No change in Cash Rates

Following its monthly board meeting, the Reserve Bank of Australia (RBA) announced that it has held the official cash rate at 1.5 per cent. All 31 economists surveyed predicted the RBA’s verdict, citing uncertainty in domestic and foreign markets. Over 90 per cent of brokers surveyed also predicted a rate hold.
Prior to the RBA’s announcement, economist at Corinna Economic Advisory Saul Eslake noted that while economic growth is “above trend”, weaker than expected labour market and inflation indicators would dissuade the central bank from lifting the cash rate.
“[The] RBA has made it increasingly clear that it is in no hurry to start raising rates,” Mr Eslake said.
“Although economic growth is now running ‘above trend’, unemployment and underemployment are still higher than the RBA wants, and inflation is lower than the RBA wants, and it expects progress on both of these fronts to be only ‘gradual’.”
Mr Eslake also claimed that the RBA “seems unconcerned” by out-of-cycle rate increases from lenders, including three of the big four banks.
The US’ new wave of tariffs on Chinese imports, and the effect that rising funding costs may have on Australian mortgage rates, could also have an influence on the RBA’s economic forecasts.
“On an international level, [President Trump’s] trade tariffs on Chinese imports may create a drag on global growth, which may impact on the Australian economy and jobs,” the spokesperson said.
Further, despite also predicting a rate hold, senior economist at AMP Capital Shane Oliver warned: “While economic growth ran above trend over the year to the June quarter and growth should be supported by business investment, infrastructure spending and exports going forward, uncertainty remains around the outlook for consumer spending, house prices are likely to fall further and wages growth and inflation remain low.”
1300HomeLoan managing director John Kolenda also made reference to the continued uncertainty brought about by the financial services royal commission, stating that the RBA should “help navigate” the economy “through these uncertain times”.
He added: “The royal commission is still a factor and we have other elements such as the US-China trade war, downward pressure on the property market and the federal election looming which all influence consumer confidence in a negative way, troubling our economic conditions.
“Lenders have already raised their rates out-of-cycle. If the RBA followed suit that would only be detrimental to consumer confidence in a falling housing market.”

How to escape mortgage stress

Understanding your borrowing capacity

First of all, it’s important to understand how much you can realistically afford to borrow for a home loan. Consider Reviewing your income, expenses, other financial commitments, potential loan details and number of dependents to get an understanding of how much you can afford to borrow.

Remember, what you can save for a deposit will play a huge part in determining the amount you can borrow. For some full -documentation loans, the loan to-value ratio (LVR) is around 80%, which means you need to come up with the remaining 20% in the form of a down payment. Other home loan products allowing greater than 80% LVR tend to come with higher interest rates or fees. On top of this, it’s important to fully understand the costs involved in taking out a mortgage and owning a property. Some major expenses include stamp duty, mortgage insurance (which is generally payable if you need to borrow more than 80% of your property value), establishment fees, ongoing repayments, any loan fees and repairs/maintenance. You can use online calculators to get a feel for how much you can afford to borrow.

Knowing your potential borrowing capacity can help to ensure that you borrow within your means, which means you’ll be in a much better position to service your ongoing mortgage repayments and the other associated expenses.

Factor in 2-3% on top of your current repayments

Once you’ve taken out your home loan, it’s important to draw up a budget and consider a buffer of at least 2-

3% on top of your existing repayments to account for interest rate rises. While the cash rate is at a low of 1.5%, it’s expected to rise as early as next year so it’s important that variable rate mortgage holders incorporate a potential rate rise into their budgeting.

Anticipating interest rate rises and planning ahead may help you avoid mortgage stress as it could help with coping with higher interest rates and the more expensive repayments that come with this.

Re-think your existing debt

Your mortgage is arguably the biggest financial commitment you’ll make in your lifetime and it’s a debt you’ll be managing for up to 30 years. This could mean making some adjustments to your other personal finances to free up your cash flow and to reduce mortgage stress. For instance, if you have multiple credit cards, you may want to consider moving your plastic debt onto a single card via a credit card with a 0% interest balance transfer promotion. If you repay the debt during the interest-free promotional period, you’ll dramatically reduce your interest costs. However, just be mindful of the revert rate that will apply once the promotional period ends.

