Stress tested your home loan recently? Don’t stress

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Seven in 10 Australian mortgage holders have not stress tested their home loan. But don’t stress, it’s much easier to do than you think.

Deloitte Access Economics’ latest report makes for pretty interesting reading.

It turns out the average Australian has a “wide-ranging hesitancy to make any sort of change” when it comes to their mortgages and other financial products.

“Why is it that educated consumers who know they’re not getting the best deal on many of their household products are so unwilling to take action to improve their household finances?” asks Deloitte.

Interesting mortgage stats

It turns out that 41% of Australians with a mortgage don’t check for interest rate changes because they either have no interest, don’t know what the RBA cash rate is, or do not see its relevance.

Even more interesting is that 68% of people say they have never stress tested their home loan.

“This is a particular worry,” says Deloitte.

“Recent estimates show that a 0.5% increase from current interest rates would cause mortgage stress to jump from one in four mortgaged households to one in three.”

Worse still, a 2% increase would throw half of all mortgaged households into stress.

Now, that might sound like a big increase, but don’t forget that it wasn’t so long ago that interest rates were at that level. In fact, it was only six years ago in June 2012.

So how do you stress test a home loan?

Simple.

Calculate how much extra a 0.5%, 1% and 2% increase on your mortgage would cost you each month and whether your budget can allow for it.

If you’d run into trouble, give us a call and we can work through some risk mitigation options with you, which could include locking in a home loan rate.

Why don’t people care about getting a better deal?

Interestingly, 1 in 3 people know there are better deals out there, while 1 in 5 don’t bother to check for a better deal.

It turns out there are three key reasons people don’t change to a home loan that would see them better off financially, with the first being decision making paralysis.

“Too often, many consumers get stuck before making a choice – and then they do nothing,” explains Deloitte.

Another big reason is people “hate feeling dumb”.

“Consumers also hesitate when they fear or worry about the possibility of making a bad decision. This, coupled with the fact that people tend to avoid what makes them nervous,” adds Deloitte.

The final key reason is that people simply put it off.

“Outcomes set in the distant future typically lack a sense of urgency in contrast with everyday needs, making it easy to defer decision making to a tomorrow that never arrives,” says Deloitte.

How can you overcome these barriers?

Well, here’s the good news. We can help you overcome all three.

For decision making paralysis we can come up with a shortlist of options, reducing the choices you need to make.

Worried about feeling dumb? I bet you we’d feel pretty dumb if we did your job for a day too. But we make it our business to help educate you and bring you up to speed in this market.

And how can you overcome avoidance? Simple. Give us a quick call today and we’ll get the ball rolling for you. You’ll be surprised how little time and effort it takes.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

Why is the bank saying I cant service a loan?

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A question we often get goes something along the lines of: ‘I make my repayments on time, and I save $1,000 per month, why is the bank saying I can’t service a loan?’ Here’s how banks conduct loan serviceability.

When a bank calculates loan serviceability, they are essentially evaluating your ability to pay back a loan.

Lenders base this decision on a number of factors, including your income, the loan amount, and other commitments or extra expenses.

With all of these things in mind, the bank figures out a debt service ratio (DSR). In a nutshell, the DSR is the percentage of your monthly income expected to be spent on debt expenses.

Lenders usually cap this at 30 or 35%.

How banks conduct loan serviceability

Of course, the borrower’s standard salary is considered here. But so too are bonuses like overtime, commission, and even company cars.

For nurses and the emergency services, all overtime payments are included in serviceability calculations.

For other professions where overtime payments are more infrequent, only a proportion of overtime is included.

If you have a second job, you must be employed there for a year before this income affects serviceability. And for investment properties, most banks will consider just 75% of the rental income (to allow for associated fees).

Lenders can also take into account Centrelink benefits like Family Tax Benefit if your children are younger than 11-years-old.

Reasons why loans can’t be serviced

If you have been making all of your repayments on time and saving a decent chunk of your income, you may well be wondering why a bank has just knocked back your loan application.

One explanation may be that lenders calculate repayments by adding a margin of 2.5% or more to the variable rate. This is known as an ‘assessment rate’. It’s used to predict whether you would be able to meet repayments if interest rates rose to 7.5 or 8%.

