Noah Cohen Archives

The lowdown on Lenders Mortgage Insurance

December 18, 2016

First of all, what is Lenders Mortgage Insurance (LMI)?

LMI is insurance the bank will generally require you to purchase if you need to borrow more than 80% of the value of the property you provide as security.

So now that I have LMI, that means the bank can only take the property I provided as security, right?

Wrong! If you can’t make your repayments, the bank can take possession of the property or force you to sell. If that still doesn’t cover what you owe, the LMI will pay the bank the balance still owing.

But it doesn’t stop there… Unlike in some States in the USA, you can’t just hand back the keys and walk away from the loan. The LMI provider can and generally will come after you for any shortfall, and numerous bankruptcy proceedings have been launched by LMI insurance companies against borrowers over the past decade.

So what?

There can certainly be legitimate reasons to borrow a high proportion of the value of the property you give the bank as security, however it does come with additional risks. If rates go up or if your circumstances change, it may be difficult to make your repayments, and it’s possible you could owe (and will need to repay) more than the value of the property.

Make sure you’re clear about what you’re agreeing to, and if in doubt, ask the questions!

Noah Cohen is Mortgage Broker with Origin Finance, and is a Credit Representative (CRN 490277) of BLSSA Pty Ltd (Australian Credit Licence 391237)

Are you fixin’ to fix?

December 18, 2016

With interest rates at a historic low, I’ve been asked a lot about whether to lock in home loan repayments at fixed rates, or wait and see if there are more rate cuts on the horizon. Unfortunately there’s no right answer, and ultimately it’s up to you.

With that said, it’s important to understand the pros and cons of each option, so you can make a decision about what’s right for you.

On the variable rate side:

There might be more interest rate cuts to come (though who knows how much the banks will pass on!)
Variable rates seem to be the ‘flavour of the month’, which means more competition in this space, and more lenders to choose from with very competitive products and rates
They offer more flexibility, with many allowing additional repayments, minimal exit fees, and offset accounts
If rates go up, so will your repayments! While banks were fairly reluctant to pass on the recent rate cuts, it seems like a safe bet that they’ll be quite happy to pass on any rate increases that may come along
There’s also speculation that some of the banks will be increasing their variable rates in the coming months even if the cash rate stays on hold.

On the fixed rate side:

Is there much room for interest rates to go lower?
You get the certainty of knowing what your repayments will be during the fixed period
Some lenders have started offering offset accounts with their fixed rate loans
Watch out if you need to repay or exit the loan early! If rates have gone down since you got a fixed rate loan, the break costs can be very high. If interest rates haven’t changed since you got a fixed rate loan, the break costs could still be significant. In short, make sure you’re unlikely to want or need to repay the loan before the end of the fixed term.

So… there are pros and cons of both options, and it’s up to you to decide which is right for you. You can pick one, the other, or even hedge your bets and get a loan that gives a mix of both.

If you have or are thinking about taking out a home loan and would like to discuss your options, I encourage you to get in touch for an obligation-free chat.

Noah Cohen is Mortgage Broker with Origin Finance, and is a Credit Representative (CRN 490277) of BLSSA Pty Ltd (Australian Credit Licence 391237)

Why bother? Is it worth the effort to refinance my home loan?

December 18, 2016

Recent articles in the media such as this have referred to the so-called “loyalty tax” or “lazy tax”: the price consumers pay for not comparing their options when taking out car insurance, home insurance, credit cards etc.

This has me thinking – how much is enough to justify moving from one lender to another to refinance a home loan. Obviously the answer to this question is going to differ from person to person, and certainly cost is not the only factor when you’re weighing up the pros and cons of different loan options. But that said, let’s focus on cost for now and ask: how much does the switch to a new loan need to save you for it to be worth your time and effort?

To help answer this, it’s probably a good idea to have a sense of how much time and effort is actually involved in making a switch. If you’re doing your own research and running around, you should probably factor in a couple of days, and probably a fair chunk of this would be spent on researching your options before you can look at making a decision (so you’re spending a reasonable amount of time, regardless of whether you actually switch across or not).

Alternatively, if you use a mortgage broker, you’ll be committing to about an hour of your time to talk the broker through your circumstances and exactly what it is you’re looking for, and then if you decide you do want to switch loans, about another 2 or 3 hours getting your supporting documents together and signing contracts.

