November 2009

Coastal property and the risks of climate change, part 2.

by Chris on November 28, 2009

Today we’re continuing the topic about coastal property being affected by the climate change. Let’s start by addressing a few questions.

Why will the sea level rise?

Because the ice and glaciers in Antarctica and Greenland are melting. Scientists don’t fully understand the whole mechanism of this melting and can’t predict exactly how and when the sea level will rise; they are estimating it to rise 1.1 meters by 2100.

Why have people been building close to the shoreline?

Because over the last 7000 years sea level around Australia has been stable, and people assumed it will stay the same. But now things are changing and the latest report from the government clearly makes that a false assumption.

What’s the worst thing that can happen?

Right now the benchmark for “nightmare weather” is an event similar to June 2007 when in NSW storms caused 200,000 houses to lose power, thousands of people were forced to evacuate and damage to property exceeded 1 billion dollars.

Where things might get really bad?

According to a graph from the government climate change report, there are 4 areas where the most extensive damage from storm tide is expected: Kingston, Hobsons Bay, Greater Geelong and Wellington. In Kingston the estimated number of existing buildings at risk is between 6500 and 9000, in Hobsons Bay between 4500 and 7500 houses are at rick, in Greater Geelong – between 4500 and 6500, and in Wellington between 3500 and 4000. These numbers are assuming the 1.1 m rise that is expected by 2100.

Where is the “risk zone”?

Have a look at the “before and after” photos below, taken from the “Climate change risks” report.

Here you are looking at Altona (Hobsons Bay area) in 2009.

Altona before climate change

And now you are looking at Altona in 2100, notice the blue area? Areas covered with water here used to be covered with houses in 2009, photo above.

Altona after climate change

These next 2 photos are of Geelong. This one is Geelong as we know it.

Geelong before climate change

And this one is a prediction of Geelong after a storm tide in 2100.

Geelong after climate change

That’s it, no more scary photos .

Now about the City of Port Phillip. According to the 2100 predictions, properties close to the Elwood Canal, Luna Park, the St. Kilda Baths, the St. Kilda Pier and Marina are at risk from 2 factors – the first is a storm surge, and the second is infrastructure instability.

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Coastal property and the risks of climate change, part 1.

by Chris on November 22, 2009

You must have heard about the latest report on risks of rising sea levels that was published by Australian Government a few days ago. To cut the long story short, it says that in the next 90 years a sea-level rise scenario of 1.1 meters looks very likely.

Many people are thinking of the climate change as something that will happen in the distant future, but the truth is we are living it now. The reason I brought up the issue of climate change here in Home I Own, where usually we discuss property-related matters, is because climate change must be taken into account when making property-purchasing decisions.

“OK, Chris” you say “so the sea levels might rise 1.1 meters by 2100, but what does it mean to us?”

Let’s begin with the big picture. On the country level, between 157,000 and 247,600 residential buildings might be at risk of damage from sea inundation, many of the ports (and therefore our import and export) might be affected and many of the recreational places such as marinas might suffer.

Not only the ports – but also the airports are at risk, as well as the power plants that are located within 500 meters of the coastline. What’s more, there are many police stations, hospitals and fire and ambulance stations located close to the coast.

The climate change risks include not only inundation, but also what scientists call “events of extreme weather” – cyclones and storm surges. They are originated over the ocean and the closer a property is to the coast line, the bigger its chances to suffer from cyclones.

On the state level, considering that 25% of Australian population lives in Victoria, we’ve got a significant number of buildings in coastal areas that is in danger of inundating and storms.

The areas at risk include bayside suburbs Chelsea and Aspendale, Altona (and the City of Hobsons Bay), Geelong, St. Kilda and Middle park.

In my next post I will write in more detail about each of the areas at risk, explaining about the problematic locations and what percentage of houses is likely to suffer in each location. Stay tuned!

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Mortgages: Fixed or Flexible Interest?

by Chris on November 18, 2009

The following is an article by Jessica Bennet. Jessica is a contributing Financial Writer, Moderator and Community Mentor of MortgageFit. She has been an active participant in the forums wherein she offers mortgage advice and suggestions to people in loan problems. If you have a query on mortgage related issues, you can simply discuss it with her in the Mortgage Forum.

The home buying process needs a lot of cool-headed calculations and a failure to do so can jeopardize your chances of getting a good deal, the most important aspect being your mortgage payments. The mortgage rates determine how much you will shell out each month. The main objective of taking out a mortgage is the same everywhere whether you are residing in the US or Australia. Whether you will opt for adjustable-rate mortgage (ARM) or fixed-rate mortgage (FRM) is something you need to decide well in advance so that you can figure out your monthly payments on mortgage. Let us consider the scenario in Australia.

Flexible-rate mortgage versus fixed-rate mortgage

When you opt for fixed-rate mortgage, your monthly payments are fixed throughout the term of your loan. So, you can plan out your finances accordingly. On the other hand if you take out adjustable-rate mortgage or variable rate mortgage, your payments will change depending on the prevailing rates in the market. If the mortgage rate escalates (in case of variable mortgage rate), so will your payments and if they drop your mortgage payments will drop too.

