Rift between Mortgage and Interest Rates.
The difference between mortgage rates and official interest rates is at its greatest in 18 years after an unexpected move by many of the major banks. With many banks raising mortgage rates this month, the average standard variable mortgage rate is at 7.4 per cent which is 3.15 percentage points higher than the current RBA interest rate.
Analysts warn that banks are likely to continue increasing mortgage rates in order to boost profitability despite the fact that funding pressures have eased in recent weeks. With the current rift between mortgage and cash rates growing, it is extremely important for those intent on buying a home, choose a good loan.
Choosing a home loan that fits your financial situation will save you money, and make the process of paying it off far less stressful. When looking for a home loan, many Australians are turning to mortgage brokers for aid and advice.
A mortgage broker uses his expertise to quickly and efficiently find you a great loan. However, with the range of brokers out there it is important to choose carefully.
Tips to Choosing a Mortgage Broker
• Find out if the mortgage broker is a member of a reputable industry association. Such associations generally have a strictly enforced set of industry standards. Consumers should be aware that brokers that are registered with these organisations have a far higher level of accountability then their unregistered colleagues.
• Find out how many lenders the mortgage broker deals with. If a broker deals with a large number of banks and financial institutions it means he is able to compare a large variety of loans and products in order to find the best possible loan for you.
• Obtain all relevant information about the broker’s fee’s. It is always important to make sure that you are not being charged for any services that you do not require. Make sure that you have an upfront agreement with the broker and that an outline of all fees is provided in writing.
• Be sure to ask any questions you may have. Mortgage brokers often have a set process through which they find the best possible mortgage solutions for you. A broker should be more than happy to explain these steps to you and answer all questions to your satisfaction.
• Find out the full cost of the loan, not just the upfront cost. It is important to understand the ongoing costs of a loan as this is what you will be dealing with in the years to come. Here you may want to compare the solutions that various brokers are offering you and decide which loan is going to better suit you.
Home Loan comparison
Whilst the housing sector was in decline at the end of 2011, further rate cuts this year may prove extremely helpful.
Many economists and commentators believe that by dropping the interest rates further, the Reserve Bank of Australia (RBA) will be giving the housing sector the jump start it needs.
Shadow treasurer Joe Hockey said this week that the RBA should do most of the heavy lifting in order to boost the local economy during this time of global economic uncertainty. “I think the Reserve Bank has the capacity to do much of the initial heavy lifting and to stimulate economic growth by reducing interest rates,” Mr Hockey said.
For Australians looking to buy a property in the coming months, it is of paramount importance that they understand the various home loan options and features available to them.
Standard Variable Rate Home Loans
This type of home loan allows you some flexibility in your repayments as the loan rate is connected to the interest rate set by the RBA. If interest rates are cut you pay less on your home loan. However your repayments will also rise when the official interest rate rises.
Fixed Rate Home Loans
Fixed interest rates give you fixed loan repayments. This loan gives you the security of a constant interest rate giving you the ability to budget your future spending. However, this type of loan is very rigid, allowing only limited additional payments and applying some penalties for early payouts of the loan.
Split Rate Home Loans
This type of home loan gives you the best of both worlds where one portion of the loan is fixed and the other is variable. This loan gives you the freedom to take advantage of the various features that the different home loans have to offer. This home loan is also very rigid and allows limited additional payments.
There are a number of features that if added to your home loan may prove to be of great value to you.
An offset facility can help you pay off your loan faster. An offset account functions like a regular savings account, where the balance of the account is offset against that owing on your mortgage. This option can help you pay off your loan sooner as well as to build up equity in your home.
A redraw facility feature in your home loan allows you to make additional repayments into your loan account and if need be access these funds in the future. This is one of the most widely used loan features on the market and one that is offered with most home loan products.
It is important to consider all your options when choosing your home loan as making the ‘right decision’ will make the process of repaying the loan less stressful for you and your loved ones.
Rise in home loans signal recovery
The housing market appears to be recovering with a 4.4 per cent increase in home loans in May, following the sluggish movement earlier in the year as a result of the rate increase in November.
