The recent predication for Australian Interest Rates by forecast group Trading Economics, using global macro models and analysts expectations, estimate the Reserve Bank of Australia cash rate to stand at 1.25% in 12 months time, currently 1.5% after the recent 2nd of August rate cut by the RBA. In the long-term, the Australian Interest Rate is projected to trend around 3.50% in 2020, according to their econometric models. If this predication is correct it could mean we see home loan rates closer to 6% for consumers by 2020.
Standard Variable Interest Rates (before optional loan package discounts are applied)
*Lenders Comparison Rate Schedule available online or with specific loan enquiry.
Fixed Rate home loan offer (with annual banking package applied)
*Lenders Comparison Rate Schedule available online or with specific loan enquiry.
(Source: Trading Economics & predicted on Tuesday, August 16, 2016)
The hot topic of Negative Gearing being abolished continues to raise its head in the media. There are many different views about its long term viability being unsustainable from Government perspective, public opinion right through to independent Economists. Further to our video on the topic the following information is to provide finer detail on indicative numbers using a recent property we purchased for an investor client here in Melbourne.
In May 2016 Provincial Property Advocates located, assessed and purchased a 2 bedroom, 1 bathroom, 2 car space renovated apartment in the inner Northern suburb of Brunswick. The purchase price was $403,000 plus purchase costs. The indicative rental estimate of the property from local property agents was $350 - $380 per week (we have rounded the indicative numbers to keep it simple for this exercise).
Indicative purchase price plus costs
|Registration of title||$1,150|
|Registration of Home Loan||$150|
|Provincial Property Advocacy||$5,850|
|Finance broker fee||Nil|
Indicative finance structure – based on borrowing the total purchase price plus costs
|80% loan secured be new purchase||$322,400|
|Balance of required lending using alternate property equity||$108,600|
Indicative Monthly Repayments for $431,000 investment loan
$1,620 Interest Only - Based on an indicative interest rate of 4.5% or
$2,184 Principal and Interest - Based on an indicative interest rate of 4.5%
Indicative rental per month
$1,520 per month - Based on approx. $350 per week rent
Indicative cash flow estimate per month (without negative gearing applied)
Less going out
$1,620 Loan repayment (Interest Only)
$120 Rates/ Water
$110 Owners Corp
$110 Rental agent management
$100 Incidentals / maintenance
Total shortfall per month
$540 per month ($125 per week)
$6,480 projected annual net cost
The above is an indicative estimate of the monthly ‘cash’ cost to maintain the Brunswick property as an investment prior to Negative Gearing benefits being applied. Note: ‘non-cash’ cost such as investment property depreciation entitlement (Building and Capital Allowances) is not factored into this simply example. Land tax may also potentially apply to those property owners that hold multiple properties.
Under current Australian tax law as long as the loan costs are greater than the rental income, then the Australian Taxation Office allows investors to offset the loss against their Australian taxable income. Negative gearing works because your tax bill is reduced by an amount equal to your effective marginal tax rate, multiplied by the excess of deductible expenses over investment income – that is, the tax loss on your property. Using the example of the recently purchased Brunswick investment property and its projected indicative loss of $6,480 p.a. then assuming the investors income tax rate for the year was say 34.5% the negative gearing benefit from the rental loss will be $6,480 (projected investment loss) x 34.5% (marginal tax rate), or 2,235 p.a. / $185 per month/ $42 per week. Using this basis formula, the difference in your actual cash cost for the year after applying negative gearing would be;
Indicative cash flow estimate (with indicative negative gearing calculation)
Coming in per month
$185 Negative gearing tax benefit (applying indicative calculations above)
Less going out per month
$1,620 Loan repayment (interest only)
$120 Rates/ Water
$110 Owners Corp
$110 Rental agent management
$100 Incidentals / maintenance
Total shortfall per month
$355 per month ($82 per week)
$4,260 projected annual net cost
The above is an indicative estimate of the monthly ‘cash’ cost to maintain the Brunswick property as an investment with an example estimation of negative gearing being applied. Note: ‘non-cash’ cost such as investment property depreciation entitlement (Building and Capital Allowances) is not factored into this basic example. Land tax may also potentially apply to those property owners that hold multiple properties.
Using the above property as an example if negative gearing was abolished for future investment purchasers then the annual cost of the property would increase by an additional $2, 220 p.a. / $185 per month/ $43 per week.
Key factors that would further increase the cost and difficulty in managing ‘cash’ shortfalls of an investment property include, purchase price of the property, rental value and demand of the property, interest rate increases, stagnant rental return growth, high vacancy rate exposure, repairs and maintenance.
Have a question? Would like to learn more about investing in property? Need assists in assessing your finance and property options? We are here to help.