Variable rate mortgages are good if you plan to move within a short time period (for instance 3 to 7 years), it is a good option. This is because in case of ARM, the interest rate is fixed initially for a period 3, 5 or 7 years and escalates thereafter and rates start to fluctuate.

In Australia, the banks are the biggest lenders of mortgage extending approximately 92% of all originating loans, Commonwealth as well as Westpac constituting the mortgage bulk (as of August 2009). Reports suggest that as of December 2008, when sale of variable-rate mortgages was dropping, FRM or fixed-rate mortgage almost came to a standstill as there were no takers.

Studies reveal that the adjustable-rate mortgage or variable-rate mortgage in Australia stood at 8.87% for the last 59 years. This data is provided by Reserve Bank of Australia’s standard variable mortgage rates between January 1959 and February 2008. Surprisingly, the same rate exceeded 9% between July 1974 and August 1993. The mortgage rate slid back to 8.75% for a year and didn’t return below 9% until 1996 November.

Australian real estate market and recession

Recession has hurt investor sentiments of consumers to a great extent. However, the policy stimulus extended by the Central Bank and Federal Government has injected some confidence among the consumers. There was remarkable increase in consumer confidence that went up to a whopping 109.4% from 9.3% in July 2009.

In addition to this the $20 billion “cash handouts” have also added to the soaring confidence among consumers. So, if the rates are affordable for you, take the opportunity to own your dream home. However, it is important that you weigh the pros and cons of taking out a variable or fixed rate mortgage in Australia so that your mortgage payments are affordable and predictable.

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Delayed settlement – buyer’s and vendor’s rights explained.

by Chris on November 13, 2009

When your settlement is being delayed, this is a big problem. There are too many things to look after when moving home, and if the date shifts, the same work you’ve already done arranging everything around your settlement date doubles or triples.

What more, nobody is expecting this to happen, so when it hits – it hits people hard. If a buyer is renting a house, while he’s waiting for his settlement date, a delayed settlement (by vendor) means that he needs to extend his lease, which may not be that easy on a couple of day’s notice, re-arrange the removalist, re-arrange the disconnection and re-connection of the utilities, re-arrange the redirect of mail, take another day off at work, etc. These are just a few examples of the amount of pain a delayed settlement can put you through. And the first reaction to a situation like this is a question:

“Can they really do this to me? What are my rights here?”

A couple of days ago I received a letter from a first home buyer who was asking these questions, and decided to write a short explanation of buyer’s and vendor’s rights, because there sure are more people out there, wondering what their rights and options are in a delayed settlement.

Delayed settlement – from a buyer’s point of view

Buyers need to know that most contracts allow the vendors delay the settlement for 14 days past the settlement date without a penalty. There is a particular clause, which you can easily find – if you know what to look for.

Also, as a buyer, you’d want the contract of sale to specify what you’d like to happen if the vendor delays the settlement beyond those 14 days – in case you decide for the vendor to settle, as opposed to taking him to the court or terminating the contract and claiming back your deposit.

Make no mistake – if a buyer delays a settlement, most contracts of sale make sure vendor’s interests are covered, by charging the buyer default penalty rates. There is a specified period during which the penalty interest rates are charged, and after that it gets worse, as a vendor can cancel the contract and sell the property to someone else. To give you an estimate of costs, I have heard of buyers paying from $1000 to $5000 for a delayed settlement.

I’m sure you won’t like hearing this, but more there are even more costs a buyer can incur if they are at fault for the delayed settlement – the conveyancers / solicitors can charge a client extra if the settlement doesn’t go through as planned. Some even would go to the extreme of abandoning clients when things are going smoothly, and while I wouldn’t wish this to my worst enemy, I still feel that people need to know these things.

Have you ever experienced problems because of a delayed settlement? Share your story – leave a comment here.

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Living or moving overseas? Tips to save money when transferring funds.

by Chris on November 7, 2009

The following is an article contributed by World First, a trusted company specializing in foreign exchange.

If you are planning to live or work overseas, there are a number of things you need to think about before you move. If you are already living abroad then you will know firsthand how much a move in the exchange rates can affect you.

As an example, the current weakness of the Pound has proven extremely beneficial for those moving into the UK, however those moving out of the UK have seen a noticeable and negative impact on how far their Sterling will take them. In October 2007 a €500,000 property in Europe would have cost a UK citizen around £348,000. 2 years later, the same priced property will cost you £463,000- an increase of £115,000. This outlines the true extent to which people living or moving abroad can be affected by volatility in the currency markets.

Regardless of this, people still need to make overseas payments and it is therefore crucial that they secure the best possible exchange rate for their transaction. Many people assume their bank to be the best place to exchange currency, unaware that the banks usually offer fairly uncompetitive exchange rates, slower transfer speeds, increased transfer charges and limited access to the various foreign exchange products available.

