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Which home loan is right for you? How can you tell when there’s so many different lenders, loan types and features to choose from? How can you compare loans properly when you’re not sure what you should be comparing?

Finding the right home loan for your situation is a process that can be confusing, particularly for first-timers. In this article, we give you a basic guide for making home loan comparisons and tell you more about the features you may need with your home loan.

Interest rates and comparison rates

Interest rates are one of the factors which determine the cost of your mortgage and how much your repayments will be. Even a small difference in interest rates can make a significant impact on the amount of interest you’ll have to pay over the term of the loan. However, the loan with the lowest interest rate may not necessarily be the cheapest, as there could be additional fees to factor in. This is where the comparison rate comes in.

The comparison rate is an indication of the true cost of a loan, once the interest rate and fees are included. It’s usually expressed as a percentage, which makes it easier for you to compare the real cost of different loan products. When choosing a home loan, it’s important to look at both the comparison rate and the features that come with the loan.

Loan Types

Principal and Interest

This type of home loan requires you to make repayments that cover both the principal (or the amount you borrowed) and the interest at the same time. People buying their own home usually use a principal and interest loan, as you pay down your loan with every repayment until you eventually own the property.

Interest-only

An interest-only loan allows you to only pay the interest you owe on the loan for a fixed period – usually from one-to five years – so the monthly repayment is lower than it would be under a principal and interest loan. At the end of the fixed period, the loan usually reverts to a principal and interest loan, but it is possible to refinance to another interest-only period. People buying an investment property often start off with an interest-only loan because the interest (and therefore the entire repayment) is tax deductible for themHowever, they are not considered ideal if you are buying your own home to live in as you will likely end up paying more in interest over the term of the loan and your repayments don’t pay off the original loan amount.

Variable Home Loan

With a variable rate home loan, the amount of interest you pay may go up or down in response to changes in interest rates. This can be a good thing if interest rates go down, as the interest you pay will be less and your repayments will decrease. Another positive is that you can often make extra repayments on a variable home loan, which may help you to pay off your home loan sooner and save some interest over the term of the loan.

Fixed Home Loan

A fixed rate home loan lets you lock in your interest rate for a period (usually 1 to 5 years). The benefit is that you know exactly how much your repayments will be during that time, which can be beneficial if you’re on a tight budget or a fixed income. You’ll also escape any interest rate rises that may happen during the fixed period.

However, if interest rates fall, you won’t be cracking open the bubbly because your home loan interest rate will stay the same and so will your repayments. There may also be restrictions on making additional repayments with a fixed rate home loan.

Split Home Loan

One option that appeals to some homeowners is to fix the interest rate on a portion of their loan and keep the rest variable. This offers the certainty of knowing what your repayments will be on the fixed part of the loan, while you can make extra repayments and enjoy any interest rate drops on the variable part of the loan. It’s a way to get the best of both worlds!

Loan Features

Offset Account

An offset account is a transaction account that’s attached to your home loan. It can save you money on the interest on your home loan and help you pay off your loan sooner because the money in your transaction account is offset daily against your loan balance, and you only pay interest on the difference. For example, if you owe $300,000 on your home loan and there’s $50,000 in your offset account, you’ll only pay interest on $250,000.

Redraw Facility

A redraw facility allows you to make extra repayments on your home loan and then take out the extra repayments you’ve made later if you need to use the money for a different purpose.

What’s right for you?

The right home loan choice is different for everyone. It all depends on your personal financial circumstances and goals. We’re here to help you decide what is right for you and will make recommendations based on what you tell us about your situation and what you want to achieve. Then we’ll compare the choices from the different lenders and offer you a selection of cost-effective options.

Don’t wait to find out what’s right for you. Call us today for a chat about your plans.

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.

A change in the official cash rate will affect the interest rate you pay on your home loan and can drastically affect your mortgage repayments if you’re on a variable rate home loan.

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.

Juggling several debts can be stressful. If you’re struggling to keep on top of your debts or you simply want to save money on interest, we can help you solve the problem and get some peace of mind. Here are 3 ways your mortgage and finance broker can help you deal with your debts so you remain in control.

