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FREE Home Buying Program & Money Saving Program

Not sure how to save 5%-15% deposit for a home? We have launched a FREE home buying program that will help Sydney wannabe home owners save money and get into a suitable home.
Our expert cheapskate lending specialist will reveal over 20 tricks to save money FAST.
Interest rates today are around 2% and the mortgage repayments are often lower than the rent for the same property.
Not to mention the property value goes UP over time, and the mortgage balance goes DOWN over the same period.
Get into the property ladder and build wealth over the next 10-20 years 🙂
Let’s get rich together!

Hmm so… I’m in… but… how much cash do I need to buy my first home?

The precise answer depends on whether you’re trying to take advantage of any government grants, concessions, special home loan schemes, blablabla, there are probably 4 different “incentives” you can exploit, by restricting yourself to a certain property type, certain price range based on the property type (land with a building contract; brand new property to be paid when completed; or second-hand property), certain household income level, certain blocks of land which are already titled, certain builders which have their building contracts ready to go, or waiting until you and your partner get Australian citizenships (some incentives are not available to permanent visa holders). Things get “complicated” and “messy”.

To achieve their goal of buying a home, the majority of Australians will find it easier if they don’t spend too much energy on “optimisation”. It is difficult enough for a lot of Australians to save $50k, they need “laser-sharp” focus to save money quickly.

Therefore, in our FREE Home Buying Program, we focus on only 1 goal, which is “saving $50k” and not on optimising and exploiting every single bit of government incentives out there. We want “our energy” to be available to be spent on “saving $50k”. The principle and mindset we advocate is “it is better to achieve something (buying a home) than to create a lot of roadmaps and achieve nothing other than having a lot of roadmap sketches that already make us tired”.

Without relying on a lot of government incentives and restricting ourselves to multiple criteria, it is quite possible to buy a home with 8% deposit. Therefore the price range should be up to $600k.

This means you buy an “apartment in Sydney”, or a “house in the middle of nowhere (supported by an employment letter stating you can work from your house in the middle of nowhere)”.

But everybody is trying to buy a freestanding house??

Yes that’s true, but also a lot of Sydneysiders are still renters, because they haven’t been able to buy a freestanding house, and they insist on not buying an apartment until they can buy a freestanding house. Everybody wants a house, and in fact, as of March 2021, the majority of houses in Sydney sell for 20%-30% above their price guides in the online advertisements. If you want to buy a house, you have to be better, earn more money and save more money than a lot of other people (your competitors).

I (personal opinion) do agree that houses are “better” to buy than apartments, but houses should be your second, third or fourth property after you’ve had more experiences with properties. Unless you earn a crazy amount of income and save money crazy well, you can’t buy a house. I have personally bought 2 apartments and I still haven’t been able to buy a house yet. Buying a freestanding house is a challenging goal. I’m not better and more successful than a lot of other people, therefore I cannot buy a freestanding house (which a lot of other people want to buy).

I (again personal opinion) do believe than by successfully buying an apartment, you’ll already be more successful than the average Sydneysider who rents a house. To successfully buy an apartment, you still need to be able to “save” money (save $50k). You don’t need to be able to save money to rent a house.

Over the long term of 10-20 years, apartment prices still go up in Sydney. You can go to Google or https://www.realestate.com.au/neighbourhoods/ to find out some historical apartment prices.

Even if apartment prices go down a bit, you need to consider the “rent” which you don’t have to pay if you own the apartment. Multiple the weekly rent by 52 weeks in a year, then multiply it by the number of years you’ve owned the apartment, and you’ll have your “inflated” (hypothetical) apartment value. This hypothetical value is likely to be higher than your apartment purchase price.

If you’re currently renting a “freestanding house”, to make yourself feel better, you can in fact look at the weekly rent you’re currently paying for that house, multiply it by 52 weeks and then the number of years, and then add it onto your “apartment” purchase price. This gives you a figure which represents the hypothetical value of your apartment home, plus the “savings” which you’ve been “forced to make” by downsizing into a smaller home. It still forms part of your “wealth”, because if you had not made this move, you would have had less savings (or less money to spend on entertainment and holidays, if your savings account has $0 balance when you do the calculation).

OK sure… what’s next? Help me buy an apartment and let go of my dream of buying a freestanding house in Sydney!

Thank you so much for reading this far into the article (if you skipped the reading, do go back above where I explain why buying an apartment is not a bad idea and why you’re more likely to be successful if your goal is to buy an apartment rather than a house).

