Land appreciates, buildings depreciate.

Many investors have heard that land appreciates while buildings depreciate. The theory is that you should buy investment properties with a high land component, namely houses. And if you’re in the hunt for a house they say you should maximise the block size with respect to the dwelling size.

This can be misleading advice. I like to use extreme cases to prove a point, so imagine you have a block of land with no buildings on it that can depreciate. Is that a better investment than a block of land with a house on it?

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The Original Post is Located Here: 4 Capital Growth Myths

The real question is, what does the rate reduction, and potential for further reductions really mean to you? This example is really to show you how you could benefit from the rate reduction. In general terms, if you owed $350,000 on a home loan currently, and the rate was reduced by 0.5%, you could potentially reduce your minimum repayments by approximately $110 per month! I am sure most of you would enjoy the extra $110, but let’s face it you really couldn’t get a nice dinner out for two for that these days, so it is relatively insignificant in the monthly budget really.

However, if you were to keep you repayments at the same amount as they were prior to the rate reduction, you would be effectively paying $110 per month more than your true minimum repayment, which would put you in advance on your home loan. Typically your bank will not even reduce your repayment amount unless you ask them to after a rate reduction, but that is not a bad thing really. Why I hear you ask?

Well, if you were to continue to repay $110 per month in advance on your $350k home loan (assuming you have approx 25 years remaining on your existing loan), you would effectively save almost $40,000 in interest over the next 22 years, and save two and a half years of your loan term.

Better still, if you refinance your loan onto a product that saves you more than 0.5%, then you could save in excess of this. For example, the average rate from the big 4 banks prior to the rate reductions was approx 6.76%, and while this will reduce to approximately 6.39% with many of these lenders, we have access to variable rate loans from 5.99% with no ongoing fees.

On this basis, if you were to refinance onto the 5.99% product, and continue to repay the same amount you were on your existing loan, including ongoing fees, you could effectively be paying in excess of $200 per month more into your loan. If you were able to do this, you would save over $62k in interest and 4 years off your loan term, assuming you had 25 years remaining on your loan and a balance of $350,000.

On the contrary, if you were to refinance your loan onto a cheaper rate, and extend your loan term (like many lenders/brokers will do automatically), even on the cheaper interest rate you will end up paying $28,000 more in interest and take 5 years more to repay your loan. This is why it is so vital to speak to a professional lending specialist to strategies over your current goals and cash flow, and see how they can ensure that whatever option you take, you will be fully aware of the benefits of this strategy.

At loan Wize we do more than just find you a cheaper rate, we look at the big picture of what you want to achieve, and ensure that our advice is tailored to your personal needs and goals. We can’t wait to work with you, and save you money.

The Original Post is Located Here: What does the RBA rate reduction mean to you!

Published 12:47 PM, 3 May 2012 Last update 12:47 PM, 3 May 2012

One more big bank has blinked on term deposits but the severe competition for money means that the rate falls are again minor. In turn, that means bank margins will be under pressure.

The big banks will be looking to trim costs. The stimulation from the Reserve Bank official rate cut will be limited and will not boost demand for lending dramatically.

The funding pressure that banks are under means credit will continue to be tight. It is likely that there will need to be further official rate cuts but, like this week’s move, their effectiveness will be lower than in previous cycles. In essence, Australia expanded on cheap overseas money which is no longer available.

Yesterday ANZ Bank trimmed its term deposit rate and this morning Westpac followed (ANZ blinks first, May 2; ANZ scrubs up for its bypass, May 2). NAB and CBA are still holding their old rates. The smaller banks will usually offer better rates.

As I pointed out yesterday, ANZ dropped its six-month rate from 5.5 to 5.3 per cent and its five-year rate from 5.6 to 5.4 per cent.

Today Westpac followed ANZ in the six-month rate and trimmed its five-year rate from 5.8 to 5.7 per cent – the same rate as NAB and CBA (Westpac’s new normal, May 3).

While Westpac’s true term deposit rates have come down a lot in recent months, the current decreases go nowhere near the half a per cent official rate cut. They can’t come down too far because the self-managed funds who are replacing a lot of the overseas money will respond by going off to the sharemarket with their money. The banks need it to fund their book.

Source

The Original Post is Located Here: A rates omen from Westpac

Published 7:16 AM, 1 May 2012 Last update 7:16 AM, 1 May 2012

Self-managed super fund owners have started to take their money out of banks and invest it in the sharemarket, so today’s expected interest rate reduction will not be nearly as stimulatory as it would have been had rates been cut much earlier.