So assuming you make use of the services of a mortgage broker, let’s figure you’re committing to about half a work-day of time and effort to switch across to a different loan.

So back to the key question – how much is 4 hours of your time, half a day, worth?

Having a look from a salary perspective, let’s say your annual income is $100,000. Taking into account public holidays and annual leave, a working year is about 46 weeks or 230 days, so that works out to be $435 for each day you work. How many days’ worth of interest savings would you need, in order to make switching loans seem appealing?

If we’re talking about a loan for your own home, chances are the interest repayments aren’t tax deductible and you’re paying off the loan using after-tax dollars. Say your average tax rate is 25% – that brings your daily take-home pay down to $326 each day. If switching loans could save you $1,600 per year, that’s essentially the equivalent of an extra week’s worth of pay. Is that worth half a day’s time and effort?

As the saying goes, ‘a penny saved is a penny earned’, and switching loans in the current low interest rate environment could potentially save you $’000s. A mortgage broker should be able to provide you with comparison figures to show the potential savings over the short and longer term, taking into account any switching costs you would incur.

Of course, there are other factors you should also consider:

There is certainly a lot of personal information required in submitting a loan application, and you might find the level of detail being asked for a bit
You might have had a particularly good or bad experience with your current lender, which could mean you’re more or less inclined to move regardless of what interest rates are available
Cost is only one aspect of a loan. Additional features such as offset accounts, online access and customer service can also be very important

If you’d like to have a chat and see what options are available, I encourage you to call or email me for an obligation-free discussion.

Noah Cohen is a Mortgage Broker with Origin Finance, Credit Representative (CRN 490277) of BLSSA Pty Ltd (Australian Credit Licence 391237)

How much are breakfasts costing homeowners?

December 15, 2016

Bernard Salt’s article in the Australian suggesting that young people should skip their smashed avocado breakfasts and use the money they save for a deposit on a house got me thinking – what about the people that already own their home (young or otherwise)? The deposit is only a small piece of the puzzle – usually about 20% or less of the overall cost. There’s still the other 80% that people spend the next 30 years paying off. How much are the smashed avo breakfasts costing them?

Let’s have a look at some numbers. For a $500,000 loan at a 4% interest rate, your repayments will be almost $2,400 each month, which works out to be a bit over $850,000 in total (or $350,000 in interest) over the life of the loan.

If you and your partner skip one smashed avo breakfast each week, that gives you an extra $190 each month to put toward your home loan (assuming you’re buying the same $22 breakfasts as Salt). If you keep adding that money to your loan repayments each and every month, that’ll shave off over $50,000 in interest and almost 4 years off your loan.

Especially in the early years of a loan where the majority of your minimum repayments are just covering the interest, every little bit can make a difference. In the example above, only $0.45 of every $1 of the minimum repayments in the first year actually goes towards reducing the loan balance, and the rest is just covering the interest. 100% of every $1 over and above the minimum repayments is going directly towards reducing the loan balance.

Don’t forget, we’ve also got historically low interest rates at the moment. If rates start climbing up again, an even larger portion of the repayments will be going towards covering the interest.

Of course there are other things you can do that won’t get in the way of your smashed avo breakfasts. There’s plenty of competition amongst the banks (and other non-bank lenders). If you can take advantage of this and find yourself a lower interest rate, you can save money without skipping a meal.

If you’ve got some money sitting around but you don’t want to limit your access to it by repaying the loan, think about an offset account. This can give you the freedom to access and use your money however you like, and you get the benefit of reducing the interest you owe to the bank while your money is sitting in the account.

Whether you want to consider cutting down on your dining out or not, there are things to consider that could potentially save you $’000s in interest on your loan.

Shopping around and researching lenders, costs, features and benefits can be a time-consuming and sometimes frustrating process. A mortgage broker can do the research for you, help you through the process, and it usually won’t cost you a cent.

If you’d like to discuss your loan options or café recommendations, feel free to get in touch.

Noah Cohen is a Credit Representative (Credit Representative Number 490277) of BLSSA Pty Ltd (Australian Credit Licence Number 391237).

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