home loan

What mortgage stress is and why should we care

by Chris Lang on September 3, 2009
What mortgage stress is and why should we care

Mortgage stress
If you watch or listen to or follow the news in whatever way, you couldn’t have missed this bit – on Tuesday this week the interest rates were left on hold by the RBA.

Phew… that was close.

What was close, you say? Mortgage stress, that’s what. For the folks who only heard about the mortgage part, but never about the stress part, here the exact definition of a mortgage stress: when people are paying above 30 percent of their income on mortgage repayments, they are under mortgage stress. In basic human language it means that they find it much harder to make the ends meet.

If this article catches you before you made a decision to take a mortgage, good. Because there is something you need to know: Reserve Bank of Australia (RBA) governor Glenn Stevens said that anyone taking on a new mortgage should allow for at least a two percentage-point increase in interest rates. Translation: they are going to increase the rates in the nearest future. To avoid getting into a loan that is too heavy for you, see what your repayments will be if the interest rates raise 2% and then see if that number is still less than 30% of your income.

Of course they won’t raise the interest rates 2% overnight, but it is possible – and even likely – that by the middle of 2010 the rates will rise 1%. I’ve never liked percentages because they can look deceivingly small and insignificant, but if you look at the real numbers – they never lie.

Let’s take the average standard variable mortgage of 270K (according to Australian Bureau of statistics). Let’s assume you’re currently paying 5% interest on that kind of loan over 15 years. Your monthly repayments would be around $2,135. This means that if you are earning anything less than $7116 a month, you’re in a mortgage stress already.

If they raise the interest rates 1%, your monthly repayments will become $2,278. That would mean that to not be in mortgage stress you’ll need to earn over $7593 a month. Do you expect a pay rise of over $5700 in the next 6 months? If you’re not, mortgage stress looks very likely to occur.

You can do this little exercise on any numbers using this helpful calculator here, and my message is loud and clear: please don’t bite more than you can chew, even if the banks let you.

Have you ever experienced a mortgage stress? How did you solve this problem?

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The pros and cons of non-bank lenders

by Chris Lang on July 19, 2009
The pros and cons of non-bank lenders

Men shaking hands on a roof of a houseYesterday I was thinking about this crazy surge of first home buyers, purchasing properties while the Boost and the Bonus last, and how strange it looks in this kind of economy.

I know, everyone has their reasons an life doesn’t stop just because we went into recession, but if I was buying now – I would think hard about who I want to borrow from.

If you haven’t lived in Australia for long, this thought might not cross your mind – nonetheless choosing your lender is very important step in buying your house. Here are some considerations for you to think about, when shopping for a loan.

There are many lenders, some of them are banks / credit unions and some are non-bank lenders or so-called “Mortgage Managers”. There are pros and cons to non-bank lenders, and I would say that now, in this economical climate, the cons outweigh the pros.

Pros

  • They will give you a loan even if you don’t have a deposit.
  • If you are self employed, they might ask for less than a mountain of paperwork to prove your borrowing capacity.
  • They are more forgiving to dodgy credit history.

Cons

  • Their loans are not cheaper than the bank’s loans any more.
  • They used to lend for less and that was their way of getting customers, but now this isn’t possible any more.

  • If there is interest rate cut and you’re on flexible interest loan they may or may not pass it on to you.
  • If RBA raises the interest rate, a non-bank lender will most definitely pass it on to you, whereas a bank might decide they will take the hit and won’t raise the interest rate to avoid putting people in mortgage stress.
  • Their loans often have high exit costs.
  • Why is this important? Assuming that there was a rate cut which they didn’t pass on to you, you have found a much cheaper loan elsewhere and want to refinance, the exit costs kill a large part of that profit.

  • They will repossess your home and evict you much faster than a bank, for the following reasons.
  • Banks are bigger and stronger, regulated better and have more ability to withstand your default and give you the chance to recover.

    Non-bank lenders are smaller and take more risk allowing you some time to get your act together and come up with the money. Because if you eventually don’t, they will be forced to sell your home later, and then there might be many other repossessed homes on the market – so the prices will drop and they won’t recover the loan back.

