The Federal Government has the amended the National Credit Code (NCCP) Act to ban home loan exit fees, it became law on 23 March 2011 and will be in effect for all new loans written from 1 July.
The final regulation differs slightly from the draft regulation, but generally has the same effect.
The new regulation prohibits ‘credit fees and charges’ on early termination and applies to loans secured by residential property so the regulation covers investment properties as well.
The only allowable termination fees that can be charged from 1 July are break fees under fixed rate loans, discharge fees or fees payable before any credit is advanced.
ASCI will now start the process of reviewing applications from lenders for exemption. This is likely to be a long process with the fee affecting all lenders. For example the fee would ban exist fees on specialist products such as the equity finance loan (where the equity finance lender charges up to 40% of the upside sales prices of the property on termination of the loan). This fee is of course key to the EFM and without it the product will simply on work.
The new ban has no impact on existing loan contacts so will only impact new lending.
Already the broking industry has begun evaluating how it will operate under these new regulations. It is likely that fee for service or new products with upfront fees will be introduced along with upfront clawbacks.
While the regulations may reduce competition initially it is being viewed as a win for consumers. The majority of the major banks have already removed exit fees on bank originated loans to cash in on the goodwill being generated with the public.
Friday, 1 April 2011
Sunday, 31 May 2009
First Home Buyers Beware!
While some experts are saying now is a good time for first home buyers to enter the housing market is it really such a wise move?
While interest rates are at 30 year lows and the housing market is more or less flat why should first home buyers think carefully?
1. Interest rates are likely to increase and expecting variable rates to remain in the 5% mark is unrealistic. Historically the Cash rate average for the last 10 years is 5.43% well above the current rates. This is also just the Cash Rate it does not include the Lenders margin. This Lenders margin has increase as competition in the Australian Lending market decreases, just 2 years ago the margin was less than 1.75% it’s now well above that and likely to increase as the cost of funds for all Lenders increases. Expect to pay more sooner rather than later.
2. Demand in the sub $500K housing market is being artificially inflated due to the low interest rates, high first home owner’s grants and reduced stamp duty offers.
3. Unemployment is yet to peek and we can expect to see more major problems occurring globally (the GM Chapter 11 can only be a few weeks away).
4. Secondary debt interest rates are increasing. The interest rates on credit cards has continued to increase during 2009. The Lenders are passing on the higher costs of unsecured lending to their customers. This means more income will be spent on repaying secondary debt. This also means that the option of using credit cards or personal loans to renovate a property will be more costly.
5. Lenders no longer offer sub prime loans in Australia, or at interest rates that are so high no one can afford them. Other products such as the 100% or no deposit loans will simply disappear as the cost to fund them makes them unsellable. In short it will be harder for consumers to get access to cheap home loans. None of the big four banks has a loan in the top 10 cheapest loan list.
So what should you do if you are a first home buyer in this market?
•Save more and borrower less (you will pay less in Mortgage Insurance Fees and be a more attractive customer for the Lender)
•Repay secondary debts (repay and closed the credit cards and personal loans)
•Keep a clean credit history.
While interest rates are at 30 year lows and the housing market is more or less flat why should first home buyers think carefully?
1. Interest rates are likely to increase and expecting variable rates to remain in the 5% mark is unrealistic. Historically the Cash rate average for the last 10 years is 5.43% well above the current rates. This is also just the Cash Rate it does not include the Lenders margin. This Lenders margin has increase as competition in the Australian Lending market decreases, just 2 years ago the margin was less than 1.75% it’s now well above that and likely to increase as the cost of funds for all Lenders increases. Expect to pay more sooner rather than later.
2. Demand in the sub $500K housing market is being artificially inflated due to the low interest rates, high first home owner’s grants and reduced stamp duty offers.
3. Unemployment is yet to peek and we can expect to see more major problems occurring globally (the GM Chapter 11 can only be a few weeks away).
4. Secondary debt interest rates are increasing. The interest rates on credit cards has continued to increase during 2009. The Lenders are passing on the higher costs of unsecured lending to their customers. This means more income will be spent on repaying secondary debt. This also means that the option of using credit cards or personal loans to renovate a property will be more costly.
5. Lenders no longer offer sub prime loans in Australia, or at interest rates that are so high no one can afford them. Other products such as the 100% or no deposit loans will simply disappear as the cost to fund them makes them unsellable. In short it will be harder for consumers to get access to cheap home loans. None of the big four banks has a loan in the top 10 cheapest loan list.
So what should you do if you are a first home buyer in this market?
•Save more and borrower less (you will pay less in Mortgage Insurance Fees and be a more attractive customer for the Lender)
•Repay secondary debts (repay and closed the credit cards and personal loans)
•Keep a clean credit history.
Friday, 22 May 2009
Repayments vs. Interest
As a home loan borrower you need to understand the relationship between repayments and interest. While interest forms part of the repayment the repayment can be manipulated by other loan factors such as the loan term.
For example if you have a $100,000 home loan at 7% p.a. and repay the loan over a term of 20 years you will pay $775.30 per month, but if the term were extended to 30 years your repayment would reduce to $665.30. Note the interest rate remains the same in both scenarios.
Some mortgage sales people would say you have saved $110 per payment! But what about the total repayment amount and total amount of interest paid? In the first scenario where your repayment is $775.30 if you were to only make the minimum repayment for the full 20 year term you would repay $186,072.00, of which $86,072 is interest. In the second scenario where you pay the loan off over 30 years but have reduced repayments, you would end up paying $239,508! That’s $53,436 higher than the first scenario and you end up paying the bank $139,508 in interest! That is definitely no saving.
The simplest way to understand interest is to remember that as the term of the loan increases or the interest rate goes up, the amount of interest paid increases exponentially.
As we have seen, by extending the term of a $100,000 loan by 10 years increases the total interest paid by more than $53,000. So what would happen if we decreased the term? A $100,000 home loan with a term of 10 years at an interest rate of 7%pa would result in total interest change of $39,330 a reduction of almost $47,000 on the 20 year term loan! The Repayment does however increase to $1,161.
I admit must people will not repay their home loan off in 10 years but it’s a good point to remember, simply put the more you pay now the better off you are in the long run.
For example if you have a $100,000 home loan at 7% p.a. and repay the loan over a term of 20 years you will pay $775.30 per month, but if the term were extended to 30 years your repayment would reduce to $665.30. Note the interest rate remains the same in both scenarios.
Some mortgage sales people would say you have saved $110 per payment! But what about the total repayment amount and total amount of interest paid? In the first scenario where your repayment is $775.30 if you were to only make the minimum repayment for the full 20 year term you would repay $186,072.00, of which $86,072 is interest. In the second scenario where you pay the loan off over 30 years but have reduced repayments, you would end up paying $239,508! That’s $53,436 higher than the first scenario and you end up paying the bank $139,508 in interest! That is definitely no saving.
The simplest way to understand interest is to remember that as the term of the loan increases or the interest rate goes up, the amount of interest paid increases exponentially.
As we have seen, by extending the term of a $100,000 loan by 10 years increases the total interest paid by more than $53,000. So what would happen if we decreased the term? A $100,000 home loan with a term of 10 years at an interest rate of 7%pa would result in total interest change of $39,330 a reduction of almost $47,000 on the 20 year term loan! The Repayment does however increase to $1,161.
I admit must people will not repay their home loan off in 10 years but it’s a good point to remember, simply put the more you pay now the better off you are in the long run.
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