Contact us to get our personal FREE help to save $50k FAST. As a bonus, we will also review your payslips & existing debt position, and set a realistic expectation on the type of property, location and price range you can buy as your first home.

Interest rates today are around 2% and the mortgage repayments are often lower than the rent for the same property (and remember that the principal repayments actually stay with you as equity/net wealth; the interest charges and the council/other rates are pretty much guaranteed to be lower than the rent). Not to mention the property value typically goes UP over the next 10-20 years, and the mortgage balance goes DOWN over the same period (completely paid off within 30 years).

Commercial Property Loan

Commercial properties can be a great investment, as it gives a higher rental income compared to a similarly-priced residential property (house or apartment which people live in).

A typical rental yield on a commercial property is 5% to 10% of the property value/purchase price. In other words, the rental income is around 5% to 10% per year of the property value/purchase price. On the other hand, a typical rental yield on a residential property is 2%-5% of the property value/purchase price.

In addition to a higher rental yield, the tenancy also tends to be for a longer duration. It’s common to see a 3-year to 10-year term on a commercial lease, compared to a 6-month to 12-month term on a residential tenancy agreement. On the flipside though, when a commercial tenant leaves, it takes longer to find a new commercial tenant compared to a residential tenant.

Commercial property loans are typically available at up to 70% LVR, in other words, the loan amount can be up to 70% of the property value. Some lenders do offer up to 80% LVR. In addition, the loan can be cross-secured by your residential property, to lower the LVR.

Popular commercial properties to invest in include office suites, retail shops, industrial warehouses, petrol stations and car washes. The more specialised the property is, the more difficult it is to re-sell quickly, and the less likely a lender will want to lend at a high LVR.

There are some low doc, lease doc or even no doc loans for commercial properties.

If you are a business owner, you can buy a commercial property for yourself, creating financial security and ensuring your landlord cannot kick you out of your own business premises. After all, your business address is a highly valuable asset and your customers already know where to find you.

Please reach out if you would like an assistance to finance your commercial property purchase.

How many properties do you need to retire on rental income

We build a property investment portfolio to build wealth, and ultimately gain financial freedom and get out of our 9-5 job.

How many properties do we need to retire modestly or comfortably?

The answer depends on what type of properties we buy, what sort of rents they get, ongoing expenses such as agent management fees, strata levies and loan repayments. Of course, how much we need also depends on what type of lifestyle we have and how many financial dependants we have.

According to the Association of Superannuation Funds of Australia (ASFA), Australians aged around 65 who own their own home and are in relatively good health, will need the following amount of money each week in retirement:

  • Single: $535 per week for a modest lifestyle, or $837 per week for a comfortable lifestyle
  • Couple: $774 per week for a modest lifestyle, or $1186 per week for a comfortable lifestyle

A typical rental yield for a freestanding house in Sydney is 2%-3% of the property value.
Therefore to achieve a rental income of $774 per week (couple with a modest lifestyle), you would need a $1.35m-$2m property portfolio consisting of one or more freestanding houses.
Remember though that you will need to pay for the ongoing property expenses and also income taxes. Income taxes on a $774 weekly income for a couple would be negligible, so we can potentially ignore those.

You can improve the rental yield by purchasing multiple low-priced houses (such as 3 x $300k houses which each tend to rent out for $300 per week). Apartment units might work to boost up the rental yield as well, but these tend to come with high strata levies, which essentially will negate the benefit.

You would want to have $0 loans on those properties. If you still have loans, you would want to look at the “equity” portion of your investment portfolio. Aim for an equity portion of $1m if your portfolio is made up of multiple low-cost $300k houses, and your loans are on Interest Only repayment basis.

Do note that this article was written when interest rates were around the 2%-3% mark (i.e. similar to or lower than the rental yield). The equation may change dramatically if interest rates are in the 7%-10% range like what we have seen in the distant past, and rental yields were much lower than the interest rates.

Also, the above assumes that you already own your home outright (no loan on the personal home).

Saving for a deposit VS using equity to buy your next property

Typically, when you buy a property, you would want to contribute 20% deposit, and pay for the 4%-ish stamp duty, with your own savings.

On a $500k property, this can equate to around $120k.

Let’s say you and your partner save $20k a year… it can take you 6 years to get there. By that time, the price for the same property has probably doubled, and you will need $240k instead of $120k…

Surely, there has to be a better way?

If you have an existing property, which has itself doubled in value since you purchased it… chances are you’re sitting on a lot of equity in that property. Equity is the difference between the market value of your property, and the mortgage balance.

