what-is-a-construction-loan

What is a construction loan?

So, you’ve decided to buy a new home – but the only issue is this home doesn’t exist yet and sadly, you don’t have a magic wand to produce your dream home on the perfect block overnight.

Alternatively, you’ve decided to renovate your current house or make several structural changes to it.

How will you pay for these plans?

This is where a construction loan comes into play.

How does a construction loan work?

A construction loan allows for all of the materials, labour and other expenses involved in building or renovating your house.

They’re often called land and construction loans, particularly if you’re buying the land itself as well as preparing to build a house on this site.

But while they’re similar to your standard home loan, there are some big differences between the two.

Firstly, a construction loan sees the lender paying out instalments of a pre-agreed loan amount to the borrower – rather than an immediate lump sum – in various stages of the property’s build or renovations.

Called ‘progress draws’, ‘progressive drawdowns’ or ‘progress payments’, these instalments are also different from standard home loans in that the borrower need only concentrate on interest-only (IO) payments.

For example, while your total construction loan amounts to $500,000, your first progress draw is $50,000 and as such, you only need to pay the interest on this $50,000, rather than the entire $500,000 loan.

These IO repayments – rather than your usual principal and interest (PI) repayments for a home loan – can therefore save you a bundle of cash.

You will have to think about PI  payments eventually, but more about that later.

When do I pay my progressive loan payments?

These payments are usually based on about five to six construction loan stages and therefore need to be paid once these stages are done and dusted.

They include:

1. Foundation

  • Levelling and laying the concrete slab of the home and connecting basic plumbing and drainage.
  • This stage will usually require about 15-20% of your total loan funds.

2. Framework

  • This construction detail will give your new house its basic skeleton including insulation and roofing.
  • Expect to pay around 20% of your funds for this stage.

3. Lock up

  • As the name suggests, your home will enjoy full security after this stage with lockable doors and windows.
  • How much should you pay for this stage? About 20%, give or take.

4. Second fix or fit-out

  • Think plastering and sealing and the installation of internal fittings and fixtures such as lights, benches and cupboards.
  • About 30% of your funds should cover you for this stage.

4. Completion and clean up

  • This is the light at the end of your construction tunnel as builders install final plumbing and electricity points and also clean up the entire construction site.
  • Prepare to hand out about 10% of your funds for this final stage.
what-is-a-construction-loan
Progressive loan payments are usually based on about five to six construction stages

What should I consider as construction progresses?

The construction of your dream home is progressing just as it should with even the weather staying kind and sunny.

But are you, your lender and your tradies also enjoying a kind and sunny relationship?

You definitely will be if, on the completion of each of the above stages, you swiftly submit all your tradespeople’s claims, invoices and similar paperwork to your lender.

Once the lender has checked and approved this paperwork, they will then advance you the agreed cash you need to pay to your tradespeople, just as you agreed to do in the builder’s contract.

The moral to the story is: ensure you’re ahead of the game – or at least keeping a very close eye on things – at both your construction site and with your lender.

What if things go pear-shaped?

It’s common for ups and downs to appear in the building journey, whether it’s a tradie not showing up or an unexpected cost somewhere, somehow.

If it’s a minor change, aim to pay for the cost yourself to save making changes to your loan.

But if it’s major – such as adding a new bathroom or similar – talk to your lender ASAP.

Also remember that even if your construction progresses beautifully,  your lender may send a valuer to the building site throughout the journey to ensure everything is A-OK.

How can I get a construction loan?

OK, you’ve decided a construction loan is the way to go for you.

What’s next?

Well, think of the lender documents and details you needed for your standard home loan and then up the game even more because guess what?

Construction home lenders are even more conservative than standard lenders – and also more rare.

Also, how much you can borrow will depend on a completed property appraisal, including the market price of the potential home’s site.