By using a specialist currency broker you can significantly improve the financial efficiency of your overseas payments, and gain access to products that may be hugely beneficial to you.

Benefits of Brokers

Usually save clients between 0.5% and 4% on the amount they transact
Faster international payments (same day in many cases)
No commission and no bank receiving charges
Bespoke and professional service with a dedicated broker
Free rate and market watch service
Access to products that the banks may not offer

Foreign exchange products available

Spot contracts
If you already have the funds in place, you could arrange a spot transaction. This is simply the exchange of one currency for another at the current market price where the settlement happens within two working days. A broker should be able to get you a significantly better exchange rate for this transaction.

Forward contracts
A forward contract allows you to fix a rate now for a date in the future (up to 2 years ahead). This means the rate is fixed regardless of exchange rate moves, thereby protecting you if the exchange rate moves against you.

Currency options
A currency option, like a forward contract, allows you to exchange one currency for another on a future date, thereby protecting you from negative movements in the exchange rate. However, with an option, if the rate moves in your favour you can still take advantage of this. There are very few brokers that can offer currency options to clients as it requires additional FSA authorisation. One such broker is World First.

Regular Payments
If you will be exchanging a set amount of funds on a regular basis for mortgage payments or pension transfers, you can set up a regular payment order which will automatically transfer the funds on a regular basis.

It is worth noting that most of the above transactions cannot be made through the bank, and you would need to talk to a specialist currency broker to see what would be best for your specific needs. Using a broker will also allow you to receive commercial exchange rates, free market updates and a personal service with professional market knowledge.

Elisabeth Dobson of foreign exchange broker World First warns, “don’t leave your foreign exchange transactions to the last minute. It could leave you exposed to the prevailing exchange rate and you may not have adequate funds to move overseas.

With some of World First’s products you can protect yourself against negative exchange rate fluctuations. The options above are becoming more and more popular especially given the recent volatility and unpredictability of the currency markets. Forward planning will ensure your emigration can go ahead as planned”.

If you would like to speak to a dedicated foreign exchange expert about your individual requirements, please contact World First on +44 (0)207 801 9080. Alternatively you can view their website at www.worldfirst.com

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Reverse mortgage – the good, the bad and the ugly

by Chris on November 2, 2009

Ever heard of reverse mortgage? Have heard of it, but unsure how it works? Kind of understand that it’s something retirees do, but not sure why? Here is what you need to know about reverse mortgages.

What’s a reverse mortgage?

Normally younger people need to borrow money to buy a house. Reverse mortgage is exactly the opposite – it’s a loan that people over 60 get against the value of their paid off house. There are no repayments with a reverse mortgage – this loan needs to be repaid at once when people sell their house, move to a retirement village / a nursing home or pass away. Instead of reducing the interest and the principle amount by making a repayment, the debt on a reverse mortgage keeps on growing.

The amount a person is allowed to borrow is nowhere near a 100% of their property – it floats between 15 and 35 percent, depending on their age. The younger the borrower is, the less they are allowed to borrow.

The good

Reverse mortgage gives you instant access to money. Imagine a pensioner with bad spending habits, who has credit card debt (or whatever else debt for that matter) and is living on a fixed income. There are many people out there who fit this description, and they would be facing difficulties when asked to repay the debt at once. One solution for that problem is to borrow money against the value of their house.

You can choose whether you want the reverse mortgage to complement your income (by receiving monthly payments) or to get a one-off amount and “have a party”, go on a holiday, buy a car, treat yourself to something you always wanted, but never could afford.

The bad

A person with a reverse mortgage is “spending their kids’ inheritance”. Personally I don’t think there’s anything wrong with it, but many people from my parent’s generation make a big deal of leaving inheritance to the children.

Also, anyone who’s got a reverse mortgage first and then decided to move to a retirement village may find out that they don’t have enough money left in their house. This is especially likely to happen during a period when the property prices weren’t going up.

People who are getting payments from Centrelink that are subjects to income test may lose their eligibility, because they’ve got the money of the reverse mortgage sitting in their bank account.

The ugly

If there’s no unconditional guarantee of ‘no negative equity’ in your contract – you’re in trouble. This guarantee is to make sure you never owe more than your house’ worth. Otherwise they may come and take it away and you will still owe money, which is exactly the opposite of enjoyable retirement.

Not many people know that anyone with a reverse mortgage has to pay for regular property valuations. At present they cost anywhere between $400 and $1000, a considerable amount that you can expect to be paying every three years.

Not many people know that a person with a reverse mortgage enters a contract with an obligation to do regular maintenance to the house and to get a building insurance, which otherwise are a completely voluntary things.

Any couple that doesn’t own the house jointly should know that reverse mortgage will be in one name only – so that when the home owner moves to a nursing home or dies, the house must be sold to repay the mortgage and the other partner can potentially be left homeless.

Do you have any experience with reverse mortgages? Are there more traps we need to know about?

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