Unfortunately, this – as well as credit card debt, student loans, car loans and the number of children or dependents living in your home – can negatively affect loan serviceability and make it much harder to get the finance you need.

Bearing these factors in mind can help you rearrange your finances and improve your chances.

How we can help

If you’ve recently been advised by a lender that you can’t service a loan, don’t hesitate to give us a call.

We’d be more than happy to look into your individual situation, help you address any issues, and line you up with a lender that’s offering a great home loan.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

Dont get outfoxed: a quick guide to property valuations

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Information is power. Knowing how much a property is worth can help you secure a great price during negotiations.

Whether you’re a buyer or a seller, having an accurate property valuation conducted can give you the confidence you need to close the deal in your favour.

And it doesn’t matter if you’ve had one conducted recently. The housing market is constantly shifting.

A house worth $600,000 a year ago could be worth much more – or even less – today.

So it’s vital to always obtain reliable, up-to-date advice on the value of a home when buying or selling.

Who conducts property valuations?

Property sellers can approach either real estate agents or private valuers for a valuation.

While private valuers are not used by banks when lending decisions are made, they are useful for a guide to the estimated market value.

In fact, “bank valuations” are altogether another thing. They’re conducted by a lender to determine their lending risks when you apply for a home loan. And they’ll usually be more conservative than the market valuation.

What exactly is meant by “market value”?

The market value of a property reflects the price that a willing buyer and willing seller negotiate before a transaction takes place.

It is not the current listing price of the property or the amount of money that was last offered for the property.

How property is valued

A property valuer takes a number of different things into account before coming up with a figure.

Typically, they look at the number and type of rooms, the size of the property, location, and areas for improvement.

They may also look into whether the building has a sound structure, the quality of the property’s interior design and fittings, ease of access, and planning restrictions.

Outside the property, they will look into any local council issues and compare recent sales figures in the area to understand how in-demand the property may be.

Factors that influence value

Many of the factors that decrease a property’s value are beyond the control of homeowners.

The popularity of a property’s location and surrounds will have a huge impact on its price. For example, a new whizz bang unit block may go up next door making yours look outdated, or a new high rise could block your ocean view.

Government legislation – such as changes to foreign ownership or Labor’s proposed changes to negative gearing and capital gains tax – can also impact the market.

There are, however, ways that sellers can increase the value of their home outside fluctuations in the market. We’ll take a look at a few below.

Kitchen and bathroom: These areas attract the most interest from potential home buyers. Consider allocating a chunk of your budget towards new sinks, countertops and cabinets.

Fresh paint job: Painting can make a property feel new. Neutral creams and whites suit most people’s preferences. Lighter shades also give the impression of spacious rooms.

Get trimming: If your property looks gloomy, try trimming overgrown bushes, mowing the yard, and growing flowers.

Improve energy efficiency: Buyers may dig deeper into their pockets for a home that helps them save on energy costs. Install appliances with positive energy conservation ratings. Also, replace old windows with ones that have a durable sealing.

And a quick warning to the buyers out there. Make sure you don’t allow yourself to get “wowed” by cosmetic upgrades. Remember that there are other important factors you’ll want to consider when you evaluate a property too.

Want to conduct a property valuation?

If you’d like help finding out exactly how much a property is worth, then give us a call.

We’d be more than happy to put you in touch with a reliable, independent valuer who will help give you an insight into the market value of the property you’re looking to buy or sell.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

More carrot, less stick: Comprehensive Credit Reporting

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Many people only pay their bills on time to avoid being slugged with late fees and a bad credit rating. But a big change this month means that you can now be rewarded for timely repayments.

From mid-September, ANZ, NAB, Westpac and CBA all agreed to commence Comprehensive Credit Reporting (CCR).

It’s seen as a more “positive” reporting system than the “negative” credit reporting system that has previously been in place.

CCR was introduced back in July but it’s just taken a while for the big four banks to get onboard.

Hold up. What exactly is CCR?

CCR will see the banks provide additional data to credit reporting bodies such as Experian, Illion and Equifax.

