Robyn Roberts

Interest Rate Comparison

Fixed rates can provide repayment certainty when you suspect that variable rates will continue to climb. However, you can see from the chart below that the fixed rates have been climbing steadily since July.

 
 
 
10 year history of RBA rate movements.

10 year history of average basic variable interest rate.

 

First Homebuyers' Borrowing Power

The gradual winding back of the First Home Owner Boost will adversely affect many first home buyers and may lock them out of the property market.  Why?  Lets look at a couple who have $14,500 in savings.  The scalled down Boost is now $10,500 until 31st December.  Combining savings plus the Boost, we have an amount of $25,000 which means that they could borrow on a house worth $250,000 due to the banks requiring a 10% deposit (standard policy).    However, if they miss out on the scaled back Boost, then they could only borrow on a house worth $215,000 because their deposit would only be $21,500.

I find this fascinating as some first home buyers are waiting for the Boost to end hoping house prices will drop by then but they aren't aware of the lending requirements as well as the potential of housing stock decreasing.  So the best time to buy is still now, regardless of the competition.

Fixed Rates Can Easily Cost Too Much

Home loan interest rates were increased by major lenders last week in line with the Reserve Bank raising the cash rate by the Reserve Bank to 3.25%.  This increase has led to a flurry of enquiry by my clients wondering if it’s time to consider fixing all or part of their mortgages.  In my September Ezine I showed how it is the time and speed factor of rate increases which truly impact on a decision to fix your home loan. 

Yesterday’s Sun Herald Article by Matthew Bell, Economist gave a great example.  The average discounted variable rate currently is about 5.4%. The average 3 year fixed rate is currently at between 7.09 and 7.29%.

“The fundamental reason for switching to a fixed rate is to protect against rising variable rates and reduce total repayments during the fixed period. For borrowers to switch to a fixed rate now, the implicit assumption would be that the current variable rate 5.4% will eventually exceed the current fixed rate of 7.2%.

Although payments would be higher until that happens, the expectation is that the money saved during the latter part of the fixed period (when the variable payments would exceed the fixed payments) more than makes up for the earlier overpayments.

So for a $400K mortgage assume that the option is to lock in your fixed rate of 7.2% for three years or to remain on the variable rate over the same period.  How fast does the variable rate have to get to 7.2% and how long does it have to exceed it, for borrowers to be better of fixing?

Assume the mortgage rates rise at the same rate as the RBA’s cash rate. Let’s also assume that the cash rate rises .25% ever three months for the first 18 months and .5% every three months for the final 18 months.  Under these assumptions the variable rate will reach the fixed rate of 7.2% about halfway through the 3 year period and will be at 9.65% by the end of it.

Under that scenario both the variable and fixed rate options will mean that at the end of 3 years, we will have paid off nearly exactly the same amount of principal and interest.  If rates rise quicker and go higher than our original assumption – fixed was the right option.

Given that in the past 13 years the standard variable mortgage rate has exceeded 9% only once and we’re still only in the early stages of economic recovery, chances are variable rates won’t exceed current fixed rates by enough over a three year period to make fixing worthwhile. “

 

Is Now The Time To Invest?

Yesterday I presented at my Business Networking Group (BNI) who held a visitor's information morning.  My topic related to changes in lending over the past 12 months.  Part of my presentation included why I think that 2010 will see Investors favouring the property market.  It included:

• Rental Yields high - some areas of Sydney have yields of 6 - 7%
• Supply and Demand - tenants outnumber the properties available
• First Home Buyers - FHB activity that peaked in June 09 at around 27% of the market is dropping back to the historical average of 12 - 14%
• Interest rates are low (first rate increase occurred this week in 18 months)
• Growth follows Yield - historically where rental yields are high you will see an increase in capital growth.

A Simple Way of Reducing The Interest You Pay On Your Home Loan

Weekly or fortnightly home loan repayments are calculated based on the following formula:

Monthly repayment times 12 divided by 52 (or 26 for fortnightly).

Accelerated weekly or fortnightly home loan repayments are calculated as follows:

Monthly loan repayment divided by 4 (or 2 for fortnightly) 

Making accelerated repayments is a simple way of reducing the interest you pay on your home loan. The accelerated component comes about by the repayment being made every week or fortnight as this adds the equivalent of an additional 4 repayments per year on a weekly basis or 2 repayments on a fortnightly basis.

