All eyes on interest rates in 2017

Commodities have surged and business is confident the economy will improve in 2017, but solid growth could see record low-interest rates begin to rise for the first time in six years.

The new year had barely begun when the first interest rate rise of 2017 was announced.

Brisbane-based lender Suncorp announced in early January it would lift small business loan interest rates by 0.15 per cent to 5.14 per cent.  The company’s banking and wealth chief David Carter said expectations of overseas rates rises, among other things, had led to a tightening of money markets. “Increasing competition for quality funding sources, the cost of meeting regulatory change and events overseas that have altered the outlook for interest rates globally have led to rising funding costs,” Mr Carter said.

“The majority of bank funding is based on these factors, not the Reserve Bank of Australia cash rate,” he said, explaining why the lender had moved rates independent of any Reserve Bank decision.  In recent months, several other lenders have also bumped rates, primarily for investment and interest only home loans.

But the moves have many SME operators pondering what lies ahead for business loan interest rates. And with that comes the question of whether to fix all or part of your small business loan.

The often-quieter first quarter of the year is a good time for owners to consult their business loan broker to review arrangements, as well as ensure the business has sufficient access to capital for any volatility.

It seems even the experts are uncertain about the year ahead, with CMC Markets chief market strategist Michael McCarthy telling The Courier-Mail that unpredictable factors such as the Trump presidency made 2017 a tricky one to forecast.  “The spread of estimates of what will happen over the next 12 months is wider than I have seen for many, many years,” Mr McCarthy said.

And while US interest rates are tipped to rise further in 2017, CommSec’s Craig James predicted the Reserve Bank would not raise rates this year. However further cuts weren’t on the cards either, after six years of the Reserve Bank continuously lowering the official cash rate.  “We think the Reserve Bank will stay on the interest rate sidelines in 2017,” Mr James said.  “The Reserve Bank still has the ability to cut, if inflation rates remain stubbornly low.

But the Reserve Bank, under the new leadership of Dr (Philip) Lowe has made it clear it is not inclined to cut rates again. It still seems a little too early to contemplate rate hikes.”  However, tightening in the US and other money markets may make funding harder to source, triggering more out-of-cycle rises such as the ones seen recently.  Inflation was expected to trend back up towards the lower end of the two to three per cent target band over the next two years with more domestic spending, Mr James said.

Unemployment and underemployment remained concerns. But business confidence was high that the Australian economy would do well in 2017, according to the latest biannual MYOB survey of small business owners.

The Business Monitor survey found 59 percent of small business operators expected the economy to improve, or remain stable in 2017. About 27 percent also reported a lift in revenues; up from 21 percent at the previous Business Monitor survey in July 2016.

In early January there was more good news for the economy when the Australian Bureau of Statistics released data showing Australia had posted a surprise trade surplus of $1.2 billion in November.  Economists had predicted a deficit of around $550 million for the month. It was the first surplus since March 2014 and was driven by surging iron ore and coal prices.

Analysts predict commodities would be the key to further economic growth. HSBC’S chief economist Paul Bloxham has said the Trump administration, with its protectionist stance and focus on infrastructure projects, could drive more demand for Australian resources.  “We think the commodity price rise … is a game changer for the Australian economy,” Mr Bloxham told Sydney’s Daily Telegraph.  If the Trump administration starts to lift the protectionist barriers then the likely policy response from China will be to boost its spending on infrastructure, which in turn, we think, will support demand for hard commodities.”

HSBC has forecast the Australian economy would grow by 2.8 percent this year. It’s good news for the economy and spending, but there may be increasing pressure on business loan interest rates and small business lenders.

Starting a new business – what should I consider?

Australians are an entrepreneurial lot and it looks like the trend is set to continue with more and more young people considering starting their own business each year.

Starting a new business is a really exciting time. The only problem is that there is a lot to remember and in all the excitement, sometimes things can be forgotten. We’ve put together a checklist for you that covers some of the key considerations to cross off when it comes to naming and promoting your business.