The data that they’re now required to supply to these agencies include:

– The type of loan or credit account.

– When it was opened or closed.

– The credit limit.

– When payments were made on time.

– And when payments were made 15 days late (not to mention the ones that are made 45 days late!).

So how does this help my situation?

In years gone by, the credit reporting bodies only heard about you when you had messed up.

Basically, this meant that banks, credit unions and lenders could only really assess your borrowing capacity on the negative aspects of your credit history. This included late payments or defaults.

However, now that CCR has been adopted by the major banks, your positive credit history, such as timely repayments, will be reported too.

This now gives your credit score the chance to go up – not just down.

Here’s the real kicker though

Just by knowing the above information you’re already more informed than 60% of the population, according to research by credit reporting agency Experian.

But the best bit is: positive credit reporting can help you obtain a loan for a home or business.

“From our experience in the 19 other countries where we operate credit bureaus, positive data sharing is a much fairer system and provides consumers with better credit opportunities,” says Experian Australia’s Poli Konstantinidis.

“It doesn’t just help those with strong credit scores, it also means those without a long credit history, young first home buyers for example, can build one quicker than before.”

So what’s my next step?

Well, that’s simple. Make sure you’re paying all your bills on time!

“This isn’t about the value of the car you drive or how big your recent pay rise was,” says Konstantinidis.

“Pay credit cards and loans on time, as lenders may now consider this when deciding whether or not to approve your credit application.”

You’ll also want to check your current credit score.

You can get a free credit report once a year from one of three national credit reporting bodies (CRB’s). You can find out how on this government website.

If you need a hand doing so – or you discover that you have a poor rating and want help improving it – then get in touch.

We’d be more than happy to help out.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

Home loans: to lock in the rate or not?

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With some of the major lenders recently lifting interest rates on variable home loans, we’ve had a number of enquiries this week as to whether now is a good time to lock in an interest rate.

As predicted, Westpac’s recent decision to increase variable home loan rates was soon followed by Commbank and ANZ.

NAB was the only Big 4 bank not to hike up rates, citing a need to “rebuild trust” with customers.

Yet with the bulk of the market moving variable rates up, many are asking: is now a good time to lock in an interest rate?

Well, like everything in life, the answer depends on your personal situation.

Fixing the rate

A fixed home loan has an interest rate that’s fixed at the time the loan was taken out and won’t change for a set period – usually one, three or five years.

Having a fixed home loan means that rate rises won’t affect you.

Selecting a fixed home loan can give you a sense of clarity and certainty, and as such, will help you budget and plan ahead.

So, while others are grumbling about rising interest rates, you can be content knowing you won’t be affected. That said, future interest rates rises are never a foregone conclusion.

You might prefer a fixed home loan rate if you:

– Believe interest rates will rise in the future

– Are comfortable with the interest rate you are committing to pay

– Prefer to be able to accurately plan your finances in the short and mid-term

– Are concerned that you would be unable to make your repayments if rates were to rise.

Variable home loan rate

A variable home loan has an interest rate that changes. Instead of staying at a certain fixed level, the rate will move according to market interest rates.

As a result, your repayments will either rise, fall, or fluctuate over the term of your loan. This means that sometimes you’ll pay more than a fixed loan, while other times you’ll pay less.

Variable loans can come with advantages linked to their flexibility.

For example, it can be cheaper and easier to switch loans if you find a better deal elsewhere than it would be if you had a fixed loan.

Often you’ll also be able to make extra repayments on your loan at no additional cost, which can help you pay off your loan more quickly.

You might prefer a variable home loan rate if you:

– Suspect interest rates will stay put or fall over time

– Are unsure about interest rate movements and would prefer to go with market rates

– Are confident you could manage a rate rise

– Don’t mind having some unpredictability in your financial planning.

Still on the fence?

With so much at stake it can be difficult to decide on the best option. The solution? Come and have a chat with us.

Discussing your individual circumstances and financial goals can help you decide whether a fixed or variable loan is right for you.

And if a fixed loan is not right for you, we can look into other refinancing options to see if there are other lenders out there offering a better home loan rate than the one you’re on.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.