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Dealing with debt: an interview with Christopher Zinn from Choice

by Chris Lang on June 13, 2009
Dealing with debt: an interview with Christopher Zinn from Choice

Debt I don’t know about you, but that report from Choice got me thinking – how did we get up to our eyeballs in debt? What can we do to turn things around? What can we do if we’re already in trouble? So when I had a chance to get some answers, I jumped on it and here is the result – my interview with Christopher Zinn, the spokesperson for Choice.

QuestionIt is common to see credit cards as debt culprit, but are there other debts people should – and can – avoid?

AnswerStore finance deals have many traps that we’ve warned about for many years. These credit deals are lucrative for finance companies and can be profitable for retailers too, but for consumers they’re a real mixed bag. Some provide good value if used cleverly; others should probably come with a wealth warning.

For example, not all credit deals are interest-free — some charge interest straightaway. Rates are likely to be higher than competitive personal loans and credit cards. Some deals, give a no-interest period (such as one year) before charging interest for the rest of the term. But with a high interest rate charged for the remainder (for example, three years), it’s not an option we’d recommend — unless you repay in full within the interest-free period.

QuestionDo you think that the chart of “Household debt Vs income” in the report represents a change in mindset of Australians regarding debt and debt management? Or do we spend more because of the marketing strategy of credit card companies that gets better and better over the years, combined with loose lending regulations?

AnswerThe main reason for the increase in debt are housing costs and high mortgages. Australians have recently adapted to the tough times ahead and are reducing their reliance on debt by repaying credit cards and other debt. But credit card debt still stands at record levels.

QuestionAre certain demographics more likely to have trouble managing debts and if so, why? In other words, is there a certain age group that is in greater danger of getting into debt?

AnswerAccording to government statistics the majority of bankrupts is aged over 40, 19% are aged between 25 and 209 and 27% are aged between 30 and 39 years. 16% only owe less than $10,000 with about half of all bankrupts owing between $10000 and $49,000.

QuestionThe report says: “Many people spiral into debt through circumstances beyond their control, such as losing their job, family breakdown or illness”. How do you know when to ask for help? What are the signs? How do you catch it before it’s too late?

Answer Trouble of meeting your repayments or paying your bills would be a sure sign that you have a problem. The worst thing you can do is paying off one credit card with another one as it gets you in deeper. A good place to go are also financial counselors they can give you information about your options, help you with budgeting and making a hardship application.

QuestionThe report suggests that people should consider selling a second car to reduce the debt. At the same time, it says that if a person is unable to make repayments on a mortgage they should apply for early release of super. Why not suggest that they sell the house to cover the debts and rent a place to live until their financial situation improves?

AnswerWe are not suggesting that people should apply for early release of super – this option is a dangerous last resort. For most people, early super withdrawal is a trap, and one that’s been used by unscrupulous and predatory lenders. What we are suggesting is to go to a financial counselor and to find out your options.

If you are unable to make repayments the first thing is to contact your lender and let them know about your situation. The Uniform Consumer Credit Code allows you to make an application for a hardship variation of your loan in case of temporary financial difficulties. Apply for temporary relief such as reducing your minimum repayments or a waiver of fees or even interest.

QuestionIn the GFC (global financial crisis), do you think Debt relief companies need more regulation? For example, should they be required to refer people to a financial counselor or at least to mention that as an option?

AnswerDebt relief companies are regulated by the Insolvency and Trustee Services Australia and all debt agreements need to be lodged with the government regulator. We would consider it good practice for a debt relief company to mention a financial counselor as an option. One thing to be aware of is that financial counselors are still desperately under funded, while the government has recently made more funding available for financial counselors there are still long waiting lists for some services.

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Lost your job, can’t pay the mortgage? Act early and save the house!

by Chris Lang on June 9, 2009
Lost your job, can't pay the mortgage? Act early and save the house!

Debt: mortgage on a houseWhen the times are good, hardly anyone asks the “what if” questions.

“What if I lose my job”, “What if our business fails”, “What if we can’t pay the mortgage or the credit cards”. I think that if there was a good time for these unpleasant questions, it would be now, in the officially recognized Global Financial Crisis.

