How does interest rate changes affect your mortgage
October 27, 2022
One of the most important decisions a person makes is whether to purchase a home. The importance of making a wise financial choice, like purchasing a home, is amplified in today's society where the proportion of homeowners to renters is declining.
However, the majority of homeowners fail to take into account the rates on their mortgages. According to a recent survey of 1,000 Australians, 55% of Australians don't know what their mortgage rate is. The homeowner may suffer negative financial consequences. A homeowner could be paying double the interest with an interest rate increase as low as 2%.
But why is this important for homeowners?
Knowing how your home loan affects your finances is more important than simply understanding it. Using the year 2022 as an example, a rise in inflation led to the Federal Reserve raising interest rates, which slowed down consumer spending. Unfortunately, this had a significant effect on homeowners' borrowing rates as well.
The amount of interest you pay on your principal amount each month increases as interest rates rise. You’ll have to pay more to pay off your mortgage, which could eventually lower your standard of living. For example, let’s say your interest rate has increased from 3% to 5% on your home loan of $500,000. If we calculate the difference in monthly interest it would look like this.
Current monthly interest calculation:
($500,000 x 3%) / 12 = $1,250 per month
New monthly interest rate after increase:
($500,000 x 5%) / 12 = $2,083.33 per month
That is a substantial increase in monthly repayments by $833.33. This money is a big difference to your bank accounts. You may know someone who has been through these changes, or you might be going through it right now. For knowledgeable guidance on how to lower your home loan rate, consult a mortgage broker. This straightforward action might end up being one of your best choices.
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There was a time when young adults eagerly anticipated moving out and getting their own "pad." One and a half million adult children increasingly opt to live with their parents well into their late 20s, signaling the end of those days. According to the most recent census data available, 17% of young adults aged 25–29 and over 43% of young adults aged 20–24 still live with their parents. This is brought on by the fact that more young people are enrolling in higher education, that marriage is often put off, and that housing is expensive in Australia. An average family is thought to spend $812,000 raising two kids from birth until they are 24 years old. How does this effect the parents long term? The parents are probably certainly in their 50s or early 60s and are preparing to spend some time alone when they have "children" who are 20 or older living at home. The young adults may occasionally help with household expenses after they are fully working. Even if they are working and attending school, some parents can be hesitant to ask their "children" to pay for their education. The result is likely that parents continue to provide for or subsidise their children during a period when they ought to be maximising their retirement savings. Mum and Dad might have sold the family house and relocated to a smaller property if they had been left to their own devices, but they now believe that this is unfeasible given the situation. It is time to think about your future. Careful planning is necessary if you find yourself in this type of situation. To make sure you still have the resources for a comfortable retirement you should give the following some serious thought: • What date do you intend to retire? • How much money will you need to set aside while waiting? • How much will you need to have saved up by the time you retire? • How much retirement income would you need to maintain your desired standard of living? With this knowledge, you may create a savings plan and work out how to achieve your goals. Make an appointment with us if you need support, and we'll walk you through the process. We can assist you in managing your finances, but we cannot urge your children to leave the nest.
Buying a new home is undoubtedly one of the most exciting time in our lives. But, on the other hand, a mortgage application can be a stressful process as you dive into a world of unknowns. Let’s look at five factors that may negatively affect your chance of being approved for a home loan. 1. Lying on your application Lying about your financial situation is a big no-no in the eyes of any bank. For example, not disclosing childcare costs or disclosing only one credit card, when in fact you have three, can add a red flag to your application. Lenders share information to prevent fraud, which can also affect any future applications. 2. High debt to income ratio Lenders will compare your income level against any outstanding loans, including the loan you are applying for. It helps them measure your ability to repay the loan without putting you under financial stress. For example, a couple earns $200,000 combined. They have a $20,000 car loan, $5000 credit card limit, and are applying for a $700,000 home loan. Their debt to income ratio is 3.62 ($725,000 divided by $200,000). Although it differs for every lender, generally, a debt to income ratio of more than 6 is considered risky. 3. Significant changes in your life Lenders like to see stable employment with consistent income. If you have started a new job recently, it can reduce your chances of being approved. Similarly, a significant expense close to your loan application date is not ideal either. For example, if you lease a new car or take out a loan on a new car, this can result in lenders rejecting your application. 4. Errors on the application paperwork A loan application involves providing numerous documents and filling out loads of forms. Make an error in haste or provide documents that are inconsistent with your application, and it will attract additional scrutiny from lenders. 5. Buy now, pay later (BNPL) services With BNPL services such as Afterpay and Zip becoming increasingly popular, banks are more cautious than ever when reviewing loan applications. This includes assessing your bank statements to ascertain if you use BNPL services. A few factors to consider: Defaulting on your BNPL repayments can affect your credit score. Outstanding payments are considered financial commitments which can impact the amount you can borrow. What if your loan application is rejected? Understanding why your application was rejected is essential. Common reasons include a bad credit score, low deposit, or inability to service the loan. You should avoid re-applying straightway after being rejected by a lender. Instead, take steps to set up a savings budget, extend your purchase timeline, or reduce existing debt. Professional advice from a financial adviser or a mortgage broker can help to avoid another rejection. Seek professional help to increase your chances of being approved To improve your chances right from the beginning, consult a financial adviser who can help with budgeting, cash flow management and explaining the impact of a home loan on your overall financial goals. When you are ready to apply for a loan, consider consulting a mortgage broker to guide you through the loan process. They can provide guidance around items lenders may flag, compare different lenders to get you the best deal, and apply for the loan on your behalf.