  1. Think about the serious legal bits first; choosing a business structure such as sole trader, partnership or company, get your ABN, register for an AUSkey, register your business name, get a tax file number, and check what licenses or permits you may need.
  2. Registration time! Register your business name, domain, and social media profiles. Check if you need to register for GST, check availability and apply for a domain name.
  3. Talk to a business accountant/bookkeeper. Understand how your business finances will work, what you can claim and what information you need to keep on record. Your accountant can help you understand what goals you should set for your income and how to know when you start making a profit. There may be financial software or a platform you will need to use.
  4. Keep a business log. Whether you choose to do so online or in a planner/notebook, it’s important to keep track of portals and services you sign up to, usernames and passwords, deadlines and goals, as well as notes on all your clients and actions.
  5. When choosing your business name, there are a few important checks you should do. Search ASIC to make sure the name is not already taken. Search for potential domain names and purchase the one (or more) you would like to use. Google the name to make sure you are not competing with a popular term already in use. Search for your potential social media usernames to make sure they are available.
  6. Be sure to have a logo professionally designed. Not only will this mean you are provided with all the file types and sizes you need, you have someone you can ask for help, should you need anything else in the future. Creating a logo in Microsoft Word is not a viable option for any business.
  7. Get your website and email arranged. If you plan to save money and try to build your own website, then give yourself quite a few months to become familiar with the platform you are using. It’s always better for appearance and functionality to have a professional designer/developer build your site. Consult your own legal expert to be sure you are not opening yourself up to any legal action by making misrepresentations or statements not allowed.
  8. Create email addresses and add them to your email program. Be sure to test these thoroughly as the last thing you want is emails going missing in your early days of being in business.
  9. Complete your social media profiles and begin populating them before officially opening your business. When potential customers find your social media profiles, it’s great for them to get a feel for your business straight away.
  10. Choose an email database and creation platform. Those who subscribe to your email list via your website and social media will be maintained on this platform. The one you choose should have an easy to use interface and automatically add in legal requirements such as unsubscribe functionality.

Once you begin trading, you may want to go back through this list to check if there is anything you would like to change.

Different loan types

Finding the right home loan is as important as finding the right property.

There are literally hundreds of home loans available, with new products emerging all the time.

An AFG broker can help you find a loan that suits your particular needs, help you complete the paperwork, professionally package it with your supporting documents and submit it to your chosen lender.

When you’re ready, ask your broker to call you to discuss next steps. Here’s a snapshot of the main types of home loans and some of their pros and cons.

Variable

Standard variable loans are the most popular home loan in Australia. Interest rates go up or down over the life of the loan depending on the official rate set by the Reserve Bank of Australia and funding costs. Your regular repayments pay off both the interest and some of the principal.

You can also choose a basic variable loan, which offers a discounted interest rate but has fewer loan features, such as a redraw facility and repayment flexibility.

Pros

  • If interest rates fall, the size of your minimum repayments will too.
  • Standard variable loans allow you to make extra repayments. Even small extra payments can cut the length and cost of your mortgage.
  • Basic variable loans often don’t come with a redraw facility, removing the temptation to spend money you’ve already paid off your loan.

Cons

  • If interest rates rise, the size of your repayments will too.
  • Increased loan repayments due to rate rises could impact your household budget, so make sure you take potential interest rate hikes into account when working out how much money to borrow.
  • You need to be disciplined around the redraw facility on a standard variable loan. If you dip into it too often, it will take much longer and cost more to pay off your loan.
  • If you have a basic variable loan, you won’t be able to pay it off quicker or get access to money you have already repaid if you ever need it.

Fixed

The interest rate is fixed for a certain period, usually the first one to five years of the loan. This means your regular repayments stay the same regardless of changes in interest rates. At the end of the fixed period, you can decide whether to fix the rate again, at whatever rate lenders are offering, or move to a variable loan.

Pros
Your regular repayments are unaffected by increases in interest rates.
You can manage your household budget better during the fixed period, knowing exactly how much is needed to repay your home loan.

Cons
If interest rates go down, you don’t benefit from the decrease. Your regular repayments stay the same.
You can end up paying more than someone with a variable loan if rates remain higher under your agreed fixed rate for a prolonged period.

There is very limited opportunity for additional repayments during the fixed rate period.
You may be penalised financially if you exit the loan before the end of the fixed rate period.

Split rate loans

Your loan amount is split, so one part is variable, and the other is fixed. You decide on the proportion of variable and fixed. You enjoy some of the flexibility of a variable loan along with the certainty of a fixed rate loan.