But never fear – registered builders able to provide you with most of the following details:

  • Council approved plans and permits
  • Progressive payment schedule
  • Industry-standard builder contract (usually fixed price)
  • Your builder’s registered licence
  • Your builder’s bank account details
  • Construction site and workers’ insurance policies

You’ll also need all the documentation from your standard home loan application for a construction loan including:

  • Credit history
  • Proof of income, debt and savings
  • Proof of deposit
  • Employment history background

These points are particularly important as the lender needs to rest assured you can repay the loan even when you move to PI payments.

Pros and cons of a construction loan

After all your hard work so far, we don’t wish to see you head downhill but we do want to let you know the ins and outs of a construction loan.

Benefits

  • Your initial IO loan repayments make for big savings overall
  • First-home buyers building a brand new home may be eligible for the expanded federal New Home Guarantee (NHG), with a further 10,000 places recently announced for the upcoming financial year
  • You can build your house exactly as you want it to be

Disadvantages

  • A construction loan is specialised and owner-builder ones (see below) even more so, so not every lender will offer them
  • The risk of such potential properties also means a generally higher interest rate is charged compared to your standard loan

Notable news

Are you lucky enough to be a licenced builder – or know of one amongst your friends and family members – and can construct your own home?

If so, you can apply for an owner-builder construction loan.

They’re not easy to find and lenders are highly conservative about splashing cash on them including only offering higher than usual interest rates.

But it’s worth a shot.

Just remember your lender will need to see the following documentation as well as your usual loan documentation:

  • Quantity surveyor report featuring expected costs and soil test details
  • Construction costs
  • Timing schedule
  • Quotations, invoices and estimates

What happens after construction is completed?  

The main difference in your construction loan now – besides the joys of moving into your brand new house! – is that you’ll start to pay a full PI loan when your lender releases your final splash of cash.

Your lender will also most likely request one last inspection before confirming the property is completed to the agreed specifications.

You may then choose to change your loan to a standard one at this point or refinance altogether.

We’re here to help

 There’s no doubt construction loans make for an exciting period ahead.

Yet whether you’re brand new to the buying circuit or a savvy investor turning to a renovation or an adventurous construction, know that we’re on your side with a wealth of advice and assistance for you.

Our team of experts can find you the best possible deals – both standard and for a  construction loan – plus we have more than 40 of Australia’s biggest banks and specialist lenders for you to choose from.

So, come to Lending Loop for top tips on finding a great lender for you!

How to get home loan ready

No matter how many homes you’ve purchased or what type of loan you’d prefer, ensuring you get home loan ready to approach a lender for loan approval is crucial – and the earlier on in the buying game, the better.

Here are our top points to consider.

Think like a lender
Lenders are conservative about who they hand money to and rightly so when you consider they’re lending you masses of cash.

So while you might be very excited about buying your first home , remember that every lender – particularly those lending to a first-home buyer – want to ensure you’re financially smart and viable, and not just for a few months before or after your loan is approved.

Minimal debt
Regularly maxing out your credit card won’t impress lenders and neither will late or irregular repayments of any kind.

Therefore, before you approach any lender, minimise all of your debt, starting with your credit card, and if at all possible, cut up the majority of them or at least, pay them off.

If you choose to keep some credit cards, organise a low credit limit as lenders will see a high credit limit as a debt you potentially owe, regardless of whether you’ve ever reached that limit.

Work hard to also pay off personal or car loans.

Savings and spending habits
Once you’ve paid off the majority of your debts, look at what’s leftover in your bank account.

How stable and considerable are your savings?

As well, it’s not how much you have available in savings that counts but how long you’ve been saving for.

Lenders want to see that you’ve been steadily saving for at least a few months if not more.

Large deposit
While you’re studying your savings, consider your home loan deposit.

You officially only need a 5%-10% deposit to buy a home but you will have to pay Lenders Mortgage Insurance (LMI) if your deposit is less than 20%.

With so many costs involved in buying a home, we recommend you hold out until you have your 20% deposit as it will save you money in the long run.

Unsurprisingly, lenders also look more kindly on home buyers with larger deposits.

Strong document proof
So, you’ve made it this far – congratulations!

But there’s one more big point to organise.

Lenders will examine your savings and expenses back to front and inside out before approving your home loan application.

