Looking at refinancing your home loan? Then look beyond your monthly repayments....

 Many people look for cheaper interest rates out in the market place. It makes perfect sense, yet many only give importance to the monthly repayments. You should really look at the overall picture and by that I mean the 25 or 30 year commitment you are making when taking out a home loan, or recommitting to another lending institution when refinancing.

Let's use some very basic figures for the purpose of this example. I am going to use the figure of a $300,000 mortgage. This seems to be the figure the media like to use when there is a shift in interest rates up, down or neutral.
So here goes;

Mortgage $300,000 x 30 years x 7.5% (average over 30 years)
= $2,097.64 per month 
= $755,151.67 in repayments over 30 years 
= $455,151.67 in interest repayments over 30 years 

The industry average tells us that customers refinance their loans every 4 years. There is nothing wrong with refinancing, in fact since the introduction of the "No Exit Fee" legislation; it makes perfect sense to shop around and continue to shop around throughout the period of time you have a mortgage.

The biggest mistake people make when refinancing is refinancing for another 30 years. Of course the monthly repayments look attractive - they are meant to look attractive. Take a look at this example below assuming you had of locked in a fixed rate at 7.5% some 5 years when many panicked and fixed their home loan during the years when we were experiencing interest rates rising.

Mortgage $300,000 x 30 years x 7.5% (5 year fixed)
= $2,097.64 per month
= $109,710.92 interest paid over 5 years 
= $16,147.69 principal paid over 5 years 

Now, you may be starting to see where I am coming from. For the $16,147.69 paid off in principal over a 5 year period, you pay close to $110,000 in interest. To be able to make the absolute most in refinancing your mortgage, you should really refinance the amount that is owed for the number of years left on your original mortgage so that the $110,000 does not go to waste.

If you were to refinance the remaining amount owing over 30 years of say $285,000, the repayments per month would be $1,688.62, a difference per month of $409.02. The monthly difference would be very welcomed by the vast majority of families, however,  if you were to refinance for 25 years (taking in to account you have already paid 5 years worth of interest), the repayments would be $1,817,14.

The difference in total interest paid between loans at 5.89% over 25 years compared to a loan at 5.89% over 30 years is $62,758.67. That is a hell of a lot of money people should be taking in to consideration when looking for a cheaper monthly repayment. Of course the likelihood of seeing interest rates stay neutral over a 25 or 30 year period is 0, but the point of this example is to demonstrate just how much money people are willing to give away by constantly refinancing for a further 30 years. The only true beneficiaries of people refinancing for another 30 year term are the shareholders of banks.

Happy 2013 to all!!

Iggy Damiani

The RBA is doing nothing for the 5%...Boo Hoo!

The RBA is doing nothing for the 5%...Boo Hoo!

Over the past few months there has been so much talk about what the RBA should do, how they should move, over what period of time and…the banks being b*stards!!

Today I would rather focus on what the RBA has or hasn’t done and the way things are playing out for the 95% of the property buying market in Australia.

The RBA decided to leave interest rates on hold this November, and this was the first time in six years on Melbourne Cup Day that the RBA decided to not move the official cash rate.

The official cash rate currently sits at 3.25%, just 25 basis points for the historic lows during the financial crisis (GFC) of 3.00%.

There are many commentators that say we should not be looking at the current cash rate of 3.25% and comparing the “emergency lows” of the 3.00% cash rate at that time - it's simply nonsense.

In fact Stephen Koukoulas, the Managing Director of Market Economics and Senior Economic Advisor to the Prime Minister, Julia Gillard had this to say: “People talk of near 3% emergency cash rate now with no idea: during the GFC, AUD 65c, fiscal stimulus, 5% GDP; now AUD 104 cents, fiscal cuts 4% of GDP”.

Those figures are not at all disputed from my point of view. However, I’m sorry, but I do look at the current cash rate and ask questions. I also look at the figures during the GFC but I am more focused on what we are experiencing today.

Newton’s law

I personally use a very basic principle when investing (predominantly) in property. I use the principle of Sir Isaac Newton's 3^rd law – every action has an equal and opposite reaction.

So it brings me to this point.  Notwithstanding the fact that we are at or close to historically low interest rates, we see articles that highlight matters of concern and I quote:

“Almost 16 per cent of the nation's first-home buyers are in severe mortgage stress.

Those in Tasmania are leading the crisis with 17.2 per cent falling behind in repayments, being driven to refinance or pressured by banks to sell. This was closely followed by Northern Territory (17%), New South Wales and South Australia (both 16.4%), Victoria and Queensland (both 16%), ACT (15.2%), and Western Australia (14.4%).”

Now, reading that comment, one would have to ask: “Why are these people in severe mortgage stress”?

We are just 25 basis points from the historically low interest rates since the GFC. This week on the Property Observer website, John McGrath has gone on to say and I quote:

“The real recovery has been limited to the first-home buyer markets. Above $1 million there is no real depth.”

Now, this is where my issues begin.

The very fact that a high profile agent/entrepreneur/celebrity agent is willing to identify the fact that the property market has been recovering thanks to the first time buyers in the market, is a real concern to me, in particular when you take in to account the article that was released by the Herald Sun, even if we assume there may be 10% margin for error, the figures remain extremely high in terms of mortgage stress for the first home buyers.

Now, let’s be real for a moment. How many of you reading this article is out in the market place looking for a $1,000,000 plus property to purchase? According to statistics, only 5% of property transactions per annum are sold above the $1,000,000 price range in Australia. Yep, just 5%!

Let’s focus on the 95%!

Have a look at these comments from Christopher Joye on 1 May 2012:

“The problem was that these folks, who were typically punters from the financial services industry, were looking at house price falls in, say, Bondi, Bellevue Hill, and Vaucluse, and using these suburbs as a benchmark for the rest of the country. Yet with a median price of more than $1 million, these areas are representative of only around 5% of the national housing stock. They therefore tell us little about the remaining 95% of homes”. 

I spoke with Christopher Joye a few days ago regarding the comments he made in May 2012 and he informed me that the numbers remain the same. Only 5% of property transactions are above the $1,000,000 mark per annum.

Why there is so much focus on this million plus market is beyond me. The affluent markets typically see auction campaigns and not private treaty sales. When we look at the sub-$600,000 property market, the potential purchasers usually have a pre-approved loan based on their borrowing capacity subject to the size of deposit they have available for the property transaction.

Purchasers looking at $1,000,000 plus properties cannot borrow 90% of the value of the property as the LMI (lenders mortgage insurance) providers will not assist and they typically draw the line at $750,000 in borrowings - and if you have experienced trying to deal with LMI of late, we are pretty close to having to provide a DNA sample to get the loan over the line.

The moral of the story – let’s focus on the 95%!