1) We can help you consolidate your debt

With debt consolidation, the idea is you take out a new low-interest loan and use it to pay off all your high-interest debts. We usually recommend one of two debt consolidation options.

Option 1: Refinance your home loan

In this scenario, you would refinance your mortgage and access some of your equity to pay off your debts.

Pros

  • Home loan interest rates are lower than those for most other types of credit.
  • One convenient repayment that’s easier to manage.
  • You can spread your repayments out over time to make them more affordable.
  • You may be able to make extra repayments and pay off your debt quicker, thereby saving money on interest.

Cons

  • Home loan terms can be 25 or 30 years. If you’re not careful, you may end up paying much more interest on your debts, even though the home loan interest rate is lower. Ask us to crunch the numbers for you.
  • If you use the equity in your home to pay off your debts, you will have less money when you sell your home.
  • If you turn all your unsecured debts (like credit cards) into secured debt (like your home loan), in a worst case scenario, you could lose your home if you get into debt again and can’t meet the repayments.

Option 2: Take out a personal loan

You could consolidate by taking out a personal loan with a competitive interest rate and using it to pay off all your other debts.

Pros

  • Interest rates for personal loans are generally lower than those on credit cards.
  • One convenient repayment.
  • Spread the repayments out over time to make them more manageable.
  • At the end of the loan term, all your debt will be paid off.

Cons

  • Personal loans come with higher interest rates than home loans (you may be better off by refinancing your home loan – ask us to crunch the numbers for you).
  • If you are struggling financially, it may be more difficult to secure a competitive interest rate.

2) We can compare interest rates on any kind of loan

We can help you find competitive interest rates on other kinds of loans, besides your home loan. Want us to compare interest rates on your personal loan? Not a problem. How about your car loan? We can access a wide variety of lenders to help with that too.

To help you manage your debts, we may be able to refinance your existing loans to a more competitive interest rate, or a longer loan term that reduces the size of your repayments. Bottom line is you have nothing to lose and everything to gain by checking in with us.

3) We can help you create a budget and savings plan 

Having a solid understanding of your income and expenses will help you remain in control of your finances. We can help you set up a budget to pay off your debts and create a savings plan to reach your goals. We’ll also give you tips, like how eliminating credit cards could save you money, or how budgeting apps work.

The last thing you want is for your debt to spiral out of control. As your mortgage and finance broker, we can explain whether debt consolidation is financially worthwhile, compare the market to find you the most competitive interest rates and help you find ways to budget and save. Please get in touch with us at Element Finance today.

This month, we saw important changes come into effect that could impact your ability to take out a home loan – or make it easier, depending on your credit history. In this article, we explain the new credit reporting changes and how they may affect you.

But first, let’s start with the basics – what is a credit report and why is it important? Remember, if you have any questions, your mortgage and finance broker is a great source of information.

What is a credit report?

Credit providers like banks, utility companies and telecommunications carriers provide details about your credit habits to credit reporting bodies. These agencies use this information to compile your credit report.

Among other details, your credit report contains your credit rating. This is a numerical value between zero and 1200 that represents your creditworthiness and how reliable you are as a borrower. The higher the score, the better.

What is your credit report used for?

When you apply for a home loan or another type of loan like a car loan, the lender will use your credit report to help them decide whether to approve the loan. They’ll consider details like your repayment history when assessing your ability to repay. Only licensed credit providers can access the repayment history information contained in your credit report.

Recent changes

From July 1, Comprehensive Credit Reporting (CCR) became mandatory for the big four banks. In the past, banks may have only shared negative financial information about you with other lenders, but under the new CCR regime, they’ll have to pass on positive information about you as well. Technically CCR has been in place since 2014, but the Australian Government recently made it compulsory for the big four banks to participate in the program to use credit reporting information to assess lending risks.

Here are some examples of the type of information that may now be shared:

Negative financial information:

  • Payment defaults
  • Overdue payments
  • Declined credit applications
  • Bankruptcy situations

How will the changes affect you?

