By Dave Fleming : 15 December, 2017

Have You Ever Heard Of Mortgage Rate Bracket Creep?

What is Your Current Mortgage Rate?

39506709 – bracket creep word highlighted on the white paper

We’ve probably all heard of bracket creep when it comes to our salaries and pay packets, which is where you can end up in a higher tax bracket as your salary or pay increases. That being so, I’m thinking about creating a new description for home loans called mortgage rate bracket creep.

As a mortgage broker I bend over backwards for my new customers and try and get them the best interest rate going based on the features of the loan they are looking for. Keeping in mind, there isn’t a one size fits all when it comes to interest rate quotes on any given loan. Mortgage brokers are attuned to what tolerances most lenders have when it comes to negotiating what interest rate they’re prepared to offer on a specific loan.

Interest Rate Influences
To clarify the above, the rate of interest a lender will offer a borrower commonly depends on the loan amount (higher loan amounts get a better rate), what the loan to value ratio is going to be can also be a factor. Commonly lenders will offer a better rate if the loan to value ratio is 80% or under. In other words the loan amount wanted doesn’t enter into Lenders Mortgage Insurance territory, which for a full doc loan is over 80%. For low doc loans that can be 60%.

The new game for lenders is (especially the majors), now seems to be luring borrowers through the front door with enticing offers and then slowly (without fanfare) gradually increase the rates as time goes by. In May 2016 the Reserve Bank of Australia lowered the official cash rate to 1.5% and since then it hasn’t moved. Nevertheless, many people are finding that their owner occupied principal and interest repayment home loan interest rate is now hovering around the 4.7% to 4.9% interest rate. So, what’s happening here?

Does Your Interest Rate have a 3 in Front of it?
However, you might say, “that wouldn’t be happening to me, when I negotiated my home loan or investment property interest rate I got the best rate going”. Don’t be so sure, typically for owner occupied loans that have principal and interest repayments attached to them we are regularly negotiating rates for customers under the 4% benchmark. If you’re paying more than that for your loan I would suggest you get a mortgage health check at your earliest opportunity.

Are You Better off with a P&I Investment Loan?
Lenders have also been making hay while the sun shines by using the regulatory authority’s edict to reduce their loan book percentage of interest only loans as a facade to increase interest rates for The words Interest Rates on a blacktop road and a percent sign at the top of the street, symbolizing the rising interest rates due to economic factors and conditions those loans. In fact some financial experts are saying that investors should get their calculators out and calculate whether or not it would save them money by switching to a principal and interest loan for their investment property mortgages.

The reasoning for that trade-off is to see if the savings on interest rates by switching to a principal and interest loans is going to be greater than the tax benefits that would received based on the higher tax deduction for the increased interest repayments. Talk to your accountant or mortgage broker on this one as I don’t foresee any lender being enthusiastically helpful with this one.

Lenders Lurking in the Shadows
While all this has been going on lenders have also surreptitiously been slowly edging up interest rates on owner occupied principal and interest rate home loans. My suggestion is, if you don’t know what interest rate you’re being charged by your lender at the moment, go and check your latest statement online and see for yourself. If your rate doesn’t have a 3 in front of it (excluding fixed rates), then it’s time to take action and either call your lender or talk to your broker and ask them what they can do for you.

Break Costs Explained Once and For All
While we’re talking about fixed rates it’s probably worth a small blurb about break cost penalty’s as many people get hung up on the fear of trying to break a fixed rate loan. For years banks tried to keep consumers in the dark with their Boogie Man story of the terrible costs that would be thrown at anyone who ‘Woe Betide’ even thought about breaking their fixed rate contract.

Here are the facts; the only costs that a borrower would have to pay would be the ones that the lender would incur. The lender would only incur costs if they had to relend the loan money you discharged at a lower rate than what they had you contracted to. In other words, if they were able to relend the money from your vacated loan at a higher rate, then they would be making money and would have no basis on which to charge you any fees for breaking your loan contract.

That said, if you have been considering fixing your principal and interest owner occupied home loan now would be a good time to do it. Rates are not going to go any lower, but there’s a chance the banks (not the Reserve Bank of Australia) will find excuses to incrementally start increasing rates. There are a number of other economic indicators that are starting to suggest that rates could increase in the short to medium term.

A Strategy Worthwhile Considering
House shape made out of wads of $100 dollar billsA good strategy is to split your loan, whereby its part fixed rate and part variable rate. This allows you to have the best of both worlds by having the certainty of the fixed rate and the flexibility of the variable rate. Most fixed rate loans have limits on extra repayments over and above the minimum contractual payments they will allow you to make. Also, most fixed rate loans lenders don’t allow you to have offset accounts linked to those loans, although there are a couple of exceptions.