Pros

  • Your regular repayments will vary less when interest rates change, making it easier to budget.
  • If interest rates fall, your regular repayments on the variable portion will too.
  • You can repay the variable part of the loan quicker if you wish.

Cons

  • If interest rates rise, your regular repayments on the variable portion will too.
  • Only limited additional repayments of the fixed rate portion are allowed.
  • You will be penalised financially if you exit the fixed portion of the loan early.

Interest only

You repay only the interest on the amount borrowed usually for the first one to five years of the loan, although some lenders offer longer terms. Because you’re not also paying off the principal, your monthly repayments are lower. At the end of the interest-only period, you begin to pay off both interest and principal. These loans are especially popular with investors who plan to pay off the principal when the property is sold, having achieved capital growth.

Pros

  • Lower regular repayments during the interest only period.
  • If it is not a fixed rate loan, you have the flexibility to pay off, and often redraw, the principal at your convenience.

Cons

  • At the end of the interest-only period, you have the same level of debt as when you started.
  • If you’re not able to extend your interest-only period, you could face the possibility of increased repayments.
  • You could face a sudden increase in regular repayments at the end of the interest-only period.

 

Low Doc

Popular with self-employed people, these loans require less documentation or proof of income than most, but often carry higher interest rates or require a larger deposit because of the perceived higher lender risk. In most cases, you will be financially better off getting together full documentation for another type of loan. But if this isn’t possible, a low doc loan may be your best opportunity to borrow money.

Pros

  • Lower requirement for evidence of income. May overlook non-existent or poor credit rating.

Cons

  • You will probably pay higher interest than with other home loan types?or may need a larger deposit, or both.

Explaining the loan process

Find out what’s involved in taking out a loan, from start to finish.

Talk to us, it costs nothing to speak to a friendly and professional AFG broker, who can quickly help find out how much you can borrow and which loan may suit your needs, plus answer any questions about the process.

How does the process work?

Arrange a pre-approved loan

If you haven’t started your property search, or are still looking, a pre-approved loan can be useful.? It gives you a clear picture of what you’re spending limits are and gives you peace of mind that if you find a property you really interested in you can move quickly to make an offer.? And it may put you in a stronger negotiating position than other potential buyers who don’t have pre-approval.? An AFG broker can take care of the paperwork to lodge a loan application.

Find your property

Make sure you do plenty of homework when you’re on the hunt for a new property. Research property prices in the area, potential capital growth and existing and planned infrastructure, such as roads, public transport, schools and shops. If you’re unfamiliar with property values in the area, consider a full valuation carried out by a registered valuer before making a final decision.

Make an offer and sign a Contract of Sale

Whether you buy property at auction or make an offer on a listing, your agreement with the vendor only becomes a legal commitment when a Contract of Sale (Offer of Acceptance in WA) has been signed by both parties. This contract will confirm the selling price as well as any terms and conditions. Your commitment will usually be subject to lender approval, a building inspection report and a pest inspection.

The period from signing a Contract of Sale to Settlement – when the property becomes legally yours – is usually six weeks (shorter in some states, such as Queensland). Note: even if you have a pre-approved loan, your lender will still need to complete a valuation of the property you have chosen before issuing full approval.

Pay a deposit

A deposit is required once a Contract of Sale has been signed by both parties (sometimes called ‘exchanging contracts.’) ?You won’t yet have access to your home loan, so your deposit will need to come from savings or elsewhere. ?You may also be able to arrange a deposit bond until settlement. Speak to an AFG broker about your deposit options.

Appoint a conveyancer

You will need a solicitor or conveyancer to check the legalities of the Contract of Sale. Your conveyancer will also check all rates and taxes have been paid, check land use or building approvals for the property and order any relevant searches. They may also help sort out any inspections.

On settlement day, the conveyancer will check the correct amount of money has been transferred from your lender to the seller and all fees – such as Stamp Duty – are paid, so you can take legal ownership of the property.

Cooling off period

If you didn’t buy your property at auction, you may have a cooling off period when you can cancel the contract, although there may be a small penalty. ?Cooling off periods vary from state to state so check with your relevant state authority in terms of what your rights may be.