The number of approved home loans in May went up 4.4 per cent to a seasonally adjusted 49,437, according to official data. Economists had predicted a 4.5 per cent increase in housing finance commitments for the month.
The total housing finance by value increased by 2.9 per cent in May, which would amount to a seasonally adjusted $20.497 billion.
Many hope that the figure in May show some positive improvement after a depressing decline in the early months of 2011, with the numbers suggesting that investors were returning to the market after months of inactivity earlier in the year.
Bank lending was at its highest in about two years, implying that recovery from the global financial crisis is imminent.
Recovery was also seen at refinancing with competition between banks making it attractive for mortgage holders to refinance.
The second consecutive month showing improvement lends support to the belief that the economy is on its way to recovery, following the slowdown in the first quarter.
The consensus view was that the soft patch in economic growth was more fundamental than structural but many now feel that these figures are evidence to the contrary.
The effect of Carbon tax on new homebuyers
There are fears that the housing market will suffer as a result of the introduction of carbon tax as first-home buyers are less likely to think about buying a property.
From July 1 2012 the cost of carbon will increase to $23 per tonne, and continue to rise by 2.5 per cent per year.
This growing cost of living, estimated at 0.7 per cent, is a consequence of the nation’s top 500 polluters passing on to the public their own increasing costs as they are forced to pay for the carbon dioxide they emit.
Taking into consideration the new carbon tax, the cost of an average residential property could increase by about $5,000-$6,000.
This could make it very hard for new homebuyers to get into the market as the new home buying public is already having to increase the energy efficiency of their homes as they are being built.
Many say that carbon tax doesn’t compensate the small businesses in the new housing market for the increased cost in their energy supply, particularly those that are manufacturing and not trade-exposed industries.
This has led to fears that jobs will dwindle, especially in the manufacturing and construction departments of the industry which include many workers overseas on 457 visas.
The longer-term impact on the industry could be the fact that those workers cannot be attracted back into the market place, with the result that the workforce is diminished permanently. Builders are concerned that from this there could arise an under build situation across Australia with a potential lack of new housing to meet the rental needs of the state and an increase to the cost of housing in the future.
It is thought that job losses could begin as early as January when the building companies begin factoring in the coming increases.
The stagnation of rent growth in capital cities
The rental rates in capital cities halted in the June quarter, showing no growth in the latest sign of a flailing property market.
In the June quarter, median capital city rents were flat with only two cities displaying increases in the same period, reiterating the sluggish activity in the property market.
Between January and June 2011, the median rents for capital cities—for residential properties and units—went up by 2.7 per cent to $380 a week. House rents in Sydney rose by 2.2 per cent in the quarter to a median price of $460 per week for a residential property, while in Perth they went up by 2.6 per cent to $400 per week in the same time.
Rents were flat in all other cities in the quarter. Hobart, where the median rent went down by 2.9 per cent, was the exception.
Many investors are aware that rental growth has been relatively subdued since 2008 due to a number of factors including stimulus from low interest rates and the First Home Owner’s Grant Boost which enticed prospective new home owners to buy and eased demand for rental.
2011 saw the real estate sector become sluggish amid softer house prices, with auction clearance rates below their 2010 peak of 80 per cent, and a far slower pace of building.
The nation is still encountering poor housing affordability and a persistent shortage of available houses for potential buyers in capital cities.
Rents for apartments were a little better with a 4.7 per cent increase in Sydney for the quarter, which amounted to a median of $450. In Melbourne, however, it was flat with a median of $350. The rents for apartments in Brisbane rose by 1.4 per cent in the quarter to $365, while those in Perth went up by 1.4 per cent to $375.
Many hope that this halt in rental yield growth is temporary and expect that, with limited new development during 2011 likely to add to the upwards pressure on capital city rental rates, rental growth will revert to around five year average levels, with inner city units and outer more affordable housing stock having the strongest prospects for rental growth.
A small bounce in housing construction is suggested by a 4.4 per cent rise in the number of home loans taken out in May. New home construction, along with loan growth, is commonly thought to signal a strengthening housing market.