Not all equity can be utilised by the bank. To get the most competitive home/investment property loan, you would want the total loan balance to be no more than 80% of the property value.

So, if you purchased the property for $500k a long time ago, borrowed $400k at that time, and your loan balance today is still $400k… the figures will look like this:

  • Property value: $1m (congratulations)
  • Equity: $1m – $400k current loan = $600k
  • Usable equity: 80% of $1m, minus $400k current loan = $800k max loan – $400k current loan = $400k additional loan
  • Note, the usable equity is less than 80% of the equity

It is possible to borrow a total of 88%-95% of the property value, if you are willing to pay Lenders Mortgage Insurance (LMI). This is a one-off cost which is typically around 2%-3% of the loan balance, or 2%-3% of the property value (as the loan balance will be pretty much equal to the property value at this point).

So, by accessing your usable equity, you can buy another property now, instead of waiting… 6-12 years?

Equity is different from savings, in the sense that it is accessed in the form of a loan. The equity you access will form part of your maximum borrowing power. So if your income (including the expected rental income from the property being purchased, or the property you’re moving out of) is only good enough to borrow $1m… if you’re needing to access $400k worth of equity, your available loan after this will be $600k.

Would you like us to work out your approximate borrowing power? We can do that for you for free 🙂

When is a good time to take out a business loan?

As a business owner, you probably want to know, when is a good time to take out a loan for your business? The prospects of growth are so tempting. Yet you have heard that business loans are evil and will kill your business.

Taking a loan for your business is indeed dangerous. It’s risky not only because lenders are evil and can force you to liquidate/sell your business, personal assets and garnish your personal income. It’s risky because business itself is packed with uncertainties.

Imagine yourself running a cafe for 10 years in your local suburb. You are the only cafe there, every residents come to you for their daily caffeine hit. It’s a small town with only 1,000 residents. Suddenly, your employee resigns and opens a rival cafe. Your income suddenly gets halved, in an instant.

If you have a loan, the loan repayments won’t get halved. How are you going to repay the same loan, with half the income?

There are 2 situations where it is probably wise to take out a business loan:

  • When the loan amount is reasonable in comparison to your safe surplus income

This is when the amount of your business loan is not too big, in comparison to a surplus income level which you are very confident to easily earn.

I like to benchmark the loan amount against my yearly salary, which I was earning before I started my business, and I know I can earn again if I get rid of my business. I know that if I need to close down my business, I can work for another company, and earn $50,000 a year without too much difficulty.

Hence, for me, a business loan of $50,000 may be reasonable. If my business fails and I lose everything, I only need to work for 1 year “for free”, and I can pay off my business loan within 1 year.

If you have a family, you will want to take them into account. Can you get an extra $50,000 on top of the minimum living expenses for your family? Does your wife/husband have their own job? Can they get their own job to contribute towards the family’s expenses? Can either of you easily get a second job & work more? Do you have kids which require your time and attention, i.e. you cannot get a second job? Do you have parents or family members you can fall back on, so you don’t need to pay rent and can share some of the household bills temporarily whilet you get back on your feet?

Because I have parents I can fall back on, my safe yearly income is the same as my safe yearly surplus income. Because I essentially have $0 mandatory expenses. If you are not in this fortunate situation, you would want to deduct your mandatory living expenses, from your safe income.

Business is a high risk, high reward venture. It’s somewhat similar to buying a lottery ticket, or a raffle ticket. The probability of losing is high. But the rewards are huge, and the rewards make it worthwhile to take the risks.

Each person’s time horizon may be different. For me, I consider it reasonable to gamble away 1 year worth of safe surplus income (employment income I can easily get from another company, less my mandatory living expenses).

  • When the loan amount is reasonable in comparison to your net wealth

For the majority of you, a safe yearly surplus income is $50,000 or even less than that. Does that mean, it would be unwise to take on a business loan of more than $50,000?

The answer would depend on how much assets you have. More precisely, your net assets (after deducting your mortgages and debts). If you have a house worth $1m with a $800k mortgage, your net asset or net wealth is only $200k.

At the start of your career and entrepreneurship journey, your yearly income is typically bigger than your net asset.

But as you go through this journey, you save a portion of your income every year, and your net asset will become much bigger than your yearly income.

What’s considered a reasonable net wealth to gamble away?

For me, I look at absolute values rather than percentages of net wealth.