They will demand clear and creditable proof of all of your assets and liabilities including income sources, credit cards, investment shares, debts, superannuation, and other financial commitments including personal loans.

As well, lenders will critique your living expenses for at least three-six months before your home loan application, including your spending habits.

They won’t accept your word or even your complex Excel spreadsheets as proof either.

These details will take awhile to organise but this tough time will be worthwhile when your lender gives you the loan go ahead.

As a side note:  if you dislike your job and are considering moving to another employer, we recommend you wait to do so until your loan application has been approved.

With the majority of your loan repayments sourced from your employment, lenders will be triple-checking your job details, including how long you’ve stayed with your employer, with a strong preference for applicants who’ve remained in a stable position for at least six months.

And finally….

By all means, come to us for lender comparisons and which one will best suit your needs.

At the same time, every lender application you submit will ultimately appear on your credit report.

While this isn’t a huge no-no, lenders won’t like it, particularly if you’ve clearly been denied approval status several times over.

To avoid this problem, aim to plan and research carefully with smart comparisons and advice before you approach any lender.

We’re here to help

If nothing else, getting home loan ready is an ideal opportunity to spring clean your expenses and your budget and ensure everything is ship-shape.

With us by your side as well, we’re confident that this spring clean will ultimately end in the reality of a new house.

So, come to Lending Loop for advice and tips on finding the best lender for you and for answers to similar property purchase questions including refinancing.

We regularly deal with more than 40 of Australia’s biggest banks and specialist lenders so give us a call today at Lending Loop.

 

When it comes to securing your first home, trust matters

Buying your first home is one of the most important decisions of your life and it’s no surprise more and more Aussies are looking to trusted mortgage brokers to help make the process simple and cost-effective.

In fact, according to a recent survey of first home buyers, nine out of 10 said they trust a mortgage broker to help them secure their first home.

Making the leap into home ownership can seem daunting at first, but the good news is that mortgage brokers can offer great support to break down and simplify the steps you need to take to get on with the most important part – enjoying your first home!

It’s good to know that mortgage brokers are bound by a duty to serve the best interests of their customers and to get the best outcome possible. For many first home buyers, this can be a huge weight off their minds.

The Genworth First Home Buyer Report 2021 surveyed 2077 prospective and 1008 recent first home buyers this year, showing the importance of having the right advice.

Almost 90 per cent said mortgage brokers provided valuable support and reliable advice during the home buying process.

The report also revealed that many buyers were taking a ‘now or never’ approach to get into the market and secure their first property, based upon their stage of life, low interest rates and a booming real estate market.

Investment properties continue to attract buyers with almost three in four first home buyers looking to enter the market with a deposit of less than 20% (73%) and the majority with less than a 15% deposit (56%).

Spurred by the pandemic, first home buyers are increasingly looking outside capital cities to find a more affordable home to enter the market, with more than a 7% rise in purchases in regional and rural areas.

WE CAN HELP YOU SECURE YOUR IDEAL FIRST HOME

Unless you’ve been living under a rock you will have noticed property prices across the nation are undergoing massive growth, pushing sales prices to record highs.

This can be a major source of frustration for new buyers who had their hope on buying in certain suburbs only to be now priced out of contention.

But this is not always the case and a mortgage broker can help you formulate a winning strategy that’s within your reach. 

A number of federal government schemes are available, including the First Home Loan Deposit Scheme – which enables you to buy your first home with a deposit of just 5% without paying for Lenders Mortgage Insurance.

State and territory government schemes, designed to assist first home buyers to get their foot in the property market, also may be available including first home buyer grants and stamp duty concessions.

Give us a call and talk to us today. We’d love to hear about your plans and help you secure your first home without the stress and worry.

Help at hand to better understand the home purchasing process

Many people know why they should invest in the property market and sometimes they even know a lot about where and what type of real estate they are interested in, too.

But the big question many new buyers can often overlook are about the financial process and all of the details that come with the question – How. And according to a 2021 survey, you wouldn’t be alone. 

