Is your home loan not up to scratch? Are you looking for a better rate? Do you want to unlock equity? Then refinancing could be for you, but there are some important questions to ask first.
If you are considering refinancing your mortgage, you are not alone. With the rising cost of living and interest rates hitting the hip pockets of many Australians, it is a popular move. According to ABS data, November 2022 saw refinancing values reach a record high of $13.4 billion.
Refinancing may offer you opportunities to unlock equity, land a better rate and avoid what is known as “loyalty tax.” Sticking to the same loan could see you missing out on favourable rates and features that lenders like to use to use to gain new customers. Or maybe you are about to come off a fixed loan period and are bracing for a potential rate hike.
Whatever the reasons for refinancing, we have some questions you help you through the process.
What Is Your Financial Picture?
Banks want to look at your financial profile before lending you money, so check that your credit score is healthy to avoid disappointment.
Look at your budget to see how much you can afford to pay towards a mortgage. Include interest, repayments, and service fees, and factor in possible additional refinancing costs such as application and valuation fees. You can also consider how the length of your loan impacts you budget.
A longer-term loan usually comes with lower repayments but more interest over the lifetime of your loan. A shorter-term loan on the other hand would usually mean you make higher repayments now, but you could save on total interest payments.
Whichever way are you are leaning, we can help you crunch the numbers.
Do You Have Equity?
Having 20% equity in your home is typically a lender requirement when refinancing. But what is equity?
It is the difference between the market value of your property and the balance of your mortgage. With the recent decline in property values, it is an important thing to check.
The 20% equity typically acts as a deposit. Not having 20% may mean you have to pay lenders’ mortgage insurance, which may make refinancing not worth it. And negative equity, when your mortgage balance exceeds your property’s value, would most likely put the brakes on any refinancing plans. But if you have additional equity, you may be able to unlock it when refinancing.
Here is an example. Say your house is now worth $1 million, but you bought it for $800,000 a few years back with a $600,000 loan that you have paid down to $500,000. Banks will typically allow a loan for 80% of a property’s market value (depending on your financial position and other factors). So, if you refinanced your $500,000 loan to an $800,000 loan, you could unlock $300,000 for things like renovation projects or investments.
What Are You Looking For?
Now it is time to think about what you want from a loan.
A better interest rate is usually at the top of the list, but what other features could benefit you? An offset account may be something you want to reduce interest, or the ability to make additional repayments without incurring penalties.
Depending on what you are after, you may not need to move to another lender. We can always talk to your current lender first to see if they will offer something better. If not, then we can explore other options.
Frequently Asked Questions
Why is refinancing a popular option?
Refinancing has gained popularity due to the rising cost of living and fluctuating interest rates. According to ABS data, refinancing values reached a record high of $13.4 billion in November 2022.
What is “loyalty tax” and how can refinancing help avoid it?
Loyalty tax refers to the disadvantage you may face by sticking to the same loan for an extended period. By refinancing, you can take advantage of better rates and features that lenders offer to attract new customers.
What factors should I consider before refinancing?
Before refinancing, you should check your credit score and budget to see how much you can afford in mortgage repayments. Also, consider any additional costs like application and valuation fees.
How does equity play a role in refinancing?
Having at least 20% equity in your home is typically a lender requirement for refinancing. Equity is the difference between the market value of your property and the balance of your mortgage.
What loan features should I look for when refinancing?
Apart from a better interest rate, you may also want features like an offset account or the ability to make additional repayments without penalties.
Can I negotiate with my current lender before switching?
Yes, it’s always a good idea to talk to your current lender to see if they can offer a better deal before deciding to switch to another lender.
Get in touch
Do you want to refinance to unlock a better interest rate, features and benefits or equity in your home? Then give us a call. We can help assess your situation to see what is possible and locate loans and lenders that would be a great fit for you.
Zippy Financial is an award-winning mortgage brokerage specialising in home loans, property investment, commercial lending, and vehicle & asset finance. Whether you are looking to buy your first home, refinance or build your property investment portfolio, the team at Zippy Financial can help find and secure the right loan for you and your business.
About the Author:
Louisa Sanghera is an award-winning mortgage broker and Director at Zippy Financial. Louisa founded Zippy Financial with the goal of helping clients grow their wealth through smart property and business financing. Louisa utilises her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients achieve their lifestyle and financial goals. Louisa is an experienced speaker, financial commentator, mortgage broker industry representative and small business advocate.
Louisa Sanghera is a Credit Representative (437236) of Mortgage Specialists Pty Ltd (Australian Credit Licence No. 387025).
Disclaimer:This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. This article is not to be used in place of professional advice, whether business, health or financial.
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Refinancing Your Mortgage: When It Makes Sense and How to Navigate the Process
The landscape for first home buyers has undergone significant changes recently. With a notable decrease in the number of first home buyers entering the market, potential opportunities have emerged for those looking to purchase their first home.
Current State of the Property Market
Recent trends indicate a shift in the property market dynamics. Factors such as rising interest rates and economic uncertainties have contributed to a decrease in first home buyer activity. This change has been reflected in property prices and buyer demographics, reshaping the market in several ways.
Impact of Economic Changes on First Home Buyers
The halving of first home buyer numbers can be attributed to various economic factors. Changes in lending criteria, increased interest rates, and the overall economic climate have made it challenging for first home buyers to enter the market. This has led to a decrease in first home buyer loan applications and approvals. Exploring alternative financing options such as personal loans may be considered by those facing challenges in the current lending environment.