Disclaimer: This information is provided as general guidance in the property financing (including buying, selling and owning) process. Figures quoted are indicative only, individual loan contracts, property scenarios may vary. Before acting on any information, you should consider the appropriateness of the information provided and it’s nature with regard to your specific objectives, financial situation and needs. In particular, you should seek independent financial and legal advice (i.e. Accountant, Lawyer, Financial Planner) prior to making any personal financial or investment decision. Provincial Home Loans and/or Provincial Property Advocacy and its agents assume no responsibility for any consequence relating directly or indirectly to any action or inaction that you take based on the information or services provided. Whilst Provincial Home Loans and /or Provincial Property Advocacy works hard to aggregate and assist with the highest quality data and to keep the information accurate, complete and up-to-date, Provincial Home Loans and/or Provincial Property Advocacy and its agents and suppliers cannot guarantee, and will not be responsible for any damage or loss related to the accuracy, completeness or timeliness of the information.
As reported in our last newsletter APRA (Australian Prudential Regulation Authority) continues to pressure lenders to apply stricter lending criteria specifically focused toward investment borrowers to meet the federal objective of all lenders having a maximum of 10% growth p.a. for investment based lending. Although still early days in the longer term objectives of APRA we are already seeing Lender changes impacting certain sectors of borrowing due to increased borrower requirements.
As a quick guide, here are some recent changes that we have observed from various major lenders:
With the above tightening there has also been some benefits:
What do we think?
The trend is showing that Borrowers (investor and owner occupiers) will continue to see a tightening of lending criteria as APRA looks to achieve its greater goals. Enquiry from new clients throughout our group shows that first home owners with tighter budgets trying to get into the market together with first time property investors starting their journey are feeling the pressure of these recent changes.
The process of knowing your options and understanding how best to manage your plans moving forward is simply achieved by having a chat with one of our qualified and experience brokers. Being able to explain the greater picture is a feature that as brokers we have always offered clients compared to one specific lenders opinion. Now more than ever it is important that you seek more knowledge to ensure you are on the right track.
Have a question?
Email us at email@example.com or call one of broker team at 03 9650 0399.
In March of this year the Melbourne median home price had grown 10% greater than it was the same time the year earlier, $625K to $688K. Back in March 2014, the RBA cash rate was at 2.5%. So, in the last year the cost of borrowing has dropped by .5% and property prices has grown by 10%. Putting the recent rate changes in basic numbers shows;
If you borrowed $688,000
to purchase a property in March 2014 and the rate was 5%,
your principal and interest repayment for a 30 year loan would be $3,694 per month at that time.
If you then took the same repayment amount ($3,694),
applied for a loan in March 2015 and the rate was 4.5%,
the same repayment would borrow you $729K ($41K more borrowing power than a year ago).
This quick calculation demonstrates one of the reasons why people may be spending that ‘bit extra’ when trying to buy a home. As consumers when we are presented such calculations as above most of us respond the same way i.e. ‘the interest rates will most likely go up soon which means the overall cost will increase due to the higher rate, so I will wait.
Considering this point have a read below of what Trading Economics who provide information for 196 countries and have received more than 100 million page views, say about the Australian long term interest rate trend;
"Interest Rate in Australia is expected to decrease to 1.93 percent in July of 2015 from
2.00 percent in June of 2015. In 2016, the Interest Rate is expected to decrease to 1.51 percent.
In the long-term, the Interest Rate in Australia is projected to trend around
3.25, 4.50 and 5.58 percent in the years of 2020, 2030 and 2050 respectively.
Australia Interest Rate Forecasts are projected using an autoregressive integrated moving-
average (ARIMA) model calibrated using our analysts’ expectations. We model the past behaviour
of Australia Interest Rate using vast amounts of historical data and we adjust the coefficients of the
econometric model by taking into account our analysts assessments and future expectations.
The forecast for - Australia Interest Rate - was last predicted on Tuesday, June 2, 2015."
Given the above info supported by the recent introduction by APRA of tighter measures for property investors who wish to borrow to buy investment property one could suggest that the cost of money will remain steady for the foreseeable future whilst other measures are put in place to control a heated property markets.
If you would like to know more about recent changes to investor lending and how it may affect you and understand your available property finance options for this current strong market we are a call / email away.
Following the historically low cash rate decrease to 2% on Tuesday 5 May by the Reserve Bank of Australia, here is a quick summary of what the 4 major banks are offering as their standard variable;
Bank Prior SVR* New SVR* Decrease Date to be applied
ANZ 5.63% 5.38% .25% Now
NAB 5.63% 5.43% .20% 13 May 2015
Commonwealth 5.65% 5.45% .20% 13 May 2015
Westpac 5.7% 5.48% .22% 18 May 2015
*SVR = Standard Variable Rate
Note: Always remember banks offer you further guaranteed rate discounts pending such things as your chosen banking package, amount borrowed, personal/ business banking relationships.
