With all residential lenders (big banks, 2nd tier lenders, and mutuals), the current low interest rates for home loans have become very enticing for first home owners, investors and customers wishing to refinance for a “better deal”.
Over the past few years, the market has seen the growth of new banks, non-banks, mortgage managers and finance brokers who have all taken the hassle out of the home loan lending process. Lenders have also fashioned various loans with all the creative “bells and whistles” to better compete and fulfill market requirements. In essence, the most valuable loan feature has not really changed, and that is the flexibility to pay more off your loan.
Recently, all major lenders have reduced their standard variable home loan rates in line with the recent Reserve Bank cut by 0.25%, the lowest cash rate in past 60 years.
Some residential lenders have increased their discounts ranging from 0.5-1% based on the amount borrowed to entice new clients. While these are enticing, you need to ensure that you meet the credit criteria and fully understand the pros and cons of each package.
Lenders have also gradually increased their Serviceability or Stress Test Rate. As a general rule, lenders add 2-2.5% to the standard variable rate as a “stress test” rate. This ensures that any borrower would have the capacity to meet increased loan repayments should the interest rate rise in the future.
Lenders also have a basic “Living Expense” formula in their criteria. For example, a husband and wife with 2 dependents require about $36,000 per annum to cover their living expenses (excluding other financial commitments).
Many borrowers become disheartened when they discover that they cannot afford to borrow the amount they require. Therefore, it is vital that potential borrowers review their net monthly income and prepare a detailed budget that allows for a loan repayment at a “buffer” repayment to ensure that they have the capacity to meet loan payments in case of an interest rate increase.
Fixed Rate versus Variable Rate
Whilst there is more emphasis on the variable rates set by lenders and media, one must also consider fixed interest rates. Borrowers should seriously consider splitting their loan into fixed and variable to provide some “insurance” for potential future interest rate fluctuations.
Whether you are buying an investment property or home, it is important to analyze your financing options. Seek expert advice about your borrowing capacity, serviceability and loan options before you commit.