By doing what we’ve just discussed above banks are now opening themselves up to greater competition to second tier banks, non-bank lenders, credit unions and building societies. Additionally, keep in mind that the Government is about to put a levy on five of the biggest banks and we all know what that means. Yes, higher fees, charges and interest rates from those lenders. Therefore, it may pay you handsomely to start devising a strategy on how to save money on your mortgage.

Find a savvy experience mortgage broker who is going to put your interests first who know all the tips and tricks on how to save you money and at the same time enhance your lender experience.

Thanks for reading.

For The Home Page <ahref=”http://www.mastermortgagebrokersydney.com.au>Go Here

By Dave Fleming : 15 December, 2017

According to figures provided by the Australian Prudential Regulatory Authority (APRA) Australian borrowers in the first half of 2016 have been forced to pay almost $500,000,000 (1/2 billion dollars) on approximately 100,000 lenders mortgage insurance (LMI) policies.

One of the inherent issues with the scheme is quite a few borrowers don’t fully understand it. Many think they are the ones being protected if they default on their loan when they sign up for these expensive policies.

Although some of these polices can cost upwards of $40,000 on top of the borrowers mortgage they in fact protect the bank, not the borrower in the event of the borrowers defaulting on the loan.

What is Lenders Mortgage Insurance?

www-mastermortgagebrokersydney-com-au-what-is-lmiLenders Mortgage Insurance (LMI) safeguards the mortgage lender in cases where a home loan borrower defaults on their mortgage loan. The insurance coverage is only necessary for mortgage loans that have a balance that exceeds 80% of the property’s value at the time of application.

Historically, home mortgages were only granted up to and including a maximum of 80% of the loan to value ratio. This resulted in borrowers needing to pay an initial deposit for at least 20% of the purchase price whenever they {|were interested in buying} a house using a mortgage. That was undertaken simply because the smaller loan to value ratio led to a lower risk mortgage loan to the loan provider. In the event of a default, the lending company could claim back then sell the home quickly in a fire sale at a discounted price to recoup their funds.

Yet as the years have passed by, a number of loan providers have made it possible for individuals to borrow in excess of 80% of the home’s value. To cancel out the associated risk, loan providers now acquire insurance cover on the total amount of the loan that goes above 80% of the property’s value. This way, if the home loan gets into default, the mortgage lender will be able to recoup a portion of the debt of the mortgage loan from the insurance provider.

What do Borrowers Know?

Martin North, an independent banking analyst who operates a rolling survey of banking customers recently said that “Around Seventy per cent of homeowners believed that LMI protected them versus the lender.”

“So it is not totally crystal clear to the householder that this actually protects the bank rather than the borrower and personally I think that there needs to be a whole lot better disclosure in regard to this LMI product set.”

How Much is LMI

The premium fees for lenders mortgage insurance can vary widely based on your loan to value ratio and how much you want to borrow. Once the loan you want exceeds 80% of the value of the property you want to purchase LMI kicks in. You may want to try this calculator to see what your LMI fee will be.

For info on best interest rates go here

What Happens in the Event of a Foreclosure?

www-mastermortgagebrokersydney-com-au-foreclosureIf the borrower defaults and the bank forecloses, but the sale of the property does not cover the value of the mortgage, then the bank can make a claim under the terms of the majority of lenders mortgage insurance policies.

Peter White, president of the Finance Brokers Association of Australia said; “The insurer pays the bank, so the bank gets out scot-free,”

“But what that loss was — [the insurers] then chase the borrower to recoup their losses. That could be $100,000.”

The Details Are ‘buried in the terms and conditions’ When It Comes To Lenders Mortgage Insurance

“Borrowers were made aware of the risks of lenders mortgage insurance.” In a recent statement, put out by the Australian Bankers Association.

“LMI would typically be discussed with customers when they initially apply for a loan, be included as part of information packs, and discussed again at the final stage when the customer proceeds to purchase,” the statement said.

“The terms and conditions of LMI are included in the loan contract.”

Peter White from the Finance Brokers Association of Australia said, “Intervention is required by the Federal Government to intervene to improve disclosure to ensure borrowers fully understand how lenders mortgage insurance works and what their obligations are.

The policies he said were “buried in the terms and conditions”.

“Make it a regulated document that every banker and every broker must give to the client and the client needs to understand,” he said.

“And if it’s introduced at the beginning of the process it maximises the opportunity of understanding.”

Bio:
About About Dave Fleming

Dave is enthusiastic and fascinated by the digital and social media worlds. He is passionate and enjoys entrepreneurial pursuits, wealth creation financial strategies, health, fitness as well as cooking. Dave is the webmaster at www.mastermortgagebrokersydney.com.au, which is an information website pertaining to loans. He has a deep commitment towards writing about and helping people understand the basics of how the financial world works.

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