Guide to home loans

Variable

Variable rate loans often provide additional flexibility and are the most popular type of home loan in Australia. As the name suggests the interest rate is variable and therefore fluctuates with the Reserve Bank of Australia’s movement and the cost of the financial institution sourcing funds to lend. Variable rates are generally broken into two categories by financial institutions: basic and standard.

As the name suggests the basic variable rate only covers the basic home loan features. On these loans you won’t have access to features such as a redraw facility; however, this also means the interest rate is generally slightly lower than other loans.

The standard variable rate is traditionally slightly higher than the basic variable, however along with this you receive extra features such as a redraw facility, repayment frequency flexibility, portability and the option to pay in advance.

Variable loans generally require closer monitoring, especially if you overcapitalise and interest rates rise. It is important to make sure that you budget and plan for the future should interest rates rise, to ensure that you are able to meet the required repayments.

Fixed

Fixed-rate loans generally have all of the features of a standard variable product; however, the interest rate is fixed generally from one to five years. Fixed rate products are great products to help maintain the household budget because the repayments will not change during the fixed period.

However, a fixed rate loan means you could end up paying more if interest rates fall. It is possible to exit the loan agreement if you feel it is right to do so, although lenders will generally charge penalty fees to compensate for any loss in profits they may suffer.

Introductory and Honeymoon

Introductory or Honeymoon loans are generally popular for first home buyers, however, this doesn’t mean that these are the only people who can access these products. Honeymoon loans give individuals a discounted interest rate for the first six to twelve months depending on the product. After this period expires, the loan generally reverts to the lender’s standard variable product.

Although it may be tempting to take out a Honeymoon loan because of it’s reduced interest rate, it is important to watch out for restrictions or exclusions on other aspects of the loan. Many lenders will limit the availability of features (such as redraw facilities, repayments etc.) to offset the lower interest rate. In some cases, this can mean less flexibility over the life of the loan.

Interest Only

Interest only loans are particularly popular for investors. The repayments of interest only loans will be lower than an ordinary loan because you only pay the interest charges each month – you aren’t required to pay off the principal.

Some interest only loans are available for owner-occupier clients; however, these can be risky because your level of debt will not fall for the life of the loan. Interest only loans should be a short term option (about 5 years at the most). Also, in times when house prices may fall this may mean you have negative equity – you have borrowed more than your house is worth.

Low Doc and No Doc

Low and No Doc loans are increasingly popular in Australia, especially for self-employed or contractors. As the name suggests you require less documentation to take out the loan (this is essentially proof of income and other debts etc).

Although it is generally much easier to be found eligible for these loans, it is not always the best way to go. As a result of providing less documentation, the bank will generally charge a higher interest rate or additional fees because there is a higher perceived risk with applicants. If possible, in most cases you will be better off with a full doc loan (full documentation – providing the required proof of income etc) because they are a cheaper product in the long run. Although it may be less work to apply for a low or no doc option, the extra work can be worthwhile applying for a full doc loan.

So how do I know which loan to choose?

That is one of the most frequently asked questions and something that needs to be carefully considered before jumping in and signing loan documents. Really, it comes down to what you think is right for you. Speaking to a broker is a really great way to find out what loan is most appropriate for you.

A broker won’t force you to take out a product; they recommend a loan that will suit you based on the information you have given them and take care of all of the paperwork and application requirements. If you specifically would like a certain type of loan a broker is able to compare a wide range of them.

Investing in property

Research and having the right people to help you are the keys when investing in property.

It definitely pays to do your research on the property market before you dive in, and we’re thrilled to be on board to help you when it comes to financing your decision. Recent share market slides, tight rental markets in most capital cities and a whiff of increase in property prices are seeing many mum and dad investors retreat to bricks and mortar.

Generally, property in Australia is still considered to be a sound investment due to steady and consistent increases over time.

But it’s not a quick win. Property usually has a seven to ten-year cycle, with highs, lows and steady stints in between.

Fortunately, an ongoing housing shortage in Australia and a tax system that allows negative gearing on a property (where any investment losses can be claimed as tax deductions) continue to favour housing as a solid, long-term investment.