I want to maintain around $1m of net wealth, as this allows me to live relatively stress-free and maintain financial freedom. The Four Percent Rule of retirement says that a typical (elderly) retiree can safely withdraw 4% of their retirement account each year, and this likely will result in their retirement account only becoming depleted by the time they… pass away. But when I’m young, I don’t know when I will pass away, so I probably want to withdraw only 3% of my investment account. This should hopefully result in my investment account maintaining its value over time, and even keeping up with inflation.

A $1m investment allows me to withdraw 3% per year, or $30,000 per year. Being single with no kids, I believe $30,000 a year is sufficient to pay for my mandatory living expenses. In fact, I’ll have more to spend each year if I have a job, but I like being financially free so I can bum around.

With this in mind, any portion above $1m can be gambled away. Before I reach $1m net wealth, I will limit my business loan to $50,000 (which can be covered by 1 year worth of salary, if I go back to living with parents).

A couple of questions arise:

  1. Do I count my owner-occupied home in the “net wealth” calculation? I do, because I know I can sell it, invest the money, and then rent somewhere cheap, perhaps in Far North Queensland. Chances are, my business will do really well, I will 10x my money, and I will never need to sell my home. But if my business fails, I sell my home, use the proceeds to pay back the business loan, and invest the remaining amount.
  2. Why don’t I sell the home or investment asset to begin with, and use the money to grow the business, instead of taking a loan? Because my home or investment asset will most likely grow in value. Hence by not selling my asset, I have 2 helpers working for me: my passive investment asset, and my active business. Chances are, both of them are great workers, and help me build my wealth faster. I would want the expected return from my passive investment asset to be more than the cost of the loan. If this is not the case, it would make more sense to sell that passive asset and fund the business with cash (although sometimes it can be better to fund it with a loan which is temporary in nature, for example if I’m not sure that I’ll be able to buy the asset again after I sell it).

To summarise, at the start of my entrepreneurship journey, I would take out a business loan of up to $50,000 if I’m confident that I’ll get a return of more than the cost of the loan. I will then wait until I have $1m in net wealth, before I take on a bigger business loan. When I do that, I’ll try to make sure the expected return from my passive investment is more than the cost of the loan. Otherwise I might just sell that passive investment and fund my business with cash.

The above discussion is about getting a cashflow loan to pay for expenditure such as employees and advertisements. If I’m buying a durable asset for my business which can easily be sold again, I may be more willing to borrow more. This is because at any time, I can sell that asset to substantially pay off the loan balance.

Are you looking for a low doc business loan, without having to provide tax returns? Or perhaps even a no doc business loan, which is only secured against your property/asset?

Please reach out to discuss what we can do for you!

Pros and Cons of Interest Only Loan vs Principal & Interest Loan

Yesterday I had a lengthy debate with my friend.
The question that always come up when a property investor wants to buy an investment property:
Should he get an Interest Only loan, or pay the Principal & the Interest?

My friend and I had a fight. We couldn’t agree on what to do. He is confident that it’s better to pay Interest Only. On the other hand, I’m not so sure…

Let me give you some arguments against paying Interest Only, and some arguments for choosing Interest Only.

ARGUMENTS AGAINST INTEREST ONLY:

  1. You pay a higher interest rate.
    Investment loan interest rates at the moment start from around 2.3%.
    If you want to pay Interest Only, the rates start from around 2.5%.
    So it is around 0.2% more expensive.
  2. You pay a higher interest rate on the whole mortgage balance.
    My argument against my friend, who wanted to pay Interest Only, is that he will need to pay the higher interest rate, let’s call it 2.5%, on the whole mortgage balance. So if he has a $1m mortgage, his interest charges in the first year will add up to $25k.
    If he has a Principal & Interest loan, his interest charges in the first year will be under $23k, that’s 2.3% multipled by the $1m mortgage balance. For simplicity, we ignore the reduction in principal each month.
    If you go to the mortgage repayment calculator on the MoneySmart website, you’ll find that the repayment on a $1m mortgage at 2.3% interest rate is $3848 per month, of Principal & Interest.
    If he pays Interest Only, each month he pays $2083, based on the higher interest rate.
    So each month, he pays $1765 less, and this equates to around $21k for the first year.
    So, he pays $2k more in interest charges, to have an extra cash flow of $21k in the first year.
    For this to make sense to him, in my mind I was thinking, he would need to be able to invest the $21k, and earn a guaranteed rate of return of 9.5%. He needs to be very sure that he’ll get more than $2k worth of investment income, if he has an extra $21k of cash flow.
    I was thinking, no way, that kind of return is not 100% guaranteed. He’s better off paying Principal & Interest towards his mortgage, pay $2k less interest, and lose his $21k worth of cash flow. This is a guaranteed savings, versus non-guaranteed investment return.
  3. You still pay more interest charges after offsetting the additional tax deduction.
    A commonly cited reason for paying Interest Only is that you get to claim more tax deductions.
    I’m not a big fan of paying more interest to reduce taxes.
    When you choose an Interest Only mortgage, your interest charges become bigger, so you claim a bigger deduction in your tax return.
    But the value of the extra tax deduction is never higher than the amount of additional interest charges. So you still pay more. It’s less of more, but it’s still more, more interest charges, even after netting them off against the additional tax deduction.
    In the example previously mentioned, you claim an extra $2k of tax deduction. The extra out of pocket expense will be $1400 if your marginal tax rate is 30%. It’s still money out of your pocket, so I consider this to be an argument against paying Interest Only.
  4. You take on more risks.
    Bigger risks often come with bigger rewards. But you’re still taking on risks.
    If you don’t pay down your principal, you don’t build up equity in the property. You’ll have extra cash which you may end up investing into risky investments, such as the share market, Bitcoin, Dogecoin, or even Pancake Bunny. If those investments don’t perform well, you may lose your money, and you don’t have equity in your property. So you may be left with nothing.
  5. You reduce your borrowing power.
    It’s funny, but if you have a 5-year Interest Only loan, the remaining term on your mortgage will be 25 years.
    So you only have 25 years to pay down the principal. For the same set of income and expenses, the bank actually gives you a smaller maximum loan amount if you choose an Interest Only loan. It could be something like 10% less. So the property you buy may need to be around 10% cheaper. This means you have less to leverage. Less leverage generally means smaller return on your cash.

ARGUMENTS FOR INTEREST ONLY:

  1. You get to keep more of your cash for other investments or for your business.
    When I had that debate with my friend, I forgot that the $2k or $1400 after-tax savings I mentioned before, only happens one time, in the first year. In the second year, he still will not have the $21k worth of extra cash flow, but he will not get another $2k worth of savings. He does get around $2k worth of savings in the second year, but this should be attributed to the extra $21k worth of cash flow he would have to further sacrifice in the second year.
  2. You get to keep more of your cash for a few years until you sell your property or ask for a cash-out.
    Now, my friend is saying, as long as he can invest his money and get more than the interest rate, of 2.5%, he’s better off choosing an Interest Only mortgage.
    I believe this argument is only valid if he never ever sells his property.
    From what I can see (and please let me know if I’m wrong), if he does sell his property in let’s say 5 years, he would get all his cash back into his pocket. He does not lose his cash flow forever.
    In the example above, the monthly repayment on a $1m Principal & Interest mortgage at 2.3% interest rate is $3848 per month (around $46k for 1 year). The interest charges for the first year is 2.3% x $1m = around $23k. Hence the principal paid down in year 1 is $46k – $23k = $23k. Ignoring the fact that the loan is progressively paid down each year, he would get around 5 x $23k = $115k when he sells his property after 5 years.
    Each year, he would have lost around $21k of cash flow.
    If we use the Excel formula =RATE(5, 21000, 0, -115000), we get around 4.6% per annum. I argue that this is the relevant benchmark rate if return which my friend needs to compare against, for him to choose an Interest Only loan rather than a Principal & Interest loan, if he believes he’ll sell the property within 5 years. Further, this 4.6% rate of return must be a guaranteed rate of return.
    In practice, as the years go by, the additional interest charges (from choosing an Interest Only strategy) becomes bigger each year, as the Interest Only loan is not progressively paid down like the Principal & Interest loan. Another way to say this is, the principal obtainable at the end of 5 years will be around $123k instead of $115k. On the other hand, the loss of cash flow remains the same, at $21k each year, because his contractual monthly repayment on the Principal & Interest loan is set at the start of the loan. The benchmark rate of return is closer to 5.9% if we account for the monthly reduction in principal over time.
    So if his investment return is under 5.9%, he would be better off choosing a Principal & Interest loan. This way, he only needs to pay an interest rate of 2.3%, on the whole loan balance of around $1m, and save $2k+ each year in interest charges.
    Most people either sell their property within 5 years, or refinance and ask for a loan top-up within 5 years. So, even though it makes sense to choose an Interest Only loan to keep more of your cash flow, you do need to forecast when you expect to sell the property or ask for a loan top-up, use this time horizon to determine your benchmark rate of return, and you need to be able to beat this benchmark rate of return with pretty much 100% confidence (if you were to invest your cash flow elsewhere).
  3. Better cash flow for your lifestyle.
    If you pay only the interest charges every month, your monthly mortgage repayments will be smaller. Chances are, the rental income is sufficient to cover the interest charges and property holding expenses. This means you don’t need to sacrifice your lifestyle. You don’t need to dip into your salary, in order to pay for the investment mortgage.