Opportunities for Prospective Buyers
With fewer first home buyers in the market, there is now less competition for properties. This situation presents a unique opportunity for those still looking to purchase their first home. Potential buyers may find more room for negotiation, potentially leading to better deals and more favorable terms.
Strategies for Capitalizing on Current Market Conditions
For those looking to take advantage of the current market conditions, several strategies can be employed:
Conduct thorough market research to understand local trends and identify undervalued properties.
Negotiate aggressively, leveraging the reduced competition in the market.
Explore various first home buyer loan options to find the best fit for your financial situation.
Government Incentives and Support Programs
Despite the challenges, there are still government incentives and support programs available to assist first home buyers. These programs can provide significant support, making homeownership more accessible despite the current market conditions.
Eligibility Criteria and Application Guidance
Understanding Eligibility Criteria: Clarify common requirements like income thresholds, property value limits, and residency conditions.
Navigating the Application Process: Provide guidance on documentation, timelines, and submission procedures for a smooth application process.
Professional Assistance for Applications: Recommend seeking guidance from professionals like mortgage brokers for informed decision-making.
Maximizing the Benefits of Government Initiatives
Strategic Integration with Financial Plans: Encourage aligning government incentives with long-term financial goals, contributing to a robust financial strategy.
Continuous Monitoring for Updates: Stress the importance of staying informed about policy changes for adapting strategies and maximizing benefits.
Educational Resources and Workshops: Suggest leveraging workshops and resources provided by government agencies for in-depth understanding and navigation.
Long-Term Market Outlook
The long-term outlook for the property market remains positive, with expectations of stabilization and growth. Prospective first home buyers should consider this outlook in their planning, balancing immediate challenges with future opportunities.
Expert Financial Advice for Navigating the Market
Navigating the current property market can be complex, especially for first home buyers. Seeking expert financial advice from a mortgage broker can provide clarity and guidance, helping you to make informed decisions and find the best path to homeownership.
The decrease in first home buyer numbers presents both challenges and opportunities in the property investment market. For those considering purchasing their first home, now may be an opportune time to explore your options and potentially secure a favorable deal.
FAQ
A: The number of first home buyers has decreased due to repeated cash rate hikes by the Reserve Bank of Australia (RBA). From May to December, the RBA lifted the cash rate from 0.10% to 3.10%, making it more challenging for first-time buyers to enter the market.
A: The decrease in first home buyers means less competition in the property market. This gives potential buyers more bargaining power and a better chance to negotiate favorable prices.
A: Property prices have softened in most parts of the country over the past three months, except for regional South Australia and regional Western Australia.
A: National median weekly rental prices rose by 4.3% in September 2022, making it potentially cheaper to buy than rent in some areas.
A: Yes, the government’s First Home Guarantee can offer mortgage insurance waivers and low deposits of 5% to eligible first home buyers.
A: If you’re ready to buy, it’s advisable to consult with a mortgage broker to understand your borrowing capacity and mortgage options. This will help you make an informed decision and potentially get a better deal.
Zippy Financial is an award-winning mortgage brokerage specialising in home loans, property investment, commercial lending, and vehicle & asset finance. Whether you are looking to buy your first home, refinance or build your property investment portfolio, the team at Zippy Financial can help find and secure the right loan for you and your business.
About the Author:
Louisa Sanghera is an award-winning mortgage broker and Director at Zippy Financial. Louisa founded Zippy Financial with the goal of helping clients grow their wealth through smart property and business financing. Louisa utilizes her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients achieve their lifestyle and financial goals. Louisa is an experienced speaker, financial commentator, mortgage broker industry representative and small business advocate.
Louisa Sanghera is a Credit Representative (437236) of Mortgage Specialists Pty Ltd (Australian Credit Licence No. 387025).
Disclaimer:This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. This article is not to be used in place of professional advice, whether business, health or financial.
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Demystifying First-Time Home Buying: Debunking Common Myths
There is no denying that 2022 was a tough year for many mortgage holders with eight interest rate rises since the start of May, and unfortunately 2023 is tipped to bring out more rate increases. But kicking off the year with a few tweaks to your budget and habits you could be in a much better position to ride out future hikes.
Here are 4 simple new year’s resolutions that can help you keep your finances fighting fit.
1 – Is it time to ditch the unnecessary expenses?
The 2022 rate rises had a lot of us trimming back our budgets, but expenses can creep back in. Before you know it, those “free trials” you forgot to cancel become paid monthly subscriptions.
It is good to get into the habit of conducting regular expense audits… cut down on streaming services, take-away meals, and impulse purchases to make savings. That said, you don’t have to become an extreme penny-pincher. Little tweaks here and there can add up. For example, a daily $4 take-away coffee habit costs you $1,460 per year. But switching to a DIY French press brew can cost you $260-$400.
2 – Have you got an emergency buffer fund?
The last few years have taught us to expect the unexpected. Having money tucked away for emergencies or more rate rises, can give you added peace of mind.
You can use unlocked savings from your expense audit to start building up an emergency buffer. And consider adding even more to this fund by selling any unused or unwanted items on ebay or Gumtree.