Most lenders will calculate the weekly and fornightly repayments based on the monthly repayment divided by 2 or 4.  This is to ensure that the minimum monthly repayment is met.

Building In Australia, 2009 - 2024

Below is an extract of a report provided by BIS Shrapnel on their outlook for 2009/10 which I found encouraging.  BIS Shrapnel is a provider of industry research, analysis and forecasting services.

Australia's residential building industry to surge in 2009/10

Leading economic forecaster and industry analyst, BIS Shrapnel, is forecasting a sharp increase of 21 per cent in housing starts, to 160,000, in 2009/10. The company says this will be the beginning of a four-year upturn for the sector.  According to BIS Shrapnel's Building in Australia, 2009 - 2024 report, the strength of the upturn in construction will be dependent on the continuation of very low interest rates.

BIS Shrapnel says the housing construction upturn will have a wide range of effects across the states.New South Wales is best placed to benefit from low interest rates, given the undersupply of housing is far greater in that state.

In other states, the housing upturn will be considerable, but offset by a sharp decline in commercial building.

The New South Wales building sector is likely to gradually emerge as a relatively attractive location for construction workers for the first time since the Sydney Olympics boom
of 2000.

New South Wales
New South Wales is expected to emerge more rapidly into recovery during 2010 than any other state.  Housing starts fell to 23,000 in 2008/09, the lowest in more than 50 years.
The rebound in Sydney house building is critical to the national economic recovery.

Temporary halving of stamp duty on new housing will make an important contribution, but this policy needs to be extended for six months (to the end of June 2010) for it to have sufficient effect on demand. This move would help address the drop in first-home buyer demand during the first half of 2010.

Don't Believe Anyone That Tells You "All Banks Are The Same"

I have never seen such an incredible disparity in rates, fees and credit policies of Lenders. To illustrate this point I have created a small table below that shows the fixed interest rate ranges between the prime lenders on our panel.

When people believe their options are limited, they don't shop around.  As you can clearly see from this table, not shopping around can cost you dearly.  This is the service a good broking firm provides.

Groundwork Laid For Rate Rise

An article in the Weekend Australian Financial Review   (Chanticleer - Aug 8) made for interesting reading. It made reference to the recent RBA statement on monetary policy.   Basically, because Australia has been insulated from the worst of the world's ecomic downtown, our recovery will be speedier than those of other major developed countries.  Glenn Stevens, RBA Governor, signalled  a  cautious, but growing,  confidence over the past few months so that athe RBA's forecasts have now been formally revised upwards.  In other words, things didn't get as bad as expected.  The RBA factored in a fall of 1% in the economy  for this year- now this has been revised to .5%,  Pedicted growth for 2010 is up from 2% to 2.25%. 

How does this effect interest rates?  The RBA doesn't think it is "particularly realistic" in the current environment "to assume that the cash rate remains at the historically low level of 3% out to the end of 2011.  The futures market is anticipating an interest rate rise as early as November and the Banks have increased their fixed rates quite strongly in quick succession. 

My recommendation is to take advantage of the all time low variable rates we have now and make as much of a dent in your home loan as possible. Pros and cons of variable rates

Still Time To Take Advantage of First Home Buyer Benefit

September 30th will see the First Home Owner Grant Boost reduce from $14,000 to $10,500 up until 31st December 2009.  For those of you still keen to take advantage of this windfall, you need to have between 3 - 5% (of the purchase price) as genuine savings held in an account or saved within a period of 3 months.  Even if you do not make the 30th September deadline, there is certainly time to take advantage of the reduced Boost through to the end of December.  In my experience,  a goal without a deadline takes longer to achieve then a goal within a set timeframe.   Begin with the end in mind. (Steven Covey).

Sleeping Beauty!

I am so excited as my son Luke and wife Alyson have a new addition to the family with the birth of Mia.  Mia was born on 13th July and weighed just on 3.4kgs   (I am still on the old pounds weight and had to convert it).  Mia will be a little princess in a family of boy cousins.