Jargon in any industry often confuses and confounds those who do not deal with it every day. Think about your computer. IT specialists seem to speak a different language. But investing shouldn’t be a minefield of gobbledygook that stops you understanding what your money is doing. Here we’ve taken some of the more commonly used financial terms and explained them in simple, everyday language. Investment terminology Bull market: A market that is exhibiting a significant price rise and is buoyed by optimism. Bear market: A market that is exhibiting a significant decline in prices and seems to be driven by pessimism. Growth assets: Asset classes (including shares and property investments) that have the potential for investment growth and which often carry greater volatility. Defensive assets: Asset classes (including cash and fixed interest investments) with limited or no potential for growth. Although they generally provide good levels of income and are often associated with lower volatility. Hedging: The process of protecting an investment from possible capital losses. Price/earnings ratio: A measure based on the multiple of earnings it would take to pay for an investment. For example, if a share costs $3.00 and the earnings on the share is $0.30 per year, the P/E Ratio would be 10; or you are paying 10x earnings. Lending terminology Gearing: The practice of borrowing to finance an investment purchase. Negative gearing: The situation that occurs when the costs of borrowing for investment purposes exceed the investment income earned. Margin loan: A loan used to buy additional investments using existing investments as security for the loan. Loan-to-value ratio (LVR): A measure of the size of the loan against the value of an investment expressed as a percentage. For example, if you had a portfolio valued at $100,000 on which you owe $60,000, the LVR would be 60%. Margin call: When the value of a portfolio funded by a margin loan falls below a specified level, the lender can place a margin call. This is a demand that the investor provide additional security to the loan (by way of cash or other investments) to restore the LVR. If there is anything else you would like explained about the world of financial management, please ask us.
If you entered the world between 1980 and 1996 you’re part of the “millennial generation”. You’ve grown up in an age of unprecedented abundance and incredible technical innovation, and as a group, enjoy a greater wealth of opportunity – professionally, socially and recreationally – than any previous generation. Many goods and services have never been cheaper in real terms, allowing you to live more for today than adopting your parents’ and grandparents’ single-minded focus on buying a home and saving for retirement. Career or a combo? That’s not to say you don’t face challenges. Increased employment casualisation, short-term contracting, and the threat of automation, can potentially threaten your job security. Or you might actually embrace a ‘come and go’ career, interweaving periods of work with stints of travel, child-raising or volunteering. Indeed, many millennials are discovering that the whole concept of work versus recreation is becoming blurred. With a computer the primary tool of trade in many professions, you may be able to work just as easily from a spare bedroom in Berlin or Barcelona as in Parramatta or Perth. Medical advances promise a long and healthy life, meaning you may not even intend to ‘retire’, choosing to work for as long as health allows. Is home ownership that important? Some of your cohort find it liberating not to be tied down to one place by a mortgage and a heap of stuff, however the likelihood is that if you haven’t bought a house already, you still aspire to the great Australian dream of home ownership. This is a real challenge particularly for younger millennials and may involve unacceptable compromises such as living a long distance from work. But attitudes to long-term renting are changing. While Australia has yet to develop both the culture and cooperative ownership structures that make life-long home rental the norm in some countries, it’s a sure bet that enterprising millennials are working to change that. In any case, renting can be an economically viable alternative to buying. There’s an app for that Whether it’s finding a meaningful job, financing a new venture through crowd funding, borrowing through P2P platforms, finding a house or just a room, or even looking for love, you know where to find the apps. Still, with the mass of opportunities that have arisen from greater connection and changing social attitudes, life is in many ways more complicated than it was for your forebears. Let’s talk about money Managing money is no exception. For a start, there’s the challenge of working out what the right balance is between funding a desirable lifestyle now and saving for medium and long term goals. Once that’s decided there are the questions of how to save and where to invest. The Internet is awash with information and advice, with much of it of a high standard. Unfortunately this is balanced by a vast amount of misinformation and an abundance of shonky investment offers, making it difficult to distinguish the good from the bad. Fortunately, help is at hand. We’ve made it our business to understand the wants and needs of all generations. There is more to life than saving for retirement and maximising entitlement to the age pension. If you have that millennial feeling and need some advice on how to manage your unique financial needs to get as much out of life as possible, check out our website or find us on Facebook and LinkedIn, then contact us for a chat.