Then, if rates go up further, you lose your job or have any unforeseen medical expenses, you will have the funds on hand. And you can get rid of some clutter in the process. It is win-win!
3 – Do you need to pay down debt?
Christmas is a time many of us cut a little loose on our spending, but it is important to make sure you pay off any debts quickly. Now may be a good time to either start paying back any money owed on your credit cards, get ahead on your mortgage (if you are able to), or vanquish any debts you might have.
Also, consider avoiding credit card or buy now pay later purchases if possible. If you forget to pay these on time, you could incur interest and/or late fees.
You may also find that quickly reducing debt tastes sweeter than a take-away mochaccino, and your credit score might thank you for it too, which can make purchasing your first home, a new property or refinancing that little bit easier.
4 – When did you last review your home loan?
If you have had your home loan for a while, you could be paying something called “the loyalty tax.” This is where lenders don’t pass on new borrower rates to existing customers.
An RBA study found that compared to new loans, borrowers are charged an average of 40 basis points higher interest rates for loans written four years ago.
Arranging regular home loan health checks can potentially uncover opportunities for savings. Not only could you secure a lower interest rate, but you could refinance to a mortgage with other features that may be a better fit for your circumstances such as an offset account, fixed period, or a linked debit card, to name a few.
To get started on your home loan health check and prepare for whatever 2023 throws at you, get in touch.
We will look at your financial footing, your mortgage, and the market to scope out suitable loan products and potential savings.
Zippy Financial is an award-winning mortgage brokerage specialising in home loans, property investment, commercial lending, and vehicle & asset finance. Whether you are looking to buy your first home, refinance or build your property investment portfolio, the team at Zippy Financial can help find and secure the right loan for you and your business.
About the Author:
Louisa Sanghera is an award-winning mortgage broker and Director at Zippy Financial. Louisa founded Zippy Financial with the goal of helping clients grow their wealth through smart property and business financing. Louisa utilises her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients achieve their lifestyle and financial goals. Louisa is an experienced speaker, financial commentator, mortgage broker industry representative and small business advocate.
Louisa Sanghera is a Credit Representative (437236) of Mortgage Specialists Pty Ltd (Australian Credit Licence No. 387025).
Disclaimer:This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. This article is not to be used in place of professional advice, whether business, health or financial.
How to Get Pre- Approved Finance?
Many borrowers are complaining that banks are slow to process pre-approvals. Why is this happening? Is there anything you can do to speed up your pre-approval?
A home loan pre-approval means that a lender has agreed, in principle, to lend you a specific amount of money towards the purchase of a property. But they have not proceeded to a final or unconditional approval yet.
Getting a home loan pre-approval is an essential prerequisite to getting serious about looking for a property to buy. It will give you the confidence to buy as you know your limits. It can also allow you to bid at an auction with a set budget in mind. Overall, it helps give you a budget to shop within and give you the peace of mind of knowing if your offer is accepted, you are very likely to be approved for a home loan.
What do you do now that pre-approvals have become difficult to get?
The Pre-Approval Shortage
The issue is that many banks have stopped doing pre-approvals. They have taken this action because they have been so overwhelmed with demand and they have not had the resources to service potential new borrowers.
The banks that have continued to proceed with pre-approvals have had to take on extra volume, which is making their response and turnaround times a lot slower than usual.
Driving this home loan demand has been the record activity the market has seen by active first-time buyers. Low interest rates have also meant that existing homeowners have been refinancing for a better deal than they have.
Furthermore, the super low interest fixed rates have encouraged a massive amount of people to apply to fix their rates.
Some banks have got themselves into a sticky situation during covid and lockdowns as they have staff overseas in bulk call centres such as India and the Philippines. These regions have been hit hard by the pandemic and in turn, put an enormous amount of pressure on banks as they tried to equip staff to work from home in offshore countries. This has contributed to the slower service levels.
In some positive news, some banks have since decided to bring their credit departments back to Australia, but it has been a lengthy process of recruiting and training – so not an immediate solution.
This can explain the why. But if you are one of the unlucky borrowers who has applied for a home loan and are slow to get approval, you can miss opportunities to buy at an auction, secure a deceased estate or take action on a property for sale by motivated sellers who want a quick sale.
If this sounds like you, and you do not want to pay more than you need to in a rising market, time is of the essence. Getting a fast pre-approval can happen, and here is what you need to do:
1. Be organised and prepared from the outset. This means getting all your paperwork organised including your payslips and tax returns.
2. Do not start looking for a property until you have got your pre-approval. If you find your dream home, it can add pressure as you will feel compelled to act fast and make an offer, but this can add a lot of stress to the process.
3. Work with a mortgage broker that understands efficiency and speed. If you delay getting all the documents to them, they are hamstrung and your application can’t progress.
4. Ask your mortgage broker to do the research for you. Good mortgage brokers have exceptionally good systems and good relationships with banks and their credit managers, so they can find you a bank that best suits your needs and has the fastest turnaround times.
5. You can fast-track the process by being super organised on your end. If you get a list of the supporting documents required and provide everything correctly the first time to the mortgage broker, it can streamline the process significantly.
It is also important to let your mortgage broker know if you need a fast turnaround time. Under best interests’ duty, it is the mortgage broker’s obligation to give you the cheapest 3 options for you, which are not always the fastest loans.