Consider refinancing your mortgage

If you don’t think you’re getting the best bang for your buck on your mortgage, then think about switching. Refinancing to a lender that offers an interest rate that’s even 0.25% lower than what you’re currently paying could mean thousands of dollars in savings over the life of your mortgage.

However, an interest rate is not everything in a home loan and it’s important to be mindful of the establishment costs and ongoing fees associated with a new home loan.

Ask your bank for assistance

If none of the above options is possible and you’re experiencing mortgage stress, ask your bank for support. You can apply for Hardship Assistance –which may involve a temporary change to your loan obligations to give you a chance to get back on your feet financially. Your bank will assess your circumstances and if it’s appropriate, may be able to help by, for example, providing a temporary reduction or deferral of your repayments.

In Summary

Repaying a mortgage is an enormous financial commitment that can cause some households a world of stress, so to ensure it doesn’t interfere with your livelihood, consider the above tactics to remain in control of your mortgage debt. A little financial discipline can go a long way to ensure that you’re in a sound position to manage your repayments and to eventually achieve full home ownership.

Bessie Hassan/Finder.com.au

 

Investing in Property with a Friend

Have you ever heard the expression, ‘no friends in business’? It’s an oldie but a goodie.

This is the attitude you should bring when considering buying property with a friend.

Many good friendships have gone under the bus, and lots of people have taken a bullet to their credit rating by not giving this decision adequate thought.

So, what are the risks involved with co-ownership, especially when you purchase with a friend?

What if one wants to sell?

One of the biggest problems with co-ownership is when one owner decides they want to sell the property, but the other owners don’t agree.

This often ends up in court, and the process can be costly and upsetting for everyone. And needless to say – the friendship probably won’t survive.

Buying could be harder in the future.

It might seem like the dream scenario to invest now with your best friend.

But if you decide in a few years to purchase a home to live in, the lender will assess your financial commitments based on the whole loan for the first property, not just the portion that you agreed to cover.

This could make it very difficult for you to get another loan.

You could be left holding the baby.

If something happens and your friend is unable to make their repayments, you could be left in the difficult situation of repaying the entire loan by yourself.

Coupled with your other living expenses, you might not be in a position to cover the whole amount yourself.

But there are some ways that you can reduce the risk, if you are keen to purchase property with a friend.

  1. Put a legal will in place. It’s important to make arrangements for what will happen to your assets if you pass away or become incapacitated.
  2. Draw up a co-ownership agreement. If you can think about any issues that might possibly come up in the future, and have an agreement in place to solve them, you’re less likely to wind up in court trying to work things out.
  3. Choose the right structure – tenants in common, or joint tenants. Tenants in common can own a different portion of the property, and they need to specify in their will who will inherit their portion if they die. Joint tenants jointly and equally own the property, and if one person dies, their share automatically goes to the other(s) regardless of the instructions in their will.
  4. Choose the right person. It’s important to discuss your financial goals and values before you enter into this sort of arrangement. You need to feel comfortable knowing that your friend will be financially secure enough to keep up their end of the bargain – otherwise you might be left trying to cover the repayments alone.

It’s important to think about your own relationships as well, if your partner is keen for you to buy a house together next year, you might want to think about how this first investment might impact your borrowing power.

 

Interest rates still on hold at record low of 1.5% as economy looks set to slow

Increases over the last week by the likes of Westpac and Suncorp were a factor in the RBA’s decision to leave official rates on hold for yet another month at 1.5 per cent. It marks the longest ever run of interest rate stability in Australia, with the last movement (a cut) happening back in August 2016.

During its last meeting on 7 August, the RBA board had examined an economy in generally good health, with steady growth in retail sales and employment, housing prices continuing to come off the boil (except in the booming Hobart market) and overall growth expected to sit just above 3 per cent in 2018 and 2019.

Of concern, though, is the ongoing drought gripping NSW and much of Queensland, which is impacting agriculture production and exports.

Inflation — a key driver of interest rate movements remains relatively subdued at 2.1 per cent and is expected to remain subdued for some time to come.

“Strong competitive pressures and low growth in wage costs had been placing downward pressure on retail prices for some time,” the board noted in its minutes.

The decision to keep rates on hold for yet another month had been widely anticipated, particularly since lenders have started hiking rates of their own accord, effectively blocking the RBA from doing so even if it had wanted to.