This year’s UBank Know Your Numbers survey revealed that 84 per cent of Australians who are yet to secure a property admit they don’t know enough about how home loans, deposits and mortgage rates work, while three in 10 admitted to knowing nothing at all and having no idea where to start.

UBank CEO, Philippa Watson noted that while some rates can seem attractive at first glance, there are common pitfalls that new buyers can get caught up in.

“Entering the property market with little to no knowledge of some essential financial terms and concepts could see Australians falling into common traps or getting themselves into situations they cannot manage,” Ms Watson explained.

JARGON BUSTER:

There’s no shortage of seemingly complicated jargon in the financial world, so we’ve put together a list of some of the most common financial terms we explain to our clients.

Loan to Value Ratio (LVR): LVR is the percentage of the property’s value (as assessed by the lender) that your loan equates to. So, for example, if the property you want to purchase is valued at $500,000 and you need to borrow $400,000 to pay for it, the loan is worth 80 per cent of the property value, making your LVR 80 per cent.

Lenders Mortgage Insurance (LMI): LMI is insurance that protects the bank or lender in case you can’t pay your residential mortgage. It’s usually paid by borrowers who have an LVR higher than 80 per cent – that is, borrowers with a deposit of less than 20 per cent.

Offset account: an offset account is just like a regular transaction account, except it’s linked to your home loan. The money held in the account is counted as if it’s been paid off your home loan, which reduces the balance of the loan and in turn, reduces the interest you need to pay.

And because the offset account acts like a regular transaction account, the money you’ve put in there is still accessible whenever you need it.

Refinancing: refinancing is the process of switching your home loan to take advantage of another, more suitable home loan for your present circumstances, such as one with a lower interest rate that might save you money. 

Have you got any other finance terms you’d like explained? We know some of the terminology around buying your first home can be confusing. If there’s anything you would like us to clarify please reach out to us today.

WE’RE HERE TO HELP:

The good news is that’s what we do best every day. We see it as an opportunity to help educate more buyers and assist with every step on the road to home ownership.

Our mission is to simplify and streamline the whole process, so you can get on with the important things that matter to you. 

We’ll be sure to explain in detail any financial terms or products you may not be totally familiar with.

We’re not just satisfied with matching you up with a home loan, we want you to be confident that it’s the right one for you, and for you to understand the reasons why.

Make the most of increased caps and move into your dream home sooner

With caps increased from July 1, more and more first home buyers are now able to make good use of the Federal Government’s 5 per cent no Lenders Mortgage Insurance (LMI) scheme.

Since 2020, The First Home Loan Deposit Scheme (FHLDS) has helped thousands of budding home owners get into the property market sooner.

This year, the good news is that single parents with dependent children can also look to benefit from higher price caps, which also applies to the government’s new Family Home Guarantee scheme.

Below you can see a summary of how much money you can spend while still remaining eligible to qualify for the FHLDS and Family Home Guarantee Scheme (FHGS).

  • New South Wales: $800,000 (Sydney, Newcastle/Lake Macquarie, Illawarra) and $600,000 (rest of the state).
  • Victoria: $700,000 (Melbourne and Geelong) and $500,000 (rest of the state).
  • Queensland: $600,000 (Brisbane, Gold Coast, Sunshine Coast) and $450,000 (rest of the state).
  • Western Australia: $500,000 (Perth) and $400,000 (rest of the state).
  • South Australia: $500,000 (Adelaide) and $350,000 (rest of the state).
  • Tasmania: $500,000 (Hobart) and $400,000 (rest of the state).
  • ACT: $500,000.
  • Northern Territory: $500,000.

More detail about increased property price caps is available on the NHFIC website.

The First Home Deposit Scheme enables eligible first home buyers to purchase a residence with only a 5 per cent deposit and to avoid forking out for lender’s mortgage insurance (LMI). This can save buyers anywhere up to $35,000, depending on the property price and deposit amount.

Meanwhile, the new Family Home Guarantee Scheme allows eligible single parents to build or purchase a home with a deposit of just 2 per cent without paying LMI, regardless of whether or not this is their first home.