Remember – mortgage brokers are on your side. If there is some urgency, make sure you advise them. They will know the majority of the turnaround times for the banks and can match you with the most suitable lender.
Frequently Asked Questions
Why Are Banks Slow to Process Pre-Approvals?
Many banks have stopped offering pre-approvals due to overwhelming demand and limited resources. Some banks have also faced challenges due to offshore call centers affected by the pandemic.
What is a Home Loan Pre-Approval?
A home loan pre-approval means that a lender has agreed, in principle, to lend you a specific amount of money towards the purchase of a property. However, this is not a final or unconditional approval.
How Can I Speed Up My Pre-Approval Process?
Be organized and prepared with all your paperwork, including payslips and tax returns. Work with a mortgage broker who understands efficiency and speed, and be clear about your need for a fast turnaround.
What Are the Benefits of Getting Pre-Approved?
Pre-approval gives you the confidence to buy as you know your limits. It allows you to bid at an auction with a set budget and gives you peace of mind that your offer is likely to be approved for a home loan.
How Can a Mortgage Broker Help in Getting Pre-Approved Quickly?
Good mortgage brokers have systems and relationships with banks that can expedite the pre-approval process. They can also guide you on the required documents and help you choose a lender with faster turnaround times.
What Should I Do If I Need a Fast Turnaround Time?
Make sure to inform your mortgage broker about the urgency. They can then match you with the most suitable lender based on turnaround times.
If you have any questions about the home loan process and getting pre-approval, feel free to get in contact with our friendly team today.
Zippy Financial is an award-winning mortgage brokerage specialising in home loans, property investment, commercial lending, and vehicle & asset finance. Whether you are looking to buy your first home, refinance or build your property investment portfolio, the team at Zippy Financial can help find and secure the right loan for you and your business.
About the Author:
Louisa Sanghera is an award-winning mortgage broker and Director at Zippy Financial. Louisa founded Zippy Financial with the goal of helping clients grow their wealth through smart property and business financing. Louisa utilises her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients achieve their lifestyle and financial goals. Louisa is an experienced speaker, financial commentator, mortgage broker industry representative and small business advocate.
Louisa Sanghera is a Credit Representative (437236) of Mortgage Specialists Pty Ltd (Australian Credit Licence No. 387025).
Disclaimer:This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. This article is not to be used in place of professional advice, whether business, health or financial.
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Following all the interest rate rises, home loans have not just returned to pre-covid levels – they’ve surpassed them. And unfortunately, there may be further rate rises ahead.
So, how can you best prepare – and what can you do about your borrowing power, if you want to buy in this market but your borrowing power has been squeezed?
The cash rate is currently sitting at 3.10%, with economists and experts predicting a few increases in 2023 as well.
Many borrowers are already reeling from the massive increase to their monthly repayment levels, and the prospect of even more rate hikes is worrying.
For those who were considering investing in property, those plans may have been put on the backburner. With home loan rates a lot higher than they were at the beginning of the year, it may not feel like the ideal time to take on another loan.
If this sounds like you, here are a few things to consider:
Rents are increasing – your home loan repayment is higher, but the rental income you’re getting is likely to be much higher, too, with the potential for rents to completely cover the mortgage repayment.
Rate hikes will slow – and eventually, stop. Some economists are even predicting that interest rates may start to come down in the second half of 2023.
Competition is decreasing – and with less competition in the market to drive prices up, you’ll be able to negotiate a lower price.
Property prices are falling – interest rates may be higher, but the price you’ll pay for the property is likely to be lower. A home that was listed for $700,000 this time last year could sell for $600,000 – $650,000 today, or less, depending on the suburb and local market factors.
Many property experts say the best time to buy is when the market is in a depressed cycle, as there’s less competition and opportunities to negotiate abound.
If you’d like to buy an investment property, you’ll first want to work out your borrowing power – and just importantly, look for ways to increase it.
How to boost your borrowing power
The factors outlined here are the things you can’t change, as interest rates and the individual bank policies are out of your control.
What are some of the levers you can pull to increase your borrowing power?
Consolidate debts
Multiple debts such as credit cards, personal loans, car loans and store cards can chew through your disposable income and increase your risk profile. By consolidating them all into one debt, you can reduce your monthly repayment obligations, which will have the impact of boosting your borrowing power. You may even be able to consolidate your personal debts into your home loan. Make sure you speak to your mortgage broker to discuss the pros and cons of doing this, considering your unique situation.
Lower your credit card limit
Many people don’t realise that banks assess your credit card debts based on the limit, not on the outstanding balance. So, if you have a $10,000 credit card limit but an outstanding balance of $500, the bank will assume you owe $10,000. Why? Because they know you have access to that amount of credit, and they need to ensure you can afford it. Reducing your credit limit by $5,000 can add upwards of $25k to your borrowing power (depending on the lender), so review and lower your credit limits before applying for a home loan.
Check your credit score
Another one of the key things you can do to get your borrowing capacity up to a higher level is to ensure you have a good credit rating. The stronger your rating, the less “risk” you present to the lender. If you have a poor credit rating, they’ll perceive you as being at a higher risk of not making your repayments, which means they might reduce the amount they’re willing to lend you.
To see what your options are, contact a Mortgage Broker to see what your options are.
Zippy Financial is an award-winning mortgage brokerage specialising in home loans, property investment, commercial lending, and vehicle & asset finance. Whether you are looking to buy your first home, refinance or build your property investment portfolio, the team at Zippy Financial can help find and secure the right loan for you and your business.