On Wednesday (29 August), Westpac became the first of the majors to raise rates, increasing all of its standard variable rates by 14 basis points. Suncorp followed suit two days later with a 17 basis point increase on variable home loans, and a 10 basis point rise on small business loans.

“There are plenty of factors keeping interest rates on hold, but top of mind is the fact that mortgage rates are already edging higher as lenders look to balance their profit margins against higher funding costs and a smaller deposit base,” noted Tim Lawless, head of research at property data firm CoreLogic.

“With the first of the big four banks announcing an out-of-cycle rate hike, the prospects for a higher cash rate have likely been pushed back even further; we could even see debate for a lower cash rate becoming more prominent.”

Likewise, it was unanimously expected by all 30 panellists from the finder.com.au RBA survey that official rates would remain on hold.

“The belief that the cash rate won’t budge combined with increased funding pressure from overseas has spurred Westpac, Suncorp and other major banks to hike mortgage rates out of cycle,” the comparison site’s insights manager, Graham Cooke, said.

“We expect this trend to continue, with the remaining of the big four and other lenders likely to follow suit in the coming days.”

 

 

Two Years with no Official Rate Change

The Reserve Bank of Australia has held the cash rate at its historic low of 1.5% for the 24th consecutive month. It is the longest period of interest rate stability on record.

The Bank’s central forecast for the Australian economy also remains unchanged with GDP growth expected to average a little over 3% in 2018 and 2019.

Read more

How do I decide between a fixed or variable interest loan?

Unsure about whether to lock down your interest rate for a period with a fixed rate home loan, or take your chances with a variable rate home loan?

It’s a decision everyone faces – from first-home buyers right through to investors – at various points in a loan’s life.

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RBA keeps rates on hold at historic low of 1.5%

The Reserve Bank has left interest rates unchanged at the historic low of 1.5 % for the 20th consecutive meeting. The current holding pattern is the longest stretch without a move, with the RBA last changing rates with a 25 basis point cut in August 2016.

The decision was of little surprise, with the market pricing no chance of a move. RBA governor Philip Lowe maintained both the domestic and global economies were gaining strength.

Following a spate of stronger-than-expected data, economists have upgraded the consensus GDP growth forecast, to be released to tomorrow, to about 2.8 % year-on-year for the first quarter.

While increased government spending on infrastructure and a stronger contribution from the export sector had helped boost the RBA’s confidence, household spending remained a worry.

“Household income has been growing slowly and debt levels are high,” Dr Lowe said.

“Wages growth remains low. This is likely to continue for a while yet, although the stronger economy should see some lift in wages growth over time.”

The statement was largely unchanged, apart from acknowledging lending conditions were likely to tighten.

Alluding to the impact of the banking royal commission, Dr Lowe noted, “while there may be some further tightening of lending standards, the average mortgage interest rate on outstanding loans is continuing to decline.”

“We think there’s a real risk that tighter credit conditions could crimp GDP growth and contain price pressures,” Mr Dales said.

“That would mean the ‘progress in reducing unemployment and having inflation return to target’ would be even more ‘gradual’ than the RBA expects.”

Indeed.com economist Callum Pickering said raising rates would be particularly risky right now given house prices are falling steadily in both Sydney and Melbourne, geopolitical risks are ever present, and retail sales growth remains disappointing.

“The banking royal commission also raises the prospect of tighter lending conditions and out-of-cycle rate hikes by the major banks,” he said.

“The RBA may not need to tighten because the banks will do so independently.”

Reserve Bank keeps rates on hold for 19th consecutive month

The Reserve Bank has kept interest rates on hold at the historic low of 1.5 per cent for the 19th consecutive meeting.

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Comparing commercial and residential property investment

If you are looking for a sound real estate investment, look beyond the typical two bedroom apartment and consider expanding your portfolio with a commercial property. There are three types of commercial property – office, retail and industrial.

There are some significant differences between investing in commercial and residential real estate, each with a potential positive or negative impact on your investment.

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The banks bare all in internal memos

The ACCC’s interim report into residential mortgage pricing reveals the “lack of transparency” around how the ‘inquiry banks’ – ANZ, CBA, Macquarie, NAB and Westpac— make these decisions.

The regulator found a “lack of vigorous price competition” between the big four banks in particular, with negative public reaction being a major concern.

The ACCC examined thousands of internal documents for this report. This is what they reveal:

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