These schemes run alongside the New Home Guarantee Scheme, a new initiative that allows both eligible first home buyers to build or purchase a new build with a 5 per cent deposit. This scheme features even higher property price caps which accounts for the extra costs that come with building a new home.

THE TIME IS NOW:

With only 10,000 spots available under each of these schemes, it’s important to get in quick as previous rounds tell us they are going to go fast. And if you’ve been thinking about looking into your options but keep putting it off, consider this the reminder you need to take action and see how you can take advantage before the opportunity has passed by.

Four key tips for helping you make the big home loan switch

There’s no better time than now to find a better deal on your home loan and we’ve observed the sharp rise in homeowners seeking to explore refinancing options since the beginning of the global pandemic.

And there’s good reason we’re seeing more and more mortgage holders seeking a better deal. With the total number of home loan customers who switched providers jumping by 27 per cent – from 143,664 in 2019 to 182,016 in 2020.

More than 200,000 Australian families are tipped to make the switch in 2021. But making the switch isn’t foolproof and there are common mistakes people make.

Laura Higgins, Senior Executive Leader Consumer Insights and Communication at ASIC, recently shared some important tips with ABC radio, which we’ve compiled for you below as well as some additional advice for good measure.

  1. GET A BETTER DEAL WITH YOUR CURRENT LENDER

When it comes to the big banks and home loans, it’s often the case that customer loyalty goes largely unrewarded. RBA data tells us that for loans written four years ago, borrowers were charged an average of 40 basis points higher interest than new loans.

So on a loan balance of $250,000, the reality is that it could cost you an additional $1,000 in interest payments each year.

“Many times, new customers are offered a better deal than existing borrowers, so if you have a home loan that is a few years old you could potentially get a better deal that saves you thousands of dollars over time,” Ms Higgins explains.

“Even if you’re happy with your current lender, it’s worth checking you’re not paying for features or add-ons you’re not using.”

  1. LOOK BEFORE YOU LEAP

Cashback offers and super low interest rates are just two ways lenders are enticing new customers to make the switch, which means you need to do your homework first to ensure you’re truly getting the best deal.

Glittery incentives are designed to entice customers to switch mortgages quickly, but Ms Higgins urges borrowers to look closely and weigh up the long-term costs.

“For example, it’s worth doing the maths to ensure a cashback offer still puts you ahead over the long-term when considered against other aspects of the loan, like interest rates and fees. If you decide to switch lenders, you may end up with a longer-term loan,” she said.

It’s vital to check whether you’re up for any other costs such as Lenders Mortgage Insurance (LMI) or discharge and loan arrangement fees, which can sometimes outweigh the benefit of having a lower interest rate.

“A mortgage broker can also help you compare loans and decide whether to switch,” Ms Higgins adds. 

  1. OFFSET BUT DON’T FORGET

If you’ve been lucky enough to put some savings away and are now eyeing off low interest rates, perhaps it’s wise to try and pay off your mortgage sooner rather than later.

And as Ms Higgins notes, “Interest rates may be low now, but probably won’t be this low forever. Making some extra repayments now can benefit customers in the long term.”

But if you’re not quite in that position and are worried about tying up all your funds in your home loan, perhaps consider switching to a mortgage redraw facility or offset account, which can help you to make extra repayments but still withdraw them if you need to.

“Either of these options might work for you depending on your goals,” Ms Higgins adds.

“Not all home loans can be linked to an offset account, and often those that can may have a fee charged or a slightly higher interest rate, so it’s worth making sure you’d be saving enough in there to warrant any extra costs.”

  1. TO FIX OR NOT TO FIX IS NOT THE ONLY QUESTION

One of the most common big questions we field relates to whether you should consider a fixed home loan rate or not, however it’s good to know there is another option available.

The good news is that you can also choose to fix the rate for a part of your mortgage, but not all of it. Doing this allows you to lock in a low rate for a portion of your home loan, while also taking advantage of some wriggle room a variable rate can offer, including being able to make extensive additional payments.

WANT TO FIND OUT MORE?