But credit has tightened in the wake of the Global Financial Crisis so lenders are more cautious about who borrows and for what. Your broker is your best ally in finding the right lender and loan for your circumstances in this new environment. They can also wade through the many investment loan options on offer, leaving you more time to find the ideal property.

Reviewing your finances?

Many people refinance their homes or investment properties to reduce their monthly home loan repayments. What other aspects of your finances can you review to help save money?

1. Review the frequency of your home loan repayments
If you are paid weekly or fortnightly, see if you can change the frequency of your home loan repayments to fit in (this may not be possible on all products). Because the interest on your home loan is calculated daily, making a payment two weeks earlier each month saves you money in the long term, and in the short term helps make ongoing budgeting easier.

2. Consolidate debt
If you’re paying high rates of interest for debt on credit and store cards – each of which will probably have an annual charge – think of consolidating debt in one place. You may very well be able to access a lower overall interest rate, reducing your monthly outgoings. You will avoid paying duplicate fees. Plus, a single monthly debt repayment is easier to manage than having to pay multiple credit card bills.

3. Cars
Cars are often the biggest family expense after home loan repayments. But as family needs change over time and the price of petrol rises, we can find we have more expensive cars than we need. Could you downsize your car/s, not only reducing monthly repayments but also potentially saving in maintenance, insurance and fuel costs? Have you thought about buying a scooter for short, local trips? Are you getting the best deal for the money you spend on your car insurance and repairs?

4. Insurance
There are three ways you may be able to save money on your insurance premiums. First, shop around when your renewals fall due rather than simply continue with your existing provider.

Also, you may be able to reduce monthly premiums raising the excess payable, or improving the security on your home.

Finally, some insurers provide discounted rates for bundling together policies such as home, contents, car, health or life insurance. Perhaps you could make an overall saving this way?

Organising your insurance through an AFG broker could save you money. For example, if you take out home insurance you could be eligible a discounted policy through one of our preferred insurance partners. Why not get a complimentary quote? What have you got to lose?

5. Clear out the shed!
Perhaps you have items of value gathering dust in your shed or garage? Whether you hold an old-fashioned garage sale or go onto eBay, perhaps now is a good time to get money for the belongings you’re never going to use.

Refinancing your home loan

As time marches on, situations change. Perhaps you’ve changed jobs? Or there’s a new addition to the family? Maybe you would just like a better rate? Maybe it’s the advent of school fees, or perhaps the kids have flown the coop? Or maybe that leaking shower or tired kitchen has just reached the end of its life. A shift in circumstances may mean it is time to revisit your home finances.

For many, the idea of refinancing a mortgage can be daunting. Fees, fixed versus variable interest rates and monthly charges all need to be considered. The right refinanced loan could help you pay off your mortgage faster and for less, clear unhealthy debt or help you upgrade and add value your home, all of which are steps in the right direction.

But where to start? An AFG broker can help you weigh it all up.

Can I get a mortgage where I pay less than I’m paying now?
With lenders adjusting their rates outside of the reserve bank now is a great time to shop around check that you have the right loan for your needs, and an AFG broker is a great starting point. It will depend?on what interest rate you’re currently paying, what type of home loan you have (e.g. fixed, variable, interest only, line of credit) and what features you want in your loan.

Can I consolidate credit card or other debts into a home loan?
This is one of the reasons many people refinance. ?The advantage is that you pay a much lower interest rate on a mortgage than for most other forms of debt – e.g. credit cards, overdraft facilities, personal loans etc.

Providing you have sufficient equity in your property, you may be able to consolidate all your debt on a home loan. If you take this option though it is important to make sure you maintain your repayments at their current level or you could end up paying more over a longer period of time.

How much money can I borrow?
We’re all unique when it comes to our finances and borrowing needs. Get an estimate on how much you could by?contacting an AFG broker who can help with calculations based on your circumstances.

How do I choose the loan that’s right for me?
Our guides to loan types and features will help you learn about the main options available. ?There are hundreds of different home loans available, so contact an AFG broker who can recommend the right loan(s) for you.

How often do I make home loan repayments – weekly, fortnightly or monthly?
Most lenders offer flexible repayment options to suit your pay cycle. Aim for weekly or fortnightly repayments, instead of monthly, as you will make more payments in a year, which can save dollars and time off your loan.