CONCLUSION:
I am in 2 minds about whether to choose an Interest Only loan or a Principal & Interest Only loan.

It seems that to decidedly choose an Interest Only loan, I need to predict when I’ll be selling my property or asking for a loan top-up. If I ask for a loan top-up each year (which is a bit of an administrative nightmare), my benchmark rate of return is around 9.5%. If I ask for a loan top-up every 5 years, my benchmark rate of return is around 5.9%. I’m not confident to definitely achieve a 5.9% rate of return in the share market.

If I am happy to sacrifice my lifestyle and dip into my salary to fund my investment mortgage, I would choose a Principal & Interest loan. This also gives me the benefit of having different buckets of investments: SAFE (equity in my property) & HIGH RISK/HIGH REWARD (the share market and/or my business). By choosing a Principal & Interest loan, each month the bank will direct debit my account and ensure that I put in more and more money into the SAFE bucket. When I sell my property, my SAFE bucket will have a lot in it, and I can ponder what to do with all the money at that time. If I feel like taking risks, I’ll spend a few days thinking about it, and hopefully make a rational decision based on my circumstances at that time.

What are your thoughts?

How long do I need to be in a job to get a home loan?

You have been working hard and have been offered to work at a rival firm.

Should you accept the job offer if you are trying to get a home loan?

The answer depends on whether you need a low deposit home loan or not, and a bunch of other factors because the banks are complicated these days.

But generally speaking, there are competitive home loan solutions if there’s less than a month’s gap between the two jobs, and the new job is reasonably similar to your old job.

If your new job is casual or contract however, you may need to wait 6-12 months before you can get reasonably competitive home loan offers.

Did you start a new job recently and would you like to know your options? Chat with us, we don’t bite and we don’t charge a fee.

Why I don’t look at home loan comparison rates?

I get a lot of customers on Facebook asking “what’s the comparison rate” of a particular loan.

For the average person, comparison rates are probably somewhat useful. They’re a quick filter to make sure you don’t get ripped off too badly.

A low comparison rate is generally good.

But a high comparison rate does not mean it’s bad, it just means you need to look into it a bit more. It can in fact be better than a loan with a lower comparison rate, if you know how to use the loan facility to your advantage.

Confused?

Let me first explain how a comparison rate is calculated for home loans (and investment property loans).

The comparison rate (if calculated according to the official definition) adds up the interest charges and the standard/known lender fees (such as the application/establishment fee and the annual fee), then expresses this total cost figure as an annual percentage, for a $150k loan over a term of 25 years.

Now, let me explain why a comparison rate may not be the ultimate figure to look at when comparing loans:

Shortcoming #1
An average loan size for a Sydney home owner is more than $150k.
A typical low-rate home loan from the major banks come with an annual fee of $395.
You divide $395 by $150k, you get 0.26%. So the comparison rate will be at least the interest rate + 0.26%.
However if your loan is $500k, the $395 annual fee is only 0.079% of the loan amount.
So I would argue that a more relevant cost figure is the interest rate + 0.079% (not 0.26%).

Shortcoming #2
A typical home loan term is 30 years.
If the home loan has a $600 establishment fee, $600 divided by 30 years is $20 per year (0.013% of a $150k loan).
But the comparison rate adopts a loan term of 25 years, so the $600 is divided by 25 years, i.e. $24 per year (0.016% of a $150k loan).
The difference is small, it’s not even worth mentioning, I don’t even know why I mentioned this…

Shortcoming #3
A lot of major banks advertise a low fixed rate for the next 1, 2, 3, 4 or 5 years, which then revert to a very high variable rate if you don’t contact the bank towards the end of the fixed-rate period.
As of March 2021, the revert variable rate with a lot of banks is more than 3%. So, because the low fixed rate is only for the first 1-5 years, and the high variable rate is for the next 20-24 years, your “comparison rate” will end up being very close to the high variable rate of more than 3%. This is because a comparison rate only looks at the standard/known figures. At the end of your fixed-rate period, the known figure is the revert variable rate.
However as a smart customer, what you can do is choose another low fixed rate at the end of your initial fixed-rate period, or if you for whatever reason do not want to do that, you can negotiate for a lower variable rate with the bank. You don’t necessarily need to refinance to another bank. You can stay with the exact same bank, and may not ever need to pay a rate anywhere as high as the comparison rate. It is common practice for the major Australian banks to give you a variable rate which is lower than the revert variable rate.
You do need to be organised and remember to contact the bank towards the end of your fixed-rate period. A lot of banks also send you a letter reminder, so even if you’re not too organised, chances are you’ll be fine.

