According to a recent news report, more than 900,000 interest only (IO) home loans will come up for refinance during the first quarter of 2019. This kind of loan is very popular with property investors, however, the recent tightening of lending conditions in this area of the market may make it difficult for some people to refinance to another interest only period on their loan.

So, what are IO home loans, what are they used for and how can your broker help you if the IO period on your home loan is about to come to an end?

What is an IO home loan?

An IO mortgage is where your repayments only cover the interest on the amount you have borrowed during the interest only period. That means the principal (the amount you have borrowed) does not reduce. This IO period can be from 1 – 10 years and after it has ended, the loan reverts to a principal and interest loan unless you refinance it.

What are IO home loans used for?

IO home loans are not recommended if you plan to live in the home you purchase, as they only provide short-term benefits and could cost you more in interest over the long run. This kind of home loan offers benefits for property investors because the interest is usually tax deductible. (Always consult an accountant to be sure this applies to you.) It also helps to lower the amount of the repayments in the short-term, which may help property investors to maximise the income from the property.

It should be noted that the principal (amount borrowed) will need to be repaid at some point. There is a risk that the property’s value could fall during the IO period, which could potentially cause a you to make a loss if you were to sell it. It could also make it difficult to refinance the loan at the end of the IO period without topping up the equity in the loan.

Why could it be difficult to refinance for some?

In 2016, the Australian Prudential Regulation Authority (APRA) – which is the regulator for the home loan industry – imposed a cap restricting IO home loans to 30 per cent of bank’s new mortgages and at the same time, imposed a 10 per cent annual growth cap on lending to property investors. These restrictions mostly applied to the big banks, as APRA felt they were over-exposed to risk if the property market should suffer a down-turn. This has caused a general tightening of lending criteria for property investors across the board.

In December last year, APRA lifted their restrictions. However, the tighter lending criteria for property investors and IO loans are still in place with the big banks, which could make it difficult for some to refinance or extend their IO period on their loan.

What if your IO period is about to end?

As your mortgage broker, I can help you access a wider variety of lenders, which could give you more options if you are looking to refinance your IO loan this year. We have access to Australia’s leading lenders, including the usual big banks and credit unions, as well as smaller, private lenders you can only access through a broker. Not all mortgage brokers can offer you such a comprehensive variety of loan options, so you can be sure that we will be able to access loan products that suit your needs and give you value for money.

Refinancing could potentially be of benefit to you in a variety of different ways in your personal situation, so please talk with us about your needs and goals. Your consultation is complimentary, so please just give us a call at Element Finance if you’d like to talk about your options.

Did your Christmas spending get out of hand this year? You are not alone! According to a recent news report, our 2018 Christmas spending binge is expected to leave us with a $29.7 billion credit card debt – that’s equivalent to $1,863 per credit card!

The good news is that mortgage and finance brokers don’t just organise home loans – we’re also fully qualified credit advisors. If you need help to get your debts under control, here’s some info that may help.

What is debt consolidation?

Pay day loans, credit cards, store cards and credit facilities like after-pay accounts often carry high interest rates that can eat up your income and make it difficult to pay off the debt.

Debt consolidation is a way of potentially reducing the amount of interest you pay, making your debts more manageable. Put very simply, the idea is that you take out a low-interest loan and use it to pay off all your high-interest debts, rolling everything into one loan.

What are the options?

There are a couple of ways to consolidate debt. You can:

Refinance your home loan

Refinancing your home loan could help you to access the equity in your home to pay off your debts. Basically, you take out a new home loan that is larger and you keep some of the money to pay off your debts.

Take out a personal loan

This involves using the funds from the personal loan to pay off all your other debts. This is a good option if you want to pay off your debts in a shorter time frame (which could potentially save you much more interest than refinancing your home loan).

What are the benefits of debt consolidation?

It makes debts easier to manage

Instead of having to get keep on track with multiple repayments to multiple parties, debt consolidation means you’ll only have to make one convenient repayment.

Potentially save money on interest

Different types of debt come with different interest rates. For example, credit cards usually have sky-high interest rates, as they are a form of unsecured debt. Home loans and personal loans, on the other hand, usually come with lower interest rates. That potentially means less of your money will be gobbled up by interest payments.

Repayment flexibility

Debt consolidation gives you the option to spread your loan repayments out over time, which could make personal budgeting and repaying your debt easier. You may even be able to get a loan that allows you to make extra repayments and pay off your debt sooner.

To consolidate or not to consolidate?