The new credit reporting system will give lenders a more complete picture of your credit position. What that means is that they’ll have access to a more comprehensive set of data when assessing loan applications, so it will be easier for them to assess if you can afford to take on more debt.

If you have a positive financial track record, it’s likely your credit score will improve following the changes. Consequently, it may be easier for you to be approved for a home loan. You may even be able to negotiate a better deal (or have us do it for you).

How to keep your credit report healthy

Here are some tips to keep your credit report in check:

  • Pay your bills and make loan repayments on time
  • Pay your credit card off in full each month
  • Lower your credit card limits
  • Consider consolidating debt (speak to us about this)
  • Limit your credit enquiries, as frequent applications can look bad on your credit report
  • Remove your name from utility bills if you move
  • Be cautious about identity theft.

How to access your credit report

You can access a copy of your credit report for free once a year from credit reporting bodies. The main ones are Equifax, Dun and Bradstreet, Experian and Tasmanian Collection Service. Simply visit the ASIC MoneySmart website to find out more here.

Like to know more?

Your mortgage broker will be happy to explain how the changes to credit reporting may affect your eligibility for a home loan. Remember, for a lot of borrowers, mandatory CCR is likely to be a good thing, as it may improve your chances of being approved for a loan. It’s also expected to increase competition between lenders in future, which is a win for borrowers. Whatever your finance needs, we at Element Finance can assist, so please get in touch today.

Last year, important changes to tax deductions for property investors were announced. For some investors, the changes may have a significant impact on the annual deductions you can claim on your rental properties. As your mortgage broker, we like to keep you up to date. Here’s what you need to know about the changes when doing your tax this year.

Travel expense deduction scrapped

As of July 1, 2017, property investors can no longer claim a tax deduction for travel to maintain, inspect or collect rent for their rental property. Likewise, you can no longer claim travel expenses for preparing the property for new tenants, or for visiting a real estate agent to discuss your property.

Investors who own property interstate will probably be the most affected by this change. If these changes do affect you, perhaps consider employing a property manager to perform some of these tasks for you, as their costs are usually still tax deductible. Talk to your accountant to find out more.

Depreciation deductions tightened

Depreciation is the decline in value of an asset with a limited life expectancy. Depreciating assets include carpets, furniture and appliances like water heaters and cookers (also known as plant and equipment).

Residential property investors can now only claim depreciation deductions for plant and equipment expenses if they purchased them. Previously, investors could claim plant and equipment depreciation on assets that were installed by a previous owner.

This “integrity measure”, introduced in last year’s Budget, was intended to prevent multiple property owners from depreciating the same assets, exceeding their actual value. The changes apply to second-hand plant and equipment acquired after last year’s Budget night (May 9, 2017). You also can’t claim a deduction for plant and equipment installed on or after July 1, 2017 if you have ever used it for private purposes.

If you owned or entered into a contract to buy your investment property before May 9, 2017, you will not be affected by these changes. You can still claim deductions for depreciating plant and equipment assets that were in the rental property before that date.

Further reading

You can find more information about the expenses you can claim for residential rental properties on the ATO website, available here. You’ll find details about expenses that are deductible immediately, such as management, maintenance and interest; and expenses that are deductible over several years, such as capital works and borrowing costs.

Your tax time checklist

Here are some tips to prepare for tax time:

  • Update your Depreciation Schedule. You can find a Guide to depreciating assets 2018 here. If you’re confused, seek advice from your accountant. If it’s a new property investment, you may need to have a quantity surveyor prepare a Depreciation Schedule report.
  • Understand what you can claim (refer to the ATO website for clarification).
  • Get your documents together and organise your receipts.
  • Tally up your deductions. It’s a good idea to create a spreadsheet with all your income and expenses listed. That way, you can save on accounting fees (rather than giving them a shoe box of receipts to go through).
  • Book in with your accountant (they are flat out at tax time, so the sooner the better).

As your mortgage and finance broker, we’re happy to work with your accountant or financial planner on your investment property finance. And if you need a recommendation for a good accountant, we can help with that too. Good luck with your tax, and if we can assist in any way, please don’t hesitate to get in touch with us at Element Finance!


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