Shortcoming #4
OK so, comparison rates only look at known figures. If your loan is a variable rate, the comparison rate assumes that the variable rate never changes for the next 25-30 years until your loan is finished. Chances are, it will change.
If the lender is really tricky, technically the lender can advertise a super sharp comparison rate, but then one year later they can bump up your variable rate by 1%, and they haven’t officially done anything wrong.
A variable rate can be increased at any time, without any reason whatsoever. It does not have to follow the movement in the RBA cash rate.

What do I look for?
If I’m taking a fixed rate loan, I look at the interest rate during the fixed-rate period, and add the annual fee divided by my loan amount (then multiplied by 100 to convert it into a percentage). I ignore the revert variable rate because chances are I’ll never pay this rate.
Most banks these days have an annual fee of $395 for most of their loan products. They usually don’t charge valuation fee and application/establishment fee. Some may have a one-off settlement/legal fee, which is not material if I do divide it by 30 years.
If the loan comes with a honeymoon/introductory rate (e.g. lower rate in the first 1-2 years), I may look at the revert rate or the best non-honeymoon/non-introductory fixed rate listed on the website, because usually the honeymoon/introductory rate is a true limited-time offer.

Should I use a mortgage broker or go direct to a bank?

The property market is red HOT like a red hot chilli. It’s so HOT right now.

The obvious question is where do I apply for a loan? Do I go to my bank? Do I go to another bank? Do I go to a mortgage broker?

We are a mortgage broker but we will try to give you a balanced argument for all sides.

Option 1: Go to your current bank
OK this may be the easiest option. You already know someone there. You may even like the teller girl at the counter and want to see her more often. If you get your home loan from the same bank, maybe you hit 2 birds with 1 stone.

Jokes aside, going to your existing bank seems like the obvious choice. They don’t need your bank statements because they can see the bank accounts internally. They don’t need your credit card and personal loan statements to verify the repayments because those facilities are with them as well. Sometimes, they don’t even need your payslips. Perhaps they don’t even need your ID’s??

A majority of the time, you can get a reasonable lending solution from just about any bank. This includes your own bank. Competition forces help to ensure the banks are reasonably competitive, and you don’t get ripped off extremely badly.

However, different banks have different risk appetite, and your borrowing power may vary from one bank to the next. For a simple household with no existing debts and earning a consistent base salary without any variable income component, the variance in borrowing power across the major banks is probably small. But the more complex your situation is and the more variable income components you have, the discrepancy tends to be more significant. The property you buy may also become important, with some banks shying away from certain property types, certain postcodes or certain buildings they already lend too much to in the past.

Still, if you are flexible with the property you buy and the loan amount you get, going with your own bank is probably not such a bad idea.

You do need to make sure you review your interest rates every 2 years, as there is a bit of a loyalty tax going on with a lot of home loan lenders. The longer you stay on a particular loan, the higher your interest rate tends to become, unless you re-negotiate it again. For the most part, banks are reasonable and will give you a discount with just a simple phone call. They hope that you forget to call, but when you do call, they will usually treat you reasonably nice.

Option 2: Go to 5-10 banks
OK so… you think you are a high achiever, you don’t want to just go to 1 bank (your existing bank). You want to compare options, get the lowest rate and the highest borrowing power (by the way, these 2 x objectives are not always compatible with each other).

Just like the best practice of inspecting 10-100 properties before buying 1, you might want to talk to 5-10 banks before getting 1 loan. Usually you need to book an appointment with the lending specialist, as they don’t have free time all the time. So if you talk to 5-10 lending specialists, you book 5-10 appointments. Some of them will want you to come in person, others might be happy with a phone appointment. The lending specialist can probably give you indicative interest rates and borrowing power without too many documents being sent through. But unless your income and financial situation are very simple, the borrowing power estimate is probably not accurate until you send through the supporting documents and complete the lengthy application form. They did say that Responsible Lending laws need to be scrapped in 2021 because the banks were looking too much into too many different things to determine borrowing power, right? There’s not much to look at before you send in all your documents and the application form, so the banks won’t be able to assess your borrowing power accurately.