About the Author:
Louisa Sanghera is an award-winning mortgage broker and Director at Zippy Financial. Louisa founded Zippy Financial with the goal of helping clients grow their wealth through smart property and business financing. Louisa utilises her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients achieve their lifestyle and financial goals. Louisa is an experienced speaker, financial commentator, mortgage broker industry representative and small business advocate.
Louisa Sanghera is a Credit Representative (437236) of Mortgage Specialists Pty Ltd (Australian Credit Licence No. 387025).
Disclaimer:This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. This article is not to be used in place of professional advice, whether business, health or financial.
Why Lender Care Your Debt-To-Income Ratio
Data from the lending watchdog reveals that almost one in four new mortgages are risky. How are they deemed risky? It’s got something to do with your debt-to-income ratio or DTI.
Your DTI might sound complicated, but it is simple to work out. Your DTI is a measurement used by lenders that compares your total debt to your gross household income.
The formula is… total debt / gross income = debt-to-income ratio
Here is an example:
If you are seeking a $700,000 home loan (and have no other debt), and you have $160,000 in gross household income, then your DTI is 4.375 – a ratio that most lenders would be comfortable with.
Why Do Lenders Care About Your DTI?
The December quarter data released by the Australian Prudential Regulation Authority (APRA) shows 24.4$ of new mortgages have a DTI ration of 6 or higher. At the 6+ ratio, APRA (the banking watchdog) deems these loans as risky, and they are keen to see the percentages of these loans that lenders approve to start to come down. That is because they have been steadily rising for a while now.
For example, in the September 2021 quarter, new mortgages with a DTI of 6 or higher were at 23.8% while in the December 2020 quarter, it was just 17.3%.
Why Has the Percentage of Risky Loans Risen?
The recent rise in high DTIs has most likely got a lot do with the phenomenal price growth (and resulting FOMO) we have seen across the country over the past 18 months.
Data released by the Australian Bureau of Statistics shows that in the 12 months to December 2021, residential property prices rose 23.7% – the strongest annual growth ever recorded.
So, with the property prices increasing at such a sharp rate and people stretching themselves to their limits to buy into the market, it has resulted in upwards pressure on high DTI percentages. The good news is that as the property market starts to cool, so too should the growth rate of risky DTIs.
How Much Can You Safely Afford to Borrow?
There is a fine line between maximising your investment opportunities and stretching yourself beyond your limits. It is important to stress-test what you can borrow in the current financial landscape and also against any upcoming headwinds that are tipped to hit borrowers, such as interest rate rises and possible tightening lending standards.
Everyone’s financial situation is different. Some lenders will consider your circumstances and accept a loan application where a DTI is higher than 6.
Frequently Asked Questions
What is Debt-To-Income Ratio (DTI)?
The Debt-To-Income (DTI) ratio is a measurement used by lenders to compare your total debt to your gross household income. The formula for calculating DTI is: total debt / gross income.
Why Do Lenders Care About DTI?
Lenders use the DTI ratio to assess the risk associated with a mortgage application. A high DTI ratio is considered risky, and lenders are keen to see the percentage of such loans come down.
What is Considered a Risky DTI Ratio?
According to the Australian Prudential Regulation Authority (APRA), loans with a DTI ratio of 6 or higher are considered risky.
Why Has the Percentage of Risky Loans Increased?
The rise in high DTI ratios is likely due to the significant growth in property prices, causing people to stretch their financial limits to buy into the market.
How Can I Safely Afford to Borrow?
It’s crucial to stress-test your borrowing capacity against current financial conditions and upcoming changes like interest rate rises. Some lenders may accept a loan application where the DTI is higher than 6, depending on your circumstances.
How Can Zippy Financial Help Me Understand My DTI?
Zippy Financial can help you find out your borrowing capacity and options, and map out a financial plan tailored to your needs.
If you’d like to find out your borrowing capacity and options, get in touch with us today. We would love to sit down with you and help you map out a plan.
Zippy Financial is an award-winning mortgage brokerage specialising in home loans, property investment, commercial lending, and vehicle & asset finance. Whether you are looking to buy your first home, refinance or build your property investment portfolio, the team at Zippy Financial can help find and secure the right loan for you and your business.
About the Author:
Louisa Sanghera is an award-winning mortgage broker and Director at Zippy Financial. Louisa founded Zippy Financial with the goal of helping clients grow their wealth through smart property and business financing. Louisa utilises her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients achieve their lifestyle and financial goals. Louisa is an experienced speaker, financial commentator, mortgage broker industry representative and small business advocate.
Louisa Sanghera is a Credit Representative (437236) of Mortgage Specialists Pty Ltd (Australian Credit Licence No. 387025).
Disclaimer:This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. This article is not to be used in place of professional advice, whether business, health or financial.
Australian homeowners are loading up their offset accounts in record amounts, so much so that the average household is now almost four years ahead on their mortgage repayments. Seeking advice from a mortgage broker can further optimize the benefits of offset accounts for homeowners.
Do you have an offset account (or several) attached to your mortgage?
They have become quite popular in recent years, especially since the RBA’s cash rate hit record low levels which impacted the amount of interest that can be earned on savings accounts.
How Much Have Offset Balances Increased?