What fees/costs are involved in switching mortgages?
Penalty fees could apply if you’re paying off your current mortgage early, especially if you’re exiting a fixed home loan. ?But these may be offset by repayment savings when you switch home loans.

Contact an AFG broker to discuss which fees would apply in your circumstances.

Should I refinance?

My lender is charging me a higher home loan rate than I see advertised elsewhere. Can I change lenders?
This is exactly the reason why most people change lenders. There may be a penalty clause in your current home loan, meaning you may need to pay a discharge fee, but it could still be in your financial interests to change. When shopping around it is always important to look for the comparison rate of a product. A comparison rate is essentially the true rate, taking into account the fees and charges you will pay on the loan. So even though you see a lower rate it doesn’t mean the repayments are less. AFG brokers are able to take the hassle out of this for you.

I have just come off a ‘honeymoon’ interest rate to a much higher rate. Can I move lenders or am I locked into my mortgage?
You can walk away from most mortgages, although penalty fees sometimes apply. To review your options, why not contact an AFG broker?

If I move my mortgage to a new lender, is there anything stopping that lender from increasing their rates in a few months time?
This depends on what kind of product you have. If you’re concerned about rising rates, perhaps you should consider a fixed rate home loan, where repayments are fixed for a period from 1 to 5 years.

Why do some lenders charge more than others for lending the same amount of money?
Banks and other lenders pay different amounts for the money they on-lend to you, they have different overhead structures and different profit expectations. All these factors affect how much they charge to lend people money.

What documentation do I need to refinance?
The last 3 – 6 months of mortgage statements is sufficient to begin this process. An AFG broker can advise on other documentation.

Typical loan features

One size doesn’t fit all when it comes to home loans.

Make sure you choose a loan with the features and benefits that are right for you. An AFG broker can recommend a loan for your particular needs – and take care of all the paperwork. When you’re ready, talk you your broker to discuss next steps.

Typical home loan feature list

Interest only repayments
You only pay the interest on the loan, not the principal, usually for the first one to five years although some lenders offer longer terms. Many lenders give borrowers the option of a further interest-only period. Because you’re not paying off the principal, your monthly repayments are lower. These loans are especially popular with investors who pay off the principal when the property is sold, having achieved capital growth.

Extra repayments
If you pay more than the required regular repayment, the extra amount is deducted from the principal. This not only reduces the amount you owe but lowers the amount of interest you repay. Making extra repayments regularly, even small ones, is the best way to pay off your home loan quicker and save on interest charges.

Weekly or fortnightly repayments
Instead of a regular monthly repayment, you pay off your home loan weekly or fortnightly. This can suit people who are paid on a weekly or fortnightly basis?and will save you money because you end up making more payments in a year, cutting the life of the loan.

Redraw facility
This allows you to access any extra repayments you have made. Knowing you have access to funds can provide peace of mind. Be aware lenders may charge a redraw fee and have a minimum redraw amount.

Repayment holiday
You can take a complete break from repayments, or make reduced repayments, for an agreed period of time. This can be useful for travel, maternity leave or a career change.

Offset account
This is a savings account linked to your home loan. Any money paid into the savings account is deducted from the balance of your home loan before interest is calculated. The more money you save, the lower your regular home loan repayments. You can access your savings in the usual way, by EFTPOS and ATMs. This is a great way to reduce your loan interest, as well as eliminate the tax bill on your savings. Lenders provide partial as well as 100% offset accounts. Be aware the account may have higher monthly fees or require a minimum balance.

Direct debit
Your lender automatically draws repayments from a chosen bank account. Apart from ensuring there is enough cash in the account, you don’t have to worry about making repayments.

All in one home loan
This combines a home loan with a cheque, savings and credit card account. You can have your salary paid into it directly. By keeping cash in the account for as long as possible each month you can reduce the principal and interest charges. Used with discipline, the all-in-one feature offers both flexibility and interest savings. Interest rates charged to these loans can be higher.

Professional package
Home loans over a certain value are offered at a discounted rate, combined with discounted fees on other banking services. These can be attractively priced, but if you don’t use the banking services you may be better off with a basic variable loan.

Portable loans
If you sell your current property and buy somewhere else you can take your home loan with you. This can save time and set-up fees, but you may incur other charges.