Let’s face it – we spend a lot. Sometimes more than we should have. Sometimes more than we earn. And recession such as this one is a good time to re-assess our budget voluntarily, before God forbid our creditors come and make us do so. Or do we even have a budget?

Reacting to the global financial crisis, Choice released a report that IMHO is a must read for anybody, no matter how safe you feel right now money-wise. This report discusses quite a few important issues.

For starters, they say that we spend $160 for every 100 we make – which basically means that the majority of us live outside our means. And to think that only 10 years ago we spent only half that much!

This leads to the most logical conclusion – some belt tightening is in order. Here is how – in addition to the report, Choice have put together a calculator to help us understand where our money goes. It allows entering your income and all the expenses (nicely classified in categories) and shows whether or not your family is spending more than earning and on what.

But what do you do if it’s too late to make a budget, if your family is left with just one income or even worse, no income at all? Choice’s report says that the most important thing is to react fast, contact your lenders and see a financial counselor. I don’t know about you, but this was the first time I have ever heard about a financial counselor. Apparently they exist, are funded by the government and their job is to help you find the best debt relief solution for your family.

The report mentions a lot of options to help with paying bills: reducing the minimum repayments on mortgage (or even the interest!), a repayment holiday for people who lost their job, etc. I was surprised to learn that if you’re unable to pay your bills (such as energy bills or taxes), there is an option of contacting the billing company and asking for a flexible repayments plan. Another option they mention is a no-interest loan scheme.

And the most important thing – you should definitely seek financial counseling before signing a debt agreement with a debt relief company. Debt agreement is basically you saying to your creditors “I know I owe you a $1000, but can only afford to pay a $100 back.” and debt relief company arranges everything to freeze your debts, no more interest will apply and you will pay the agreed amount over a long period of time. As easy as this sounds, Choice says this is may not be the best solution for your situation and it will certainly harm your credit history.

Bottom line – Choice is saying this: you may be in debt and lost your income, but your still have consumer rights, the situation can be fixed and there are people you can see to seek help and solutions. Read the full report here and learn how.

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Mortgage and home loan types used in Australia

by Chris Lang on March 26, 2009
Mortgage and home loan types used in Australia

The article below is by Paul Tiernan, a British expat who moved to Australia in 2006. Paul is a founder of AIMFS, a company that specializes in migrant mortgages.

As any newly arrived migrant, you may find it difficult to decide on whether to rent or buy. Renting means you’ll be using your hard earned money paying for somebody else’s mortgage. However, you do have another option, that’s to buy. If you’re thinking: “Can I get a mortgage as soon as I arrive?” the answer is YES. The type of loan you can get will depend on your financial situation and your employment.

Below you will find my best attempt to cover the major points to think about when securing a mortgage in Australia. As you will appreciate it would not be possible to cover all the points in one single article, so if you should require any further information, do contact me via the email below.

Let’s start with people who do not hold Australian citizenship or full residency status – they too can purchase a property, subject to Foreign Investment Review Board (FIRB) approval. There is a process you will have to go through, an application to fill and some information you need to supply. Click here to learn more.

The most common question people ask me is “What evidence of my income will I need to supply?”. For a Full Doc loan, you will need to supply a copy of your most recent payslips or a letter from your employer detailing your income and length of employment. Different rules apply for LiteDoc loans and for self-employed applicants. You have the choice to have your accountant verify your income or you can certify it yourself.

Now let’s move on to types of loans.

Variable Rate

A Standard Variable home loan offers more flexibility, with many lenders offering additional features such as redraw facilities, chequebooks, the ability to make lump sum payments or to transfer your loan to another property in the future.

A Basic Variable home loan is generally about 1 per cent cheaper but offers few added services. No frills and low cost.

With either type of variable loan the interest rate charged moves up or down with the official ‘cash rates’ as set by the Reserve Bank (RBA). So, if they go up, so do your required repayments, but if they fall so do the required repayments.

Fixed Rate

With a fixed rate your interest rate, therefore your repayments, stay the same regardless of changes to the official ‘cash rates’ set by the RBA. If you think interest rates will rise or you prefer to have some certainty about your repayments over the term of the loan, a fixed loan may be more suitable.