Research from the Australian Prudential Regulation Authority (APRA) provided to The Australian shows the average balance sitting in offset accounts is nearly $100,000 – up almost $20,000 since the pandemic started in March 2020.
In total, $222 billion was in offset accounts across the country as of September 2021 – that is up almost $50 billion from $174 billion in March 2020. In the September 2021 quarter alone, offset account balances increased by 10%!
All of this has helped contribute to mortgage holders, on average, 45 months ahead on their repayments – this is up from 32 months prior to the pandemic.
In terms of the various ways Australians have gotten ahead, 57% of prepayments came from offset accounts, 40% via available redraw balances, and 3% through other excess repayments.
What Is an Offset Account?
An offset account is a regular transaction account that is linked to your home loan. The advantage is that you only pay interest on the difference between the money in the account and the mortgage.
Some banks also allow you to have 10 offset accounts attached to your mortgages with cards linked to them that you can use for everyday spending.
How Does It Work?
Say you owe $350,000 on your mortgage and have $50,000 in a savings account. If you move that $50,000 into a full offset account, you will only pay interest on $300,000 (which is the loan value minus the amount in your offset account).
The offset account can then continue to be used for all your daily needs, like receiving your salary or withdrawing cash.
Why Would You Consider an Offset Account Over a Savings Account?
With the RBA’s cash rate as low levels, the interest you will receive on the balance in your bank’s savings account will also be at low levels.
For example, say savings account with a 1% interest rate and a mortgage with a 2.2% interest rate. By allocating money into your full offset account, you would save more money on interest than you would earn in your savings account.
Additionally, interest on your savings account is subject to tax, whereas the interest-saving on your mortgage is not.
Is an Offset Account for You?
There are additional factors you will want to consider, such as account keeping fees and the minimum amount needed in the account to make it useful.
And obviously, savings accounts and offset accounts are not the only two places you can put your money. Depending on your risk appetite there are also other options you could consider that might yield a higher return.
Frequently Asked Questions
What is an Offset Account?
An offset account is a regular transaction account linked to your home loan. The money in the offset account reduces the amount of interest you pay on your mortgage.
How Have Offset Balances Changed Since the Pandemic?
Since the pandemic started in March 2020, the average balance in offset accounts has increased by nearly $20,000. As of September 2021, there was a total of $222 billion in offset accounts across Australia.
How Does an Offset Account Work?
If you have a mortgage of $350,000 and $50,000 in an offset account, you will only pay interest on $300,000. The offset account can be used for daily needs like receiving your salary or withdrawing cash.
Why Choose an Offset Account Over a Savings Account?
With low interest rates, the money in a savings account earns less interest. Additionally, the interest earned in a savings account is taxable, whereas the interest saved on your mortgage through an offset account is not.
Are There Any Downsides to Using an Offset Account?
You may want to consider factors like account keeping fees and the minimum amount needed in the account to make it useful. Depending on your risk appetite, there might be other investment options that yield a higher return.
How Can Zippy Financial Help Me with Offset Accounts?
Zippy Financial can help you explore your options and determine if an offset account is suitable for your financial situation.
Everyone’s situation is different, but if you think an offset account might be for you, get in touch and we can help you explore your options.
Zippy Financial is an award-winning mortgage brokerage specialising in home loans, property investment, commercial lending, and vehicle & asset finance. Whether you are looking to buy your first home, refinance or build your property investment portfolio, the team at Zippy Financial can help find and secure the right loan for you and your business.
About the Author:
Louisa Sanghera is an award-winning mortgage broker and Director at Zippy Financial. Louisa founded Zippy Financial with the goal of helping clients grow their wealth through smart property and business financing. Louisa utilises her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients achieve their lifestyle and financial goals. Louisa is an experienced speaker, financial commentator, mortgage broker industry representative and small business advocate.
Louisa Sanghera is a Credit Representative (437236) of Mortgage Specialists Pty Ltd (Australian Credit Licence No. 387025).
Disclaimer:This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. This article is not to be used in place of professional advice, whether business, health or financial.
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Your Mortgage: Proven Strategies for Today’s Homeowners
It is impossible to know how much interest rates will rise, but one thing we know for certain is that they are rising…
It is important to look at your budget and financial situation, so you can plan for the increase in your budget.
If you are worried about the extent of interest rate rises, keep in mind that all increases are introduced gradually. The most important thing to do is get prepared. How can borrowers prepare themselves for the increases in mortgage rates?
Tips to Manage Higher Mortgage Repayments
Tip 1: Review your mortgage pronto
If you have a home loan bit haven’t checked out the details in the last 12 months, now is the time to do so. You could be paying more than you need to. Did you know, for instance, that many banks will offer new customers a lower interest rate than existing customers? Check out your current rate and see what you are paying. Then…
This is what helped car salesman Rihan Nasser purchase his villa unit last August. Rihan had been crunching the numbers on what he’d need to do to save a 20% deposit. The scheme fast-tracked the process by maybe two, three or four years and made it easier to come up with the deposit to buy.
Tip 2: Contact your bank
Make sure that you are not paying too much by checking the interest rate that you are paying with the interest rate that the bank offers new customers. Then call them and ask for a discount.
Tell them that you are thinking of refinancing, and you would like to know if they are willing to offer you a discount to stay with them. They could say no, or they may shave off some of your repayment, gibing you an instant saving.