Using your home loan for debt consolidation purposes is not necessarily right for everyone – it all comes down to your financial situation and goals. Some people, for example, may end up paying more interest on their debt over the life of the loan (25 to 30 years), even though the home loan interest rate is lower than a credit card.

What’s more, by turning your unsecured debt into secured debt (i.e. your home loan), you could lose your home if you default on the repayments. For these reasons, it’s important to speak to a professional credit advisor before proceeding.

Are there other options?

Absolutely! If debt consolidation isn’t right for you, we may be able to suggest other ways to manage your debt – like creating a budget and repayment plan, for example.

If you’ve blown the budget this Christmas, it’s important not to panic. There are many ways to regain control of your finances, so get in touch. If you think your debt levels may affect your capacity to make your home loan repayments – don’t wait! It’s important to get things under control before you miss any repayments. Please call us at Element Finance today.

We hope you enjoyed some quality time with family and friends over the Christmas and New Year break.

Welcome to our first newsletter for 2019. As many people are still on their summer holidays, there’s not much happening in our property markets this month. Few auctions have been listed around the country and most property movements are occurring through private sales.

Property market activity

Declines in property listings are quite typical in summer, however the drop in national property listings in December 2018 was higher than expected at 9.2%. In Sydney property listings declined by a huge 17.7%, Melbourne 17.2% and Canberra 15.5%. Hobart experienced a decline in property listings of 5.8%, Adelaide 4.1%, Darwin 2.9% and Perth 9%.

Home value movements

In 2018, there was a general softening in property values, for both units and houses across the country. Sydney experienced a year on year decline of 8.88%. Melbourne experienced a year on year drop in values of 7.04%. Perth’s home value decline for the year was more moderate at 4.73%. Darwin experienced a year on year decline of 1.54% with most of this fall occurring in December when prices dropped 1.84%.

Other markets experienced year on year growth. Canberra’s yearly home values were up by 3.27%. Brisbane/Gold Coast’s prices were up 0.02% year on year, while Adelaide’s yearly growth was 1.33%. The outstanding performer was Hobart, with an annual home value increase of 8.66%.

Interest rates and lending news

Interest rates have remained stable during the holiday period and we can expect the RBA to keep the official cash rate at 1.5% for some time. The next RBA board meeting will happen on February 5. Some market analysts predict an improvement in economic conditions which may prompt an RBA cash rate rise later this year, whilst others are predicting a cash rate cut. It’s a game of wait and see!

From January 1 the Australian Prudential Regulatory Authority (APRA) removed its 30% limit on interest-only residential property lending. This may prove to be a big bonus for property investors, as it will likely prompt an improvement in lending conditions for them across the board.

What are your plans for 2019?

Did you overspend during Christmas? If you are experiencing a Christmas debt hangover, read our article about how we can help if you’re struggling to organise your finances. We’ve also provided some guidance for those needing to refinance an interest-only loan and ideas for achieving your property goals in 2019. Remember, we’re always happy to chat about your needs and goals so please don’t hesitate to give us a call.

Sincerely,
Mike & the Element Finance Team

It’s been nearly eight years since the Reserve Bank of Australia (RBA) last raised the country’s official cash rate. Interest rates have been at historical lows for quite some time and as a homeowner, you may never have experienced an “official” rise in interest rates.

At present, interest rates remain low and we expect them to stay that way for a while. However, forecasters predict Australia’s economy will continue to strengthen over the next 12 months and as it does, an RBA cash rate rise becomes more likely.

So, how does the cash rate affect interest rates and ultimately, your home loan repayments?

Understanding the RBA cash rate

The RBA cash rate sets the prime interest rate on overnight loans in the money market. In simple terms, it’s the interest rate that every bank must pay on the money it borrows. The official cash rate is currently at 1.5%.

The RBA may decide to change the official cash rate for a variety of reasons. These include:

• stimulating the economy,
• managing inflation,
• controlling fluctuations in the Australian dollar,
• to encourage or discourage consumer borrowing and spending. (For example, a rate rise often stimulates the Australian dollar, which can negatively affect export businesses and our tourism industry).

How would a rate change affect your home loan?

When the RBA makes a change to the cash rate, lender’s interest rates will usually move in line with the change. In recent times, lenders have also been making minor ‘out-of-cycle’ interest rate changes (outside the RBA’s rate movements) but historically, major home loan interest rate changes have been determined by RBA decisions.