Now really is the time to get on top of your refinancing options and see how your loans can work for you, instead of you working for them – now and well into the future.  We would love to go over home loan refinancing options with you, whether that be renegotiating with your current lender or exploring your options elsewhere.

Get in quick while First Home Loan Deposit Schemes are still available

With the latest offering of loan deposit rounds already well underway, now is the time to find out how you can take advantage of the Federal Government lending schemes before it’s too late.

And if you’d like the idea of paying no Lenders Mortgage Insurance (LMI) and buying your first home with just a 5 per cent deposit, then you need to get in before the limited spaces have been taken.

In years previously, the 10,000 places released in each round in the The First Home Loan Deposit Scheme (FHLDS) have been snatched up within a few months, and we’ve had more than a few hopeful applicants reach out to us only to find out the opportunity has passed them by.

And if you’re doing it solo as a parent with dependent children, a similar scheme now allows you to purchase a home with just a 2 per cent deposit and without paying LMI, regardless of whether or not you’re a first home buyer.

The three Government schemes, released on July 1, announced a fresh round of 10,000 spots. Let’s take a closer look at each.

FIRST HOME LOAN DEPOSIT SCHEME (FHLDS)

Commencing at the start of 2020, The FHDS has helped thousands of Aussies get their foot in the doors of the property market, accessible to those wanting to build or buy their first home.

The scheme allows eligible first home buyers with just a 5 per cent deposit to buy a property without having to pay LMI. The scheme is backed by government guarantees (to a participating lender) up to 15 per cent of the value of the home you’re purchasing.

While it varies based on the cost of the home itself and deposit amount, not having to dip into your pocket for LMI means potential savings of between $4000 and $35,000. Depending on the property price and deposit amount.

10,000 First Home Loan Deposit Scheme places will be available to eligible first home buyers from 1 July 2021 to 30 June 2022.

The New Home Guarantee Scheme (First Home Buyers)

This scheme allows eligible first home buyers to build or purchase a new build with a 5 per cent deposit.

While it is a similar proposition to the FHLDS detailed above, one of the key differences is that the price caps are higher, to account for the extra expenses which come with building a new home.

The Family Home Guarantee Scheme (Single Parents)

This scheme enables eligible single parents with dependents to build or purchase a home with a deposit of just 2 per cent and without paying LMI.

But unlike the other two schemes detailed above, you don’t have to be a first home buyer to qualify for this scheme. So how does it work?

Well let’s take this as an example. Jeremy is a single parent with two young kids. Let’s say he’s found the perfect home for $460,000 but has struggled to save enough for the standard $92,000 deposit (20 per cent) required while paying rent. With the Family Home Guarantee, and pending a successful application with a lender, John could move into his dream home sooner, with just a $9,200 deposit (2 per cent).

BE QUICK, CALL US TODAY!

All schemes listed here have only 10,000 spots available for prospective homeowners for this scheme this financial year – and in previous years they’ve been allocated within a few months. So you’ve got to get in quick!

Avoid disappointment, get in touch with us today and we can help you determine which scheme is most suitable for you, and then help you apply for finance with a participating lender.

The importance of being ready for interest rate hikes

How well prepared are you for a rise in interest rates? While that may seem like an odd prospect for many of us after 18 consecutive cash rate cuts from the RBA, we always need to be prepared.

And when the big banks start showing signs, it’s time to consider what that might look like for you in a practical, month-to-month sense.

What would an interest rate rise look like for you and how much extra would a new mortgage holder expect to pay each month? 

RATE RISE PREDICTION:

While the RBA’s official position has been that it doesn’t expect to lift the lid on the cash rate until 2024, and this month held the rate at 0.10 per cent, there’s healthy speculation that the next rise in rates could arrive as early as 2022.

Westpac and the Commonwealth Bank have earmarked the period between late 2022 and early 2023 as a likely time when rates may start to spring up, with the official cash rate predicted to hit 1.25 per cent in the third quarter of 2023 and peaking in 2024.

Meanwhile, NAB increased its two, three and four-year fixed rates by up to 0.10 per cent for owner-occupiers paying principal and interest.