Bonus tip: If you do secure an interest rate discount and your repayments go down, set up a direct transfer of the difference into a separate bank account that you do not touch. If you let that money build up over time, you can use it towards your repayments when they increase. Or simply leave the direct debt instalments as it is and leave the extra money in your mortgage.
Tip 3: Review the market
Whether your bank agrees to a discount or not, have a quick look around at other deals that are available. This is where a mortgage broker may be able to help. We look at your situation and review the market for you, then come back to you with the best offers and deals to suit your needs. Shopping around could see you save hundreds or even thousands of dollars a year on your home loan.
Tip 4: Look for cash-back deals
Many lenders offer cash-back deals when they approve you for a loan. There are a few fees and charged involved when you refinance, but if you find a loan that suits your needs and it offers cash-back, you could bank $2,000 to $2,500 from your refinance.
Set this money aside in a bank account you don’t touch or consider making an extra repayment in your variable-rate home loan now and you will instantly make a saving on interest.
Tip 5: Start saving
Interest rates are going up and your mortgage repayments will go up with them. Look at your budget to find ways to set aside the extra money for the expected increases now. This way you will be able to afford the repayments when interest rates rise, and you will build up a small nest egg to help you deal with the increase in rates.
If you calculate your future repayments and realise you might have trouble making repayments at the higher amount, it is a good idea to reach out to an experienced mortgage broker. They can look at your overall situation and potentially restructure your debt, so that you don’t get into financial stress down the track.
Phone: 1300 855 022
Email: clientservices@zippyfinancial.com.au
Zippy Financial is an award-winning mortgage brokerage specialising in home loans, property investment, commercial lending, and vehicle & asset finance. Whether you are looking to buy your first home, refinance or build your property investment portfolio, the team at Zippy Financial can help find and secure the right loan for you and your business.
About the Author:
Louisa Sanghera is an award-winning mortgage broker and Director at Zippy Financial. Louisa founded Zippy Financial with the goal of helping clients grow their wealth through smart property and business financing. Louisa utilises her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients achieve their lifestyle and financial goals. Louisa is an experienced speaker, financial commentator, mortgage broker industry representative and small business advocate.
Louisa Sanghera is a Credit Representative (437236) of Mortgage Specialists Pty Ltd (Australian Credit Licence No. 387025).
Disclaimer:This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. This article is not to be used in place of professional advice, whether business, health or financial. r-less normal distribution of letters. making it look like readable English.
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How to Refinance When Property Prices Are Declining
The property and mortgage market has evolved with interest rates going up (and up!), but this does not mean you necessarily need to be cautious about your equity. In fact, the opposite could be true.
What is equity and why should you recycle it?
In simple terms, equity is the difference between how much your property is worth and how much your loan is worth.
If your property is currently valued at $800,000 and your loan is $450,000, then you have equity of $350,000.
In the current property market, the value of your property is evolving. Banks and lenders use a vast array of data and resources to help them assign an up-to-date value to your property, but it is safe to say that the official valuation on any given property in Australia now is likely to be lower than it was 6 to 9 months ago. However, you may still be able to access your equity, so that you can recycle it and put it to good use.
Recycling the equity in your property
To recycle the equity that you have available, means you take that equity and put it to good use.
Referring to the earlier example, in this scenario you have $350,000. To avoid paying lender’s mortgage insurance (LMI), you may want to keep your borrowing to a maximum of 80% of your property’s value.
80% of $800,000 is $640,000. You currently owe $450,000 so your usable equity is $190,000.
Depending on your income situation and whether you qualify for finance, you may be able to “recycle” this equity by investing it into another income-producing asset such as an investment property.
In an environment where property values are declining, you should carefully consider how far you want to leverage your equity. You have 3 options, and the right one for you depends on your life stage, income, and future goals.
1 – Conservative. You keep your overall equity level at around 70-80%. This helps you avoid paying LMI and builds a buffer to safeguard you against falling property prices.
2 – Moderate. You access equity worth 80% of your home’s value. This pushes your leverage to the maximum level that banks are comfortable with before they change your LMI to compensate for the perceived extra risk.
3 – Growth. You access equity worth up to 90% of even 95% of your existing property’s value to build your investment portfolio.
None of these options are right or wrong.
Overall, accessing your equity can be done safely and conservatively. The key is to find the balance – don’t be reckless and over-commit yourself to financial obligations that could cause you stress but remember that being too conservative and doing nothing means you risk have a comfortable retirement.
What about my mortgage? I want to pay it off first and foremost.
Many people have this goal, and it is understandable. Owning your own home outright would unlock an incredible feeling of freedom! That being said, planning to pay down your mortgage as quickly as possible without recycling the equity at any stage along the way represents a missed opportunity to grow your wealth.
Here is an example…
Julia and Tom buy their own home and spend the next 20 years paying it off. They don’t invest, they don’t access the equity and they don’t renovate. After 20 years their home is paid off and they use the money they no longer spend on mortgage repayments to update and upgrade their home. They also consider investing in a rental property.
Their neighbours, Angela and John, buy their own home. Three years later, they use the equity to buy an investment property. Over the next 5-6 years, both properties grow in value. They use the equity to invest in another 2 rental properties. After 20 years their original home is not paid off, but they own 4 properties. Their total equity across all 4 properties is around $1 million, more than enough to pay down the small remaining debt on their own home.