Rate changes usually occur in fractions of a percentage point, but this can still have a big impact on the size of your monthly home loan repayments.

So, how do you prepare for a home loan interest rate rise? Here’s a few suggestions that could help to make sure you’re not caught on a financial back foot.

Consider switching to a fixed interest rate

With a fixed rate home loan, your interest rate will be locked in for a pre-determined period. You won’t have to worry about fluctuations in the cash rate or interest rates. Plus, you’ll know exactly how much your repayments will be during the fixed period.

Another option is to hedge your bets and fix part of your mortgage, while leaving the rest variable. This is called a split loan. These options could help to protect you from interest rate rises in the near future, however you will still need to plan and budget for a rise in repayments once the fixed period has ended.

Build a buffer into your home loan

A good idea is to make extra repayments while interest rates are still low, so you can build in a buffer by getting ahead on your repayments. You could also channel any spare money into a redraw facility or offset account. These loan features reduce the interest you’ll have to pay over the life of the loan.

Shop around for lower interest rates now

If your current home loan isn’t competitive, you’ll be left even more out of pocket if rates rise. It may pay to shop around now for a more competitive home loan that better suits your financial circumstances and goals.

Pay down your debts and consider consolidating

It’s a good idea to pay down any variable debt, particularly credit cards, while interest rates are low. Concentrate on paying off debts with the highest interest rates first, then knock over the others.

If you have multiple debts of different types, you may like to consider consolidating everything into your home loan or a personal loan. Consolidating is not necessarily right for everyone, so it’s very important to speak to your broker before proceeding.

As a homeowner, it’s important to be prepared when interest rates head north. If you’d like to know more, please get in touch with Element Finance today. We are always ready and willing to answer any questions you may have, help you save money on interest and find ways to prepare for any future rate rises.

Getting ready to buy your first home? As your mortgage broker, we’re here to help you every step of the way. It’s an exciting time and it’s easy to make mistakes. Here are 5 common mistakes that you should try to avoid!

1. Relying on advice from family and friends

Family and friends are people you can trust, so it’s understandable that you listen to their advice. However, while they may have the best of intentions, it’s always best to seek independent professional advice when buying a property. Things may have changed a lot since your mum and dad purchased their first home, and your circumstances are likely to be different. They may also have made mistakes without even realising it.

As a first-time buyer, you’ll want a team of experienced professionals in your corner. That means a reputable mortgage broker (like me), a solicitor or conveyancer, plus a building and pest inspector. A good accountant can also be invaluable, particularly if you are self-employed. If you need recommendations, please let me know and I’ll give you a referral.

2. Blowing the budget

The last thing you want is home loan repayments you can’t really afford – you might end up eating baked beans for years to come! That’s why it’s so important to have a solid grasp of your financial situation and budget.

As your mortgage broker, I can help you understand your borrowing power and create a home-buying budget. That will help save time when you start looking for your dream home. I’ll also organise pre-approval on your home loan, so that your finance is ready to go.

3. Underestimating the costs involved

Many first home buyers don’t understand the full costs involved in buying a property. There’s a lot to consider – your deposit, stamp duty, lender fees and charges, solicitors fees, and so on.

Then there are the ongoing costs associated with home ownership. These may include rates, insurance, body corporate fees, maintenance and repairs. Remember, if you need help crunching the numbers, I can assist. I’ll also let you know about any grants or concessions you may be entitled to (like the First Home Owner Grant), which could help get you into your own home sooner.

4. Getting the wrong mortgage

As a first-time buyer, getting your head around all the different home loan products out there can be overwhelming. Offset accounts and redraw facilities. Fixed versus variable rates. Split home loans and lines of credit. It’s enough to give you a head spin! It’s important to choose the mortgage that is most suitable for your needs and saves you as much money as possible.

My role as your mortgage broker is to: 1) understand where you’re at financially and where you want to be; 2) compare the home loan market; 3) find you the right home loan, based on your specific financial circumstances; and 4) walk you through the home loan application process.

5. Being blindsided by emotion

When you’re new to the property hunt, it can be easy to let emotions cloud your judgement. However, try not to let your daydreams get in the way of the facts. Do your research to ensure you’re buying the right property for the right price. If you need help, we can give you some guidance about how to research a property properly to make an informed decision.

With careful planning and support, buying your first home will be a positive experience. As your mortgage broker, I’ll help you every step of the way and can refer you to other professionals whom you can rely on. Please call us at Element Finance Fremantle – let’s make your home ownership dream a reality!