Banks have the ability to increase fixed rates as a method of heading off potential RBA rate hikes. In overall terms, this means that the shorter the length of term of the fixed rate that is increased, the sooner a bank is expecting the next increase in rates will be.

Generally, the shorter the term of the fixed-rate that’s increased (ie. if two-year fixed rates are raised), the sooner a bank may predict the next rate hike will be. And with economists at the big banks seeing that future in their crystal balls, how should you be planning to make the most of it and how much extra money should you be factoring into your monthly mortgage repayments if the official cash rate starts to rise?

THE HIP-POCKET IMPACT:

You’d have to cast your mind back to 2019 to find the last time that the RBA cash rate target was at 1.25 per cent. Although it wasn’t that long ago, it seems like a completely different world – before the global COVID pandemic appeared like an unwanted neighbour at a backyard barbeque.

So, just how much extra should the average mortgage holder expect to pay?

Modelling provided by Canstar showed that the average variable mortgage rate would jump from 3.21 to 4.36 per cent, based on the current gap between the two rates.

In plain English terms, this means that if you took out a $500,000 loan tomorrow, and the cash rate hit 1.25 per cent in 2024, the modelling estimates your monthly repayments would increase $300 to $2464 per month. Commonwealth Bank’s modelling covers a similar scenario, with repayments up $324 per month.

That’s despite shrinking your remaining loan balance to $468,770 after three years of repayments, and assuming the banks only add on the cash rate increase – and not any extra. On top of that, there’s also the possibility that even more waves of RBA cash rate increases could soon follow.

So if the average variable loan rate increased to 7.04 per cent in 2031, where it was not that long ago back in 2011, Canstar estimates that same borrower who took out a $500,000 loan would pay $900 more in monthly repayments than they do now, even after a full decade’s worth of repayments.

TAKE OUT THE GUESSWORK:

Every household is different, in unique situations and you can’t take a one-size fits all approach. Let us run you through your options and help you find the right mortgage option for you.

It may be difficult to imagine that interest rates could rise from the relaxed position of the current record low cash rate, however it’s vital to pay close attention. We had 18 cash rate reductions before the RBA increased the cash rate to 4.75 per cent back in November 2010.

It pays to look ahead, if you’re worried about what such a scenario could mean for you and your home budget in the coming years, get in touch with us today and we can run you through a number of options that include (but are not limited to) fixing your interest rate for two, three, four or five years, or just fixing part of your mortgage (but not all of it).

Australian house prices drive to record highs but are there speed bumps ahead?

Knowing when to buy in the housing game can seem a little bit like a lottery when property prices just keep going up, but it’s important to remember that old saying ‘what goes up must come down’.

And we’re starting to see some signs of a slowdown in the market, which reached record-breaking levels in 2020. In fact, you’d have to cast your mind back to 2004, a year when Shannon Noll’s version of the classic ‘What About Me?’ was dominating the airwaves to find a time when house price growth was faster than it has recently been.

The latest data is pointing to signs that the auspicious run is starting to slow down. Looking back, it’s clear to see that while sellers collected their share, it left buyers asking themselves the same question Nollsy was pondering all those years ago.

Over the past year, home values increased by 16.1% which was the fastest pace of growth since 2004, according to CoreLogic’s latest Hedonic Home Value Index.

SLOW MOVING TRAFFIC AHEAD:

CoreLogic Research Director Tim Lawless said that while the market is still powering on (up 1.6% in July) there are signs of a slowdown.

“The monthly growth rate has been trending lower since March this year when the national index rose 2.8%,” Mr Lawless reported.

PROCEED WITH CAUTION:

There may be more bumps ahead, too, with the value of new housing loan commitments dropping 1.6% in June, the first decline in monthly lending figures in 2021, according to the latest Australian Bureau of Statistics figures.

WHAT’S CAUSING THE TRAFFIC JAM?

Mr Lawless explains that dwelling values increasing greater in a month than incomes are rising in a year, the ‘Great Australian Dream’ of home ownership is simply moving out of reach for members of the community.