By recycling their equity, Angela and John have been able to build long-term wealth through their property investments. If you would like to learn more about accessing your equity and growing your wealth, contact a us to talk through your options.
Zippy Financial is an award-winning mortgage brokerage specialising in home loans, property investment, commercial lending, and vehicle & asset finance. Whether you are looking to buy your first home, refinance or build your property investment portfolio, the team at Zippy Financial can help find and secure the right loan for you and your business.
About the Author:
Louisa Sanghera is an award-winning mortgage broker and Director at Zippy Financial. Louisa founded Zippy Financial with the goal of helping clients grow their wealth through smart property and business financing. Louisa utilises her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients achieve their lifestyle and financial goals. Louisa is an experienced speaker, financial commentator, mortgage broker industry representative and small business advocate.
Louisa Sanghera is a Credit Representative (437236) of Mortgage Specialists Pty Ltd (Australian Credit Licence No. 387025).
Disclaimer:This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. This article is not to be used in place of professional advice, whether business, health or financial.
If you’ve been thinking of applying for a mortgage, you may have spent some time preparing for the process. I’m guessing you’ve cut back on your non-essential spending, saved as much money as possible for a deposit, maybe even paid off that last little bit of credit card debt that’s been hanging over your head.
You do all of this so you can present yourself as an excellent borrower to the banks.
But have you thought about how your older debts might come back to haunt you?
When Credit Cards from the Past Can Be a Problem
Recently, I’ve had a couple of clients who were shocked to find that credit card debts from the past were getting in the way of a successful finance application.
One client was hoping to secure a home loan. They had a squeaky-clean application that ticked all the boxes, as far as we were concerned.
Serviceability? Check! Are current accounts all paid on time? Check! Enough income to service the debt? Check!
Unfortunately, they’d failed to disclose late payments on a credit card from the past.
Now, in this client’s defence, they hadn’t deliberately left his information out. It simply wasn’t on their radar, because the card had been closed for two years. They genuinely believed it wouldn’t be an issue, especially considering the effort they’d made to keep their finances on track ever since.
But, as a result of this old credit card they’d pretty much forgotten about, their application was knocked back.
Six-figure Income Doesn’t Mean Home Loan Success
Another recent example was a couple who came to us for help getting a home loan. They’re both professionals on great incomes, pulling in more than $300,000 between them. Shouldn’t be a problem securing finance, right?
They too ran into difficulty, thanks to a credit card from a few years back. While they’ve always had the cash available to make their repayments, the organisation wasn’t their strong suit.
Busy lives and day-to-day distractions meant they’d missed a few payments, and their credit provider had shared this information with another major bank – the bank we’d approached for their mortgage.
Here’s the thing. When we submit a finance application for a client, we like to be 99 per cent confident it will be approved. Why? Because every application you make, whether it be for a mortgage or a lounge suite on interest-free terms, means an enquiry on your credit file. And having too many enquiries on there is not a good look. It can even make getting approval in the future more difficult, which is the last thing you want.
Not only that, it could mean you miss out on your dream home, because you now need to take the extra time to find a new lender, and another buyer with their finance pre-approved could swoop in and snap it up.
Unfortunately, we didn’t know about these historical credit issues. If we did, we could have managed expectations with the lenders in question prior to submitting the application formally.
The Lesson
Even if a debt or credit issue is in your past, please share it with your broker. We may be able to use a credit repair agency to sort it out, or sometimes we can try to find a lender whose policies suit your needs.
What we can’t do is fix problems that we don’t know about.
Full disclosure is the best way to help us help you!
Think of your broker like a dating agency, trying to find you the perfect match. If you leave out key details when filling out your profile, chances are you’ll end up paired with potential partners who you find less than desirable.
So, tell us everything – even if it’s embarrassing, or you don’t think it’s super important. We’ve heard everything before, and we won’t judge. What we will do is find the best lender, best interest rates, and best terms for your unique situation, so all you have to worry about is packing your moving boxes and settling into your new home.
If you have any questions about the home loan process, how much you may be able to borrow or what your options are, feel free to get in contact with our friendly team today.
Zippy Financial is an award-winning mortgage brokerage specialising in home loans, property investment, commercial lending, and vehicle & asset finance. Whether you are looking to buy your first home, refinance or build your property investment portfolio, the team at Zippy Financial can help find and secure the right loan for you and your business.
About the Author:
Louisa Sanghera is an award-winning mortgage broker and Director at Zippy Financial. Louisa founded Zippy Financial with the goal of helping clients grow their wealth through smart property and business financing. Louisa utilises her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients achieve their lifestyle and financial goals. Louisa is an experienced speaker, financial commentator, mortgage broker industry representative and small business advocate.
Louisa Sanghera is a Credit Representative (437236) of Mortgage Specialists Pty Ltd (Australian Credit Licence No. 387025).
Disclaimer:This article contains information that is general in nature. It does not consider the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. This article is not to be used in place of professional advice, whether business, health or financial.
Comparison Rate calculated on a secured loan amount of $150,000 for a term of 25 years. WARNING: This Comparison Rate is true only for the example given and may not include all fees and charges. Different terms, fees and other loan amounts might result in a different Comparison Rate. Fees and Charges Apply. Terms and Conditions are available on request.