Lenders will normally offer a fixed rate for periods of up to five years. However, if you lock into a fixed mortgage and rates fall, you’ll miss out on the lower rate. Also, during the fixed rate period extra repayments may not be allowed and penalties may apply for early repayment or exit.

Combination (or Split) Loans

A Combination or Split loan offers borrowers the ability to set part of their loan as a variable rate loan and the other part as a fixed-rate loan. It’s akin to having a bet each way, in terms of where rates may go.

Introductory loan – Honeymoon rates

Many lenders offer so-called honeymoon rates. The interest rates offered can be significantly lower than the prevailing variable interest rate, although, the introductory rate only applies for a limited time of usually between six and twelve months. After the introductory period, generally, rates revert to the standard rate of the time.

Home equity loan or Line of Credit mortgage

From lender to lender this type of service can be structured differently, basically, it gives you access to equity that you have built (the difference between asset valuation and amount owed). So, in effect any payment you make can be drawn back out as long as the interest charges are being met. This type of loan may be useful to investors or business.

Transactional Account or All-In-One loan

This type of loan is normally set up as a complete transactional account with the mortgage, savings and cheque account combined. As a rule, all your income and cash deposits are paid into this account which reduces your loan balance. A credit card is often linked to the account and monthly payments drawn from the transactional account. Gains desired could be from utilizing interest free credit card periods to allow income to reduce interest costs.

Mortgage Offset account

The mortgage or loan account is linked to a savings account into which your salary and other cash can be deposited and from which you can withdraw to pay everyday expenses. For as long as money sits in the savings account, it is ‘offset’ against your loan and no interest is charged on that amount.

Low-Doc

A low-doc or no-doc (doc=documentation) loan is ideally suited for investors or self employed borrowers who may not have, or want to share, income records. No tax returns or financial reports are generally required, although, a higher interest rate and/or fees may be charged.

I realize that the descriptions above are only the tip of the iceberg and eventually you will need to discuss you personal preferences and financial situation with a professional – which is where my company comes in.

AIMFS provides loans for expatriate and temporary resident borrowers. We provide a full range of fixed and variable rate loans with standard loan features as outlined above. Funds are available to purchase or refinance an established dwelling, or an off the plan purchase, subject to the borrower obtaining Foreign Investment Review Board approval and appointing a recognized Australian based law firm and Power of Attorney to receive loan documents and notices after settlement.

You can contact me by phone + 61 (7) 56304365 or email [email protected] or learn more about our services via our website.

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Home, Mortgage, Landlords and Renters Insurance explained

by Chris Lang on January 20, 2009
Home, Mortgage, Landlords and Renters Insurance explained

There are several kinds of home insurance and I thought to give you a quick run-through to compare and explain them once and for all. It is not uncommon for people to get lost amongst these different forms of insurance, so here they are, demystified.

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Homebuyers and Homeowners: they cut the interest rate again, how much we save?

by Chris Lang on November 5, 2008
Homebuyers and Homeowners: they cut the interest rate again, how much we save?

This time, when they announced the third successive interest rate cut, I made an exception, because I want to explain what it means to the home buyers.

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How to buy a house – Part 1

by Chris Lang on September 24, 2008
How to buy a house - Part 1

House buying is a long process that seems to be vague, confusing and unpredictable in the beginning. The truth is that every home buyer goes through similar stages on his way from the raw idea “I should buy a house” to the actual house he purchases. The length in time can vary, but the stages are pretty much the same for everybody.

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What exactly happens on settlement date

by Chris Lang on August 31, 2008
What exactly happens on settlement date

There are two important dates in the house buying process: the contract date and the settlement date. Contract date is the date when the vendor have signed a contract of sale or a contract note. In most contracts the house price is split in 2 parts, first the buyer pays the deposit (5 – 10 percent of the house price) and the remaining amount is paid on the settlement date.

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What kind of house can I afford?

by Chris Lang on August 25, 2007
What kind of house can I afford?

After the latest interest rates raise everybody are talking even more about affordability crisis. The builders say that people who don’t already own a house (which they can sell) simply can not buy a house. “First home buyers just aren’t buying”, they say.

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