That’s a lot of work… talking to 5-10 lending specialists at mutually workable appointment time slots, completing 5-10 application forms, and gathering 5-10 sets of supporting documents (which by the way may be significantly different between different banks).

Option 3: Go to a mortgage broker
A mortgage broker typically has access to around 40 banks and non-bank lenders. Granted, the broker may not regularly use all 40-odd lenders, and probably will not do detailed borrowing power calculations for you specifically against all of those 40-odd lenders.

But the broker generally has a pretty good idea of which 2-3 lenders tend to be good for particular scenarios, whether it’s to do with a specific component of your income (such as sales commissions being earned significantly in the last 6 months), or particulars of your existing debts and expenses. They will then focus their time and effort, as well as your time and effort, on gathering documents and assessing documents for these 2-3 lenders. They try to make the process as efficient as possible, both for you and for themselves, because they typically don’t get paid a single cent until your loan has commenced. Most mortgage brokers don’t charge a fee.

So, going with a broker, you are likely to achieve a better outcome than talking to 1 bank (your existing bank). You probably need to do more work than if you borrow from your own bank, but it’s probably well worth the extra effort. It will still be less effort than talking to 5-10 different banks.

Does going through a broker guarantee a better outcome than talking to 5-10 banks yourself?

The answer probably depends on what’s important to you, how much free time you have, how much energy you have, how lucky you are with the 5-10 banks you talk to, and how lucky you are with your broker. Not everything is black and white.

It is probably true that sometimes you may luck out with one of those 5-10 banks you talk to. You may build a really great rapport with the lending specialist and get offered a really low interest rate out of love (maybe that person has a discretion to offer whatever rate he likes, who knows). Or you may find a lending specialist who somehow has nothing to do, he approves your loan application on the spot (same day), everything is smooth sailing. But the opposite can happen too. You may get a bad interest rate, or the lending specialist may be super busy and takes 2 weeks to look at your documents, and then he says he cannot help.

By going with a broker, you tend to get a deal which is reasonably competitive, probably more competitive than the average market outcome. It may not necessarily be better than if you spend a whole week full-time talking to 5-10 banks, but it’s likely to be quite good, and you only need to spend 1 day talking to 1 person. You don’t need to be a great negotiator and you don’t need to “play hard to get”. The broker generally gets easy access to one of the bank’s lowest rates without having to enter into deep negotiation talks and play hard to get. They have hundreds of customers a year, it’s tiring and time consuming to spend 1 hour for each customer trying to negotiate the rate down, so the bank just gives them good rates to begin with. The broker knows what’s a reasonably good market rate and what’s a really bad rate, so they will make sure you get a reasonably good rate for your situation.

It is probably true that sometimes you can get a faster approval through the bank directly than through a broker. It depends on which bank, whether the person you are talking to has an approval authority, whether that approval authority extends to your specific loan (some loans need to be referred up to somebody else due to complexity), and how busy that person is. It also depends on how busy your broker is, and some banks (rare) may give priority assessments to certain brokers. There’s no black and white which channel is faster. There are too many variables. Intuitively though, if you already know which bank you’re going for, it may be faster to go straight to that bank, because there’s 1 less person/organisation involved. If your lending specialist has approval authority, only 1 person needs to assess your documents, instead of 2 (the broker and the bank).

So, should you use a mortgage broker or go to the bank directly?

I would say, if you are a busy person or a lazy person, you are likely to be better off going through a broker. A broker is likely to get you a reasonably great outcome, and consider your situation against their panel of typically around 40 lenders.

If you already know, with 100% certainty, which bank you want to end up with, you may sometimes get a better outcome if you go to that bank directly.

A lending specialist at a bank is like a medical specialist with 1 particular area of expertise. They only work for 1 particular bank, they know the bank policy really well because they spend all day every day working with that policy. They know their own interest rates really well and they have seen the lowest possible rate that the highest level of management has approved in the past. They see more transactions involving that bank (because they only work for that bank).

On the other hand, a mortgage broker is like a general practitioner. They know a bit about various diseases, but they don’t specialise. But a lot of people go to a general practitioner (mortgage broker) anyway, because they do not know which bank they want to end up with.

One problem which mortgage brokers face is they typically don’t charge a fee. What happens if a customer goes to the mortgage broker to narrow down the choice of banks, and then the customer goes directly to the bank to try to get a better rate? I guess the mortgage broker is screwed huh?

Actually the interest rates tend to be the same in the majority of cases. It’s only the odd rare ones, the lucky ones, where sometimes you do get a lower rate from a particular person at the bank who happens to