Making Your Home Loan Market-proof
Newcastle Herald
Tuesday February 3, 2004
TODAY sees the Reserve Bank of Australia's first board meeting for 2004 and its first opportunity to act on the effects of last year's rate rises.
November 2003 saw the first rate rise in Australia in 15 months. The 25 basis point increase meant an additional monthly repayment of about $30 for a $200,000 loan over 25 years and was followed by duplicate increase in December.
At the time there was speculation that continually rising house prices and the much discussed ``housing bubble" were reasons for the increases. But Reserve Bank Governor Ian Macfarlane defended the rate rises in December, saying that a return to good economic growth, both locally and internationally, was the reason for the increases.
Mr Macfarlane's comments reveal the considerable concern the RBA has over Australian debt.
``An economy growing at 6per cent in nominal terms cannot have credit growing at 15per cent. Something has to give," he said.
Today, Australians have an average debt-to-income ratio of 130per cent compared to 55per cent 10 years ago. This proves that a low interest rate environment encourages consumers to borrow, particularly for consumer goods.
Compared to this time last year the total outstandings on credit and charge cards has grown by more than $3billion and this is a concern to the RBA.
On the one hand it means Australians are so highly geared that interest rates need only half the interest rate movement to have the same impact on budgets. To achieve the impact of 17per cent mortgage interest rates that we had in the 1990s, rates would only need to rise to around 8-8.5per cent to have the same general economic effect.
That would mean another six rate rises of 150 basis points which, in my opinion, is highly unlikely. However, current Australian debt levels strongly highlight the need for responsible borrowing.
Because Australian interest rates were flat for so long and the property market grew so rapidly through 2002-2003, borrowers have become lazy. Many have taken for granted the easy gain they have made and their personal finances are getting messy.
Now, as the property market begins to level out and interest rates start to rise, Australians need to get their debt under control. In particular, property investors need to watch their budgets as prices start to slow.
Consider this scenario: You've borrowed for an investment property and are paying about 7per cent on your loan. Your rental yield is about 3.5per cent, leaving a shortfall of 3.5per cent.
You need the property prices to grow continuously at at least 3.5per cent to cover this shortfall, let alone make a profit.
And remember, your capital gain is only realised when you sell and the money is in your hands.
But what if the market starts to slow? Will your plan for property finance work as well in a flattening market?
Despite the fact that Australia has one of the most progressive mortgage markets in the world, we know borrowers are still not using their mortgages fully.
They often assume the market will do the hard yards for them.
It's these reluctant borrowers who often ignore the cold facts at their peril.
You need to make your mortgage market-proof. How? Work your mortgage harder, pay it off faster and the benefits will magnify any gains made in a climbing market.
Look at your loan. If possible, switch to a lower interest rate and apply some basic discipline.
Many people refinance their home loan to get a better interest rate and save money over the life of their loan.
Others refinance to raise money to buy an investment property, pay for renovations or diversify their investments.
We've also had many business customers inquire about how they can refinance their business loans at home loan rates.
The key elements to consider include service, flexibility, loan features, fees and interest rates.
So here's my tip to borrowers to make the most of a rising rate environment. Use your loan features, compare your loan to others, refinance and save money even as rates go up.
Lisa Montgomery is head of consumer information and advocacy at Wizard Home Loans.
© 2004 Newcastle Herald