Mortgage tips

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01 .Interest rate trends

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Interest rates are nearing historical lows. The Reserve Bank of Australia (RBA) has dropped the cash rate 2% since November 2011, while the standard variable mortgage rate dropped 1.35% in the same period. The banks say the 0.65% variation is due to high wholesale borrowing costs and competition for your savings and investment accounts, but that’s about to change.

In this article we look at:

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The RBA’s assistant governor (financial markets) Guy Debelle noted in a recent speech that there has been a general decline in wholesale borrowing costs in the second half of 2012. Meanwhile, anyone with a savings account will tell you interest rates have been falling on them.

IMB, BMC Mortgage, and Holiday Coast Credit Union all cut their standard variable rates during February, despite the RBA cash rate remaining unchanged since December, while ANZ cut its variable rates by more than the cash rate in May.

But what does all this really mean for you?

Buying a new home

While the smaller lenders are lowering their rates, standard variable interest rates have only been lower than current levels for less than two of the past 40 years on average. In the long run, interest rates are more likely to go up than down from their current levels.
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When buying a new home, Robert Drake of ASIC’s MoneySmart website advises drawing up a budget and evaluating the reliability of your income.

  • You can use MoneySmart’s mortgage calculator to get a sense of the repayments, but make sure you take into account any possible changes to your circumstances.
  • What will happen if you find yourself in between jobs, not getting as much overtime, retiring or adding the cost of a new child to the bills? Will you still be able to afford those repayments? 
  • To address these scenarios and the possibility of a rate rise, Drake suggests building in a buffer of one to two per cent. 
  • You should also consider paying this extra percentage down now, either into a mortgage offset account or redraw facility. 
Anyone who has a mortgage will tell you the first few years are the toughest, so doing this can not only reduce your interest payments but also ensure you have a buffer to draw upon should your circumstances change.
 
 

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MoneySmart's mortgage switching calculator can help you work out the costs of changing your mortgage, how long it will take to pay off the cost of the switch, and the difference in payback times.

Watch out for fees that can offset any savings made by switching to a lower interest rate. These incude:
  • establishment fees
  • early termination fees
  • break fees
  • administrative costs
  • valuation fees
  • legal fees
  • Lenders Mortgage Insurance (LMI)
Mortgage lenders cannot charge early termination fees on new variable home loans taken out from 1 July 2011. However, variable rate home loans taken out before that date may still incur early termination fees.

Break fees on fixed rate loans can still be charged if you switch within the fixed-rate period, and with some lenders offering interest rates below five per cent, these loans can be very appealing. But if you’re likely to need to refinance soon, fixed interest rates could end up costing you more in break fees than what you’d save by moving to a lower interest rate.

If you break a loan with a fixed rate of 7.5%, but the interest rate your bank currently offers is six per cent, you may have to pay the 1.5% differential. Ask your lender for the amount for which you may be liable before switching.

Lenders mortgage insurance

If you’re borrowing more than 80% of your property’s value, it’s likely that you’ll have to purchase lenders mortgage insurance (LMI ). LMI protects the lender from loss should you default on your loan and the amount from the sale of your property is less than the outstanding loan amount. The insurer will still try to recover any outstanding money from you if you default on your loan. 

LMI isn’t portable between mortgage lenders, and it’s not guaranteed that you’ll receive a rebate on your premium if you terminate your mortgage.

MoneySmart's mortgage switching calculator can help you work out the costs of changing your mortgage, how long it will take to pay off the cost of the switch, and the difference in payback times.

Watch out for fees that can offset any savings made by switching to a lower interest rate. These incude:
  • establishment fees
  • early termination fees
  • break fees
  • administrative costs
  • valuation fees
  • legal fees
  • Lenders Mortgage Insurance (LMI)
Mortgage lenders cannot charge early termination fees on new variable home loans taken out from 1 July 2011. However, variable rate home loans taken out before that date may still incur early termination fees.

Break fees on fixed rate loans can still be charged if you switch within the fixed-rate period, and with some lenders offering interest rates below five per cent, these loans can be very appealing. But if you’re likely to need to refinance soon, fixed interest rates could end up costing you more in break fees than what you’d save by moving to a lower interest rate.

If you break a loan with a fixed rate of 7.5%, but the interest rate your bank currently offers is six per cent, you may have to pay the 1.5% differential. Ask your lender for the amount for which you may be liable before switching.

Lenders mortgage insurance

If you’re borrowing more than 80% of your property’s value, it’s likely that you’ll have to purchase lenders mortgage insurance (LMI ). LMI protects the lender from loss should you default on your loan and the amount from the sale of your property is less than the outstanding loan amount. The insurer will still try to recover any outstanding money from you if you default on your loan. 

LMI isn’t portable between mortgage lenders, and it’s not guaranteed that you’ll receive a rebate on your premium if you terminate your mortgage.

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