In addition, the winding back of some COVID-19 support payments, including JobKeeper and HomeBuilder, have been a factor. CoreLogic’s latest Hedonic Home Value Index report noted that the pandemic itself has been a complicating factor.

“It is likely recent COVID outbreaks and associated lockdowns have contributed to some of the loss of momentum as well, particularly from a transactional perspective in Sydney which is enduring an extended period of restrictions”  – CoreLogic’s latest Hedonic Home Value Index report

It should be noted, however, that housing values are continuing to increase substantially faster than average. In fact, according to CoreLogic, the average pace of monthly dwelling value appreciation has been just 0.4% over the past decade.

THE ROAD AHEAD:

The rapid growth rate is predicted to slow as 2021 draws to a close and affordability plays a greater factor and housing supply gradually lifts, CoreLogic reports.

“Other potential headwinds are apparent, including the possibility of tighter credit policies”.

On the other hand, demand remains strong, assisted by record-low mortgage rates and the prospect that interest rates will remain low for some time to come.

“A lift in the cash rate is likely to be at least 18 months away,” CoreLogic adds.

“The recent spate of lockdowns is likely to see Australia’s economy once again contract through the September quarter, a factor that is likely to keep rates on hold for a while longer.”

LET’S DRIVE!

With house prices having just experienced their fastest pace of growth in almost 20 years, it’s as important as ever to purchase your new home with a finance option that’s right for you.

If you’re a prospective homebuyer who wants to explore what options are available to you – including your borrowing capacity – get in touch today. We look forward to showing how we can help!

How you can simplify debt and save at the same time

If you’re like most Aussies, you’re probably paying off more than one loan.

Whether it be a mortgage, a car loan, a credit card, a personal loan – or even all four (gulp!) – keeping track of what needs to be paid and when can be difficult. 

If you add in changing interest rates and the need to make milestone purchases, you wouldn’t be the only one to find yourself, and your finances, under quite a bit of stress.

The good news is that you don’t have to don a clown suit and keep all of those loan repayments in the air, as there are solutions available to help you manage your money, and your repayments, better.

In a nutshell it’s called debt consolidation, and it has the power to take the pressure off your finances.

Debt consolidation essentially means rolling all of your existing loans into one easy-to-manage loan. Let’s take a look at some of your options:

ROLL UP, ROLL UP!

One of the most common ways to consolidate debt is to take out a new personal loan and use that to pay off your existing debts.

Importantly, the interest rate on your new personal loan must be lower than the rate on your existing debts, such as a credit card with a 17.99% interest rate. 

This will mean you pay less interest each month and you can either use the funds you save on other things or put the money back into paying the loan principal so that you pay off what you owe faster (and save more interest again!)

Another benefit is avoiding costly late payment fees many credit cards have and with just one loan to keep track of, you’ll be able to budget a lot easier and have a clearer picture of when you’ll be debt-free.

HIT A HOME RUN

Another option is to refinance your home loan to consolidate your debts, including car loans and credit cards, into your mortgage.

Mortgages offer comparatively low interest rates, so consolidating your loans in this way will reduce your monthly repayments and cut down the time and energy spent on managing multiple loans. 

It’s important to note, however, that while this option can help ease the pressure on your finances now by reducing monthly repayments, consolidating your debt through your mortgage can extend the term of your loan, which may have previously been much shorter.

This means unless you aim to make a lot of extra repayments as soon as possible, you may wind up paying a lot more interest than you bargained for.

One way to address this is to create a loan split for the debt consolidation, which enables you to pay off short-term debts within a few years, rather than over the existing long-term home loan period, which is usually 25 or 30 years.

With mortgage rates down due to the RBA’s official cash rate being at record low levels, it’s a good time to see how you can consolidate and take back control of your debt.

That’s where we come in:

Get in touch with us today to find out how we can help you explore your debt consolidation and refinancing options. We’re here to make the whole process as simple and cost effective as possible.

At present, lenders are providing mortgage holders impacted by COVID-19 with a range of hardship support measures, including loan deferrals on a month-by-month basis.

Whatever your circumstances, we’re here to support you however we can through these times.