competitor, or sometimes even with your own lender.  Lenders will often put very competitive rates on the market to attract new customers, leaving existing customers paying more.  And the difference between one lender and the next could be thousands of dollars a year.

It could also be that your circumstances have changed since you initially took out your loan.  Perhaps you want to clear your credit cards and consolidate some debts, or want to access some equity to start that renovation you’ve been talking about.   

To make sure everything is factored into your decision, you will need to understand your existing rate, repayments, and fee schedule.  Will you have to pay LMI again?  Is there a break cost such as with a fixed loan?  There might also be other features such as offset accounts, or user-friendly internet banking for you to consider.

Your property value also comes into the equation, so we would look at some data to understand what the house or asset is worth.  

If you find an alternate option to your current loan that meets your needs and is going to save you money then it’s usually a simple decision to make.  

We can compare lots of different lenders and, if there is a better opportunity, we’re able to access it. We are always working to give you great advice that’s in your best interests.

Contact us today for a home loan health check.  You could save yourself some serious money.

Problems paying your mortgage

Most people at some point in their lives will have an event that interrupts their income and finances.  It could be that you are made redundant from a job, or are sick, or are impacted by a natural disaster.

Sometimes people take on too much debt, and find they are in a position where they can no longer afford all their financial commitments.

This article aims to give some advice on how to manage these situations if it happens to you.*

Contact your lender

This is the most obvious and sensible thing to do, however due to various reasons it is often difficult for people to reach out when in trouble.

Most lenders have a dedicated hardship assistance team who are well trained to understand your situation, and help you find a solution in an understanding and empathic way.  All consumer loans in Australia are regulated under the National Consumer Credit Protection Act (NCCP) which has hardship provisions to ensure you are treated fairly. 

Lenders are usually able to temporarily reduce or suspend repayments and can sometimes vary your loan to capitalise missed payments or extend the term to make repayments more manageable.  

Consider switching to interest only

If your loan is principal and interest payments, your lender might be okay with you switching to interest only for a period.  This will reduce your monthly commitment, freeing up some of your mortgage repayment so it can be used for other expenses.  There are pros and cons to this, and you should speak to your lender or broker to understand.

Consolidation of debts

If you have various credit cards and personal loans it may be worth considering consolidation into your home loan.  This will likely reduce your overall monthly repayments (often considerably), and most people find it easier to manage one loan repayment a month rather than multiple.  Speak to your lender or broker to find out if this is possible and the right option in your circumstances.

Sell or downsize

Obviously, this is a pretty drastic measure, however something to consider should your situation be that your ability to pay your debts is permanently reduced.  Particularly if you have an investment property, it might be wise and relatively easy to sell and clear your debts and re-enter the property market once your circumstances have improved.

Speak to a financial counsellor

If your situation is serious or more long term you may want to speak to a financial counsellor.  A counsellor can speak to your creditors on your behalf and can reduce some of the anxiety that comes with financial hardship.  Counsellors to do not charge for their services and there are bodies in each state of Australia.  A counsellor may also explore other options with you such as Part IX, Part X, and bankruptcy.

Seek additional support through Lifeline or another trusted crisis support service

Being unable to pay your mortgage can be incredibly stressful for both you and your family.  Organisations such as Lifeline (phone 13 11 14) can provide mental health support and emotional assistance

 * All the advice in this article is intended to be general.  The advice provided does not make consideration of your specific financial situation, your objectives, or your needs.  You must consider the appropriateness of the advice before taking any action.

Buying with a smaller deposit - lenders' mortgage insurance

When you consider that an inner Sydney apartment could set you back a million dollars, saving a 20% deposit to buy can seem an insurmountable task. That’s where insurance can help.

Lenders mortgage insurance (LMI) may be an added expense, but it offers buyers the opportunity to dive into the property market earlier, without saving up an entire 20 per cent of the property’s purchase price as a deposit.

What is it?

LMI protects the bank or lender should a home loan go into default, guaranteeing that the lender will get its money back if the property needs to be sold and there is a shortfall in repaying the loan.

While a 20% deposit generally provides a good buffer against any drops in property value over the life of a loan, LMI can also provide the same protection, meaning borrowers can purchase property with a smaller deposit.

What’s in it for you?

For the borrower, it may seem LMI is just another expense to cover. But insurance can mean that some buyers will be able to enter the property market with, for example, only a five per cent deposit saved. For a million-dollar property, this brings the deposit down from $200,000 to $50,000.

And, if the market is hot and prices are rising rapidly, paying LMI so that you can buy now could be cheaper than taking the time to save a bigger deposit. In the time it takes to save a higher deposit amount, property prices may well have surged by more than cost of the insurance so, for some properties and purchasers, it can make good financial sense to purchase earlier even with the added cost of LMI, especially when you consider the rent that you would pay while you’re saving.

What you need to know

The insurance premium is generally a one-off payment, but you can usually capitalise it into the loan amount so that you are paying for it month-by-month along with your mortgage. 

There can be a big difference in premium amount paid.  If for example you have a 10 per cent deposit compared with a five per cent the LMI premium will be much cheaper.  It’s worth gathering all the extra funds you can muster, even if you despair of reaching the full 20 per cent.