It is interesting to know that even though we take out a mortgage for typically 30 years or more and do all the due diligence at the time of taking out the loan, things change over time and we should review our loan every 3-5 years. The number one reason is rates, what are you paying, is it the best today, more flexibility, do you have redraw and an offset account working for you, you may also have equity that will allow you to borrow more for renovations or an investment property. It isn't complicated and can save you money and years off your mortgage.
Our Provincial finance advisers are here right now to assist you in understanding your options in reviewing your current home loan structure
In reviewing your property finances we will:
• Work out what you want to achieve by refinancing, whether it be;
a) to increase flexibility - more borrowings/ easier access to equity,
b) to reduce flexibility - ensure you get debt-free sooner,
c) to reduce risk,
d) to save money.
• Review and compare – current loan term, rate, products.
• Review and assess any penalties that may apply.
It is very common to note ‘I must do that’ when it comes to finance reviews but rarely does it actually happen. We are an email/call away to start the review chat with you today.
Equity is the difference between what your home is worth and how much you owe on it. For example, if your home is worth $300,000 and you owe $100,000, you have $200,000 in equity. Over time, as you reduce the amount you owe on your home or the value of your home grows, your equity increases. The great thing about equity is that you can use it as security with the bank and borrow against it;
However, it’s important to be aware you can’t use all of your available equity. Since the bank is lending you money against the value of your home, they won’t lend you the full amount. If house prices dip, they don’t want to have a security that is worth less than a customer owes. Typically, lenders will lend you 80% without mortgage insurance fees on the value of your home, minus the debt you still owe against it. Some lenders will offer up to 95% against the value pending the purpose but mortgage insurance fees typically apply.
You may have lots of equity but that does not mean you can borrow against it. The lender takes in to account your income, how many children you have, any existing debts and a range of other items. Above all, remember to play safe. If you don’t have any spare funds aside from the equity in your home, then do not use all your usable equity, just in case you need to draw on it in the event of an emergency. To learn more about your personal position and options. Simply start the chat by e-mail us at firstname.lastname@example.org
Home buyers and mortgage borrows are currently enjoying the Reserve Bank’s December 2014 decision to leave the cash rate unchanged at 2.5 per cent. This record low rate has remained constant since August 2013. The first sitting of the RBA for 2015 is Tuesday 3rd of February.
Late 2014 saw the majority of Australian economists and finance commentators hold an opinion that interest rates will rise in 2015. Released on the 15th Jan this year ANZ’s Economic Insight paper has seen some adjustments to ANZ’s view on the economic forecast for 2015 -2016.
Weaker growth and lower inflation in 2015 will provide the RBA (Reserve Bank of Australia) with a reason and the scope to take the cash rate down 50 basis points (.5%) to 2.00% over the first half of the year. ANZ economists believe the case for rate cuts has been building over the past two months with weaker than expected GDP (Gross Domestic Product) numbers released in early December and ongoing softness in non-mining activity outside of residential construction. The big fall in global energy prices means lower than previously expected inflation in 2015 provides the scope for lower interest rates. ANZ expect the Australian dollar to fall further against the US dollar with a view that the AUD will be at 0.74 against the USD by end 2015.
In their paper, ANZ believe it is not that the Australian economic outlook has deteriorated in any substantial way. Rather, the downward pressure on prices from lower energy costs and the risk that the Australian dollar’s depreciation may stall as global interest rates fall make monetary policy a potentially important policy lever once again. ANZ think the first rate cut will come in March following confirmation of low inflation in late January as well as data on housing activity in February when the market re opens after the summer lull.
ANZ believe a robust housing market is important to the economy’s transition to a sustained non-mining economic expansion. Outside of Sydney and Melbourne owner occupied mortgage demand remains soft while the pace of price rises is modest at best. A modest reduction in Australian interest rates combined with lower energy costs, low wage growth and a falling currency should ensure a return of robust growth across the economy in 2016.
Want to read more or have a question? Simply e-mail us at email@example.com for a copy of the complete commentary on the above opinions.
Source: ANZ Research ANZ Economic Insight – Australia | 15 January 2015
With the holiday season just around the corner, we all look forward to enjoying some celebration and rest with our loved ones. However, not everyone experiences such good times at Christmas. Thanks to your ongoing support, Provincial are pleased to make a special Christmas donation to our two primary charities, OzChild and Lighthouse Foundation, who actively assist Australian children who are in need of support right now.