What is happening in our banking system is part of a global pattern of events. There is a similar version of the Australian phenomena taking place elsewhere in the world, which is reducing the stimulation normally created by lower interest rates.

I hope the Reserve Bank has cottoned on to these new developments.

Conventionally when the Reserve Bank lowers interest rates it encourages business to borrow by lowering their interest burden. Housing, which is one of the more sensitive interest rate markets, receives a big boost.

This effect will still operate but its impact will be lessened by the effect on the bank funding base. In the past decade there was unlimited credit available for Australian lending because our banks could borrow whatever they wanted on the overseas wholesale markets at low rates of interest.

In the last two or three years that market has effectively closed down at least twice and has also become very expensive because of the problems in Europe. Accordingly our banks are now seeking to attract more and more local deposits. And so whereas in times gone by, local deposits could be as low as 40 per cent of bank funding, now they are nudging 60 per cent and most Australian banks are looking to take local deposits to 70 to 80 per cent of their loan book.

One of the biggest contributors to bank deposits has been self-managed superannuation funds, with fund owners that have relished the idea of receiving a 6 per cent return (and often much more) with minimal risk. But banks have now lowered their deposit rates to around the 5.5 per cent level and once they did that self-managed fund owners started to look elsewhere. As a result, self-managed funds have been withdrawing from the bank deposit market and investing their money in hybrids or high-yielding shares.

Self-managed fund administrator Multiport (a subsidiary of AMP), has surveyed 1800 funds managing $1.4 billion and found that cash held in the self-managed funds slumped from 27 per cent of portfolios in the December quarter to 22.9 per cent in the March 2012 quarter. Most of that money went to the sharemarket, which includes hybrids.

Let’s assume that interest rates are cut another half a per cent in May-June and that flows into deposit rates. Even more money will flow out of bank deposits into the sharemarket. To replace that money banks could theoretically go back to overseas markets to borrow but that option is no longer on the table. So they will have to curb their lending or bid up for deposits.

As it happens the big fall in business confidence that has been isolated by Dunn and Bradstreet is limiting demand for business lending, particularly in south eastern states and the job insecurity so created will keep a lid on housing demand. But if lower interest rates were to stimulate demand markedly then banks would have to lift their deposit rates to woo back the money which would flow into lending rates.

This vicious circle will curb the stimulatory effect of lower interest rates. And of course outside the super fund movement lower interest rates will curb the spending of people relying on interest-bearing deposits to live.

I must emphasise that Australian interest rates are very high at the moment and they must come down. Just don’t expect a ‘normal’ stimulation. A lower dollar would be much more beneficial.

In a strange way a similar effect is being created by the very low interest rates in the US and Europe. Shareholders now want higher dividend payments and are less interested in companies reinvesting their profits. So that curbs the amount of money available for expansion. Australian miners BHP Billiton and Rio Tinto are both being subjected to this pressure.

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The Original Post is Located Here: Beware the rate cut dampeners

At its meeting today, the Board decided to lower the cash rate by 50 basis points to 3.75 per cent, effective 2 May 2012. This decision is based on information received over the past few months that suggests that economic conditions have been somewhat weaker than expected, while inflation has moderated.

Growth in the world economy slowed in the second half of 2011, and is likely to continue at a below-trend pace this year. A deep downturn is not occurring at this stage, however, and in fact some forecasters have recently revised upwards their global growth outlook. Growth in China has moderated, as was intended, and is likely to remain at a more measured and sustainable pace in the future. Conditions in other parts of Asia softened in 2011, partly due to natural disasters, but have recently shown some tentative signs of improving. Among the major countries, conditions in Europe remain very difficult, while the United States continues to grow at a moderate pace. Commodity prices have been little changed, at levels below recent peaks but which are nonetheless still quite high. Australia’s terms of trade similarly peaked about six months ago, though they too remain high.

Financial market sentiment has generally improved this year, and capital markets are supplying funding to corporations and well-rated banks. At the margin, wholesale funding costs have declined over recent months, though they remain higher, relative to benchmark rates, than in mid 2011. Market sentiment remains skittish, however, and the tasks of putting European banks and sovereigns onto a sound footing for the longer term, and of improving Europe’s growth prospects, remain large. Hence Europe will remain a potential source of adverse shocks for some time yet.

In Australia, output growth was somewhat below trend over the past year, notwithstanding that growth in domestic demand ran at its fastest pace for four years. Output growth was affected in part by temporary factors, but also by the persistently high exchange rate. Considerable structural change is also occurring in the economy. Labour market conditions softened during 2011, though the rate of unemployment has so far remained little changed at a low level.

Recent data for inflation show that after a pick up in the first half of last year, underlying inflation has declined again, and was a little over 2 per cent over the latest four quarters. CPI inflation has also declined, from about 3½ per cent to a little over 1½ per cent at the latest reading, as the weather-driven rises in food prices in the first half of last year have, as expected, now been fully reversed. Over the coming one to two years, and abstracting from the effects of the carbon price, inflation will probably be lower than earlier expected, but still in the 2–3 per cent range.

As a result of changes to monetary policy late last year, interest rates for borrowers have been close to their medium-term averages over recent months, albeit tending to increase a little as lenders passed on the higher costs of funding their books. Credit growth remains modest overall. Housing prices have shown some signs of stabilising recently, after having declined for most of 2011, but generally the housing market remains subdued. The exchange rate remains high even though the terms of trade have declined somewhat.
Since it last changed the cash rate in December, the Board has maintained the view that the setting of policy was appropriate for the time being, but that the inflation outlook would provide scope for easier monetary policy, if needed, to support demand. The accretion of evidence over recent months suggests that it is now appropriate for a further step in that direction.

In considering the appropriate size of adjustment to the cash rate at today’s meeting, the Board judged it desirable that financial conditions now be easier than those which had prevailed in December. A reduction of 50 basis points in the cash rate was, in this instance, therefore judged to be necessary in order to deliver the appropriate level of borrowing rates.

Source: RBA Media Release

The Original Post is Located Here: RBA changes rate by .5%

Which loan is right for me?

Well, that all depends in your circumstances. Variable and fixed los have their advantages and disadvantages so it is imperative to consider these before making a decision. Split loans combine features of both variable and fixed loans allowing you to broaden your options.

Variable Loans

Advantages

• When the Reserve Bank or the market lowers rates these savings will usually be passed on to you.
• You can make additional repayments without incurring a penalty then have the option to redraw the additional funds at a later date.
• Provides more flexibility than other types of loans.

Disadvantages

• When the Reserve Bank or market increases rates, the interest rates on your loan will also increase – meaning you will pay more interest.

Fixed Loans

Advantages

• During the fixed period, if interest rates go up your loan interest rate and repayments won’t change.
• Budgeting is easier, giving you security over your financial situation.

Disadvantages

• When market rates go down, the rate on your loan will remain the same so you won’t have the benefit of potential savings.
• Most fixed loans limit the flexibility of being able to make extra repayments t repay your loan early. Some lenders allow extra payments for a fee; however you are not able to redraw the extra repayments during the fixed rate period.
• If you choose to exit or switch your loan, there may be early termination fees.

Features to consider

It is important not to judge a home loan solely on the interest rates. Be aware of other fees including up front fees, ongoing monthly fees, exit fees, and ‘deferred’ establishment fees which are often charged f you leave a variable loan in the first 5 years. We can help you review the costs and benefits of extra features which may save you money such as an offset account or redraw facility.

Other loan features to pay attention to include lenders waiving fees and charges to other accounts held with them, such as monthly transaction account keeping fees. Make sure extra payments are not penalised. Some loans, such as fixed loans and some no-frills variable loans, may limit the amount by which you can reduce your loan.

How easy is it to switch to another home loan?

Many people end up paying more than they need by staying in an incorrect loan because they think it is ‘too hard’ to investigate switching to another option. We research alternative products available for you and if changing products is the right solution for your situation then we help make the process as smooth as possible.

Remember, there may be large costs such as rate break fees to refinance and discharge the current loan and you might lose access to your funds for a period of time. Standard costs such as stamp duty and registration will also apply (although in some states you may be exempt for paying stamp duty.)

Call us for more information about how interest rates will affect your situation or help in determining whether fixed or variable is the best option for you.

The Original Post is Located Here: To fix or not to fix? That is a really BIG question!

This approach is beneficial especially when you are pre-paying the interest when tax cuts are scheduled for the following year. Also, when you are foreseeing a low financial income the following year, it is best to pre-pay the interest while you are able.

However, it takes an individual with a huge cash flow to do this technique because one year’s worth of interest requires a significant amount of cash. An investor should asses himself if he is able to do this technique for the following years to come.

A property investor can claim a tax deduction for additional expenses other than the interest in the loan. It is advised by the Australian Taxation Office to claim expenses for a rental property that is currently being rented or available for rental.

Things that can be claimed as deduction do not include contributions to sinking funds and appliances. However, depreciation can be claimed for freestanding items that costs $300 or less in one year.

Investors can claim capital works deduction for construction expenses. Other expenses includes advertising, bank charges, body corporate fees, borrowing expenses, council rates, decline in value of depreciating assets, insurance, gardening and lawn mowing, pest control, telephone, water charges and others.

If only a certain part of the property is being rented, an investor can also claim expenses for the specific part alone.

Read more Here.

The Original Post is Located Here: The Advantages of Pre-paying Interest on Rental Property

The current financial climate and uncertainty surrounding us today has created a very unique situation in Australian mortgages, which has and will change the certainty for mortgage borrowers forever, and many Australian mortgage clients don’t yet know the half of it.

Once upon a time in a perfect world, the banks would set their standard variable rates at a level playing field where borrowers had certainty that the only rate movements would occur when the RBA me on the first Tuesday of every month. They would offer discounts for the life of the loan that provided clients with the knowledge that they would always have competitive rate.

Now however, the lenders have cut their ties with the RBA, and in doing so, each other. The variation between available standard variable rates between the big 4 is up to 0.15% at the moment, and to make the effect of this worse, the discounts available between lenders is always under review, depending on who is buying market share at the time.

This causes a great deal of confusion for mortgage holders as the result of this can be variations of up to 0.4% between lenders current offers, and if you have a mortgage more than three years old, your current discounts could also be well below those available now.

Now the banks are controlling the types of clients they are seeking by the discounts they offer, effectively buying market share for certain types of loans, whether it is by loan size (which has always been the case) or more recently by lower loan to value ratios. This has created considerable opportunity for astute clients in the current market.

The ultimate consequence of this shift in mortgage rates and ideology by the banks is that borrowers will need to become more reliant on a Professional Lending Specialist for advise to ensure that they are suitably informed on products available prior to applying for a new loan or when considering refinancing their existing loan.

With the smaller second tier lenders also gaining significant market share to the big 4 over the last three months, this is also another factor to consider. Will they continue this trend by taking hold of this current “Shift” in thinking and using this to create and ongoing advantage to consumers?

Now more than ever the value proposition provided by a Professional Lending Specialist has never been higher. With recent regulation and licensing only strengthening the offering from Professional Mortgage Brokers, and access to lenders that aren’t available to the retail market, it is now more critical than ever to ensure you seek quality advice before considering a new mortgage.

The Original Post is Located Here: The Mortgage industry in Australia has now changed forever

Right now is a great time to buy a property as the market has undoubtedly taken a battering over the last three years, and prices have come back least five years, however I do not believe that this will stay like this for ever, and it creates a fantastic opportunity to get into the property market for the same cost as rent. With rental costs increasing by up to 6% per annum in some cities due to the lack of supply, and this trend not about to stop due to the continued undersupply of new product to the market, renting will only get more expensive over time.

This is great news for investors as well, as will improve rental yields even further. Look around www.realestate.com.au and you will easily find properties in growing areas that represent fantastic value and have incredible opportunity for rental growth due to tight supply and growing demand. It is all about location, so rule out your emotions and use your head to identify the best deals. Property cycles are varied throughout Australia, and it may not be the best time to invest in property in your own back yard, but there are plenty of good opportunities in the wider market if you are willing to spend the time and look.

So if you are a first home buyer considering whether you should jump in boots and all to home ownership, or a potential investor considering whether the timing is right to buy that perfect investment, now is a great time to talk to professional lending specialist about how much you can borrow. Or you could look back in three years time and wish you acted back in 2012! Call Jon or Tammy on 1300 LOANWIZE.

The Original Post is Located Here: High Time for Property Investment

Homeowners are in rage with this decision and 70 percent of them threat to leave their banks if there shall be any increase in the monetary policy.

72 percent of people who joined the poll sponsored by News Ltd websites said the increase will stop them from buying new homes. At the same time, 72 percent claims to be struggling to keep up with their present financial status.

People claim that the Big Four has been monopolizing the Australian market for a long time. They are voicing to encourage international banks to get involved with the Australian business competition. The four banks have done a little to the economy as they continue to gain and give back a little to the society.

Treasurer Swam encouraged people to walk down the road to get a better deal if they are unhappy with the banks’ decisions. Swan’s comment also triggered further chorus of disapproval as homeowners find it rather dim as there is no better deal “down the road”.

However, banks are still expected to wait until Friday to make announcements if there should be any changes in the cash rates.

Learn more from this article.

The Original Post is Located Here: Homeowners Outcry to Leave Major Banks