Our donation to Ozchild will help to run educational and therapeutic and vital assistance programs in 2015 and services such as on call 24 hour support during time of critical need. To help further go to www.ozchild.org.au
Our donation to Lighthouse Foundation helps support young people with school supplies, uniform and books for the new year. Many young people, have grown up knowing nothing but abuse and neglect and have had to fence for themselves from a very young age. To help further go to http://lighthousefoundation.org.au
We are finding more people taking advantage of family guarantee home loans than ever before. With continual improvements in lender policy the option to consider this type of lending is well worth investigating. By considering a family guarantee you find that more loan option will become available. Typically the most common benefits are;
(a) removing mortgage insurance fees when you only have a certain amount of cash deposit to contribute.
(b) the ability to borrow more than you initially thought you could.
Family guarantee lending works in a variety of ways, normally it utilises equity in another family members (or friends) property to reduce the maximum loan to value ratio on a overall home loan. It can be used to buy a home or investment property by first home buyers or even someone who is buying their 10th property. To learn more on how it may help you buy better email us at firstname.lastname@example.org.
Most recent expert opinions- The monthly Reserve Bank Survey of 20 leading experts by comparison website www.finder.com.au (including senior economists from all four major banks) found 17 of the 20 respondents expect the cash rate to increase in 2015. Earlier this year, the same survey showed five respondents expected a rate rise by the end of this year. The 17 experts who expect the cash rate to rise in 2015 are split on timing, with 7 betting on an increase in the first half of the year while 6 believe it won’t start until the second half. In his October rate announcement, RBA governor Glenn Stevens summary flagged rates remaining unchanged for some time.
What does this mean to you? Interest rate percentages are based on a number of factors i.e. the Reserve Bank, the cost of money on overseas markets and the general state of the economy. As outlined above there remains mixed messages as to which way rates could go which places added pressure on those who are trying to make an informed decision right now. Current home loan interest rates are historically the lowest we have ever seen in this country with fixed rate for up to 5 years still on offer for under 5%. Rather than concentrating on trying to ‘beat the market’ or ‘second guess the experts’ a question we think that is very important is, if the rates did go up would it dramatically affect your living ability? As a guide if you have a loan for say $500,000 and the rate increased by .25% the interest cost would increase by a further $1,250 per annum, if the rate increased say .5% then $2,500 per annum. The same numbers would apply if the rate decreased by these percentages and you would obviously save this amount per annum. Need help working out what is the right way for you? We are here to help and only a call/email away for you.
Members of the greater Provincial Team got into the Melbourne city spirit with 32,000 other participants at the Melbourne Marathon on Sunday 12th October. Top runner, David Hicks made 22 km in 1.47 hr. While the rest of the crew opted for 10, 5 km run and the 3 km walk. Check out all the legs on our Facebook's page here
David Hicks proudly represents Provincial Team at Melbourne Marathon 2014 on Sunday 12th October. He’s determined to raise money for Cerebral Palsy Education Centre (CPEC). Support David who’s training hard for half Marathon, 22km and for doing a good cause by sponsoring him here http://melbournemarathon2014.gofundraise.com.au/page/DavidHicks
*All sponsorship helps to cover the cost of supporting the children and their families. This is done through therapy intervention programs where children learn practical skills and receive essential equipment that will enable them to reach the best of their abilities.
The Inaugural ‘Team Provincial Pedal’ battled against 80+ KPH winds on 28th October 2014, cycling from our Carlton office to Blackrock and back. Luckily the crew was streamlined in the new Provincial cycling kit, lycra is back ladies and gents! Tim Clarke from Plus Architects took out the top sport winning the sprinter prize, Tim's lycra clad legs were able to get him over the line at a flying 60kmh. Our MD Max Waller reckoned his top speed was about 20 KPH (with a handy tail wind) Suggesting that the new lycra kits works for some better than others…… Thanks to everyone who joined in the ride and made the morning such a hoot.
We enjoyed our 5th year of supporting the Lighthouse Foundation’s annual footy finals luncheon at the MCG on 10th September 2014. The charity auction raised over $13K in 10 minutes at the big event.
You too can make a difference at www.lighthousefoundation.com.au
Saving the average $10–$30,000 to use as a deposit for your new home can seem daunting. So here are some tips to help grow your savings account balance:
1. Work out how much you really need to save
2. Save 10% of each pay check
3. Eliminate the luxuries
4. Pay off your debt
5. Consider using a family guarantee loan to help buy your first home and save potential mortgage insurance
1. A 100% offset home loan will save you money throughout the lifespan of the loan.
2. Having your properties financed with multiple banks will better protect your assets.
3. A fixed home loan offers the same benefits as a variable home loan.
4. A 20% deposit is necessary to attain your first home loan.
5. Numerous monthly repayments will pay off you loan faster.
Provincial Newsletter Archive
The Big Reno is back. , March 2014
What's changed 10 years ago vs. today?, September 2013
Do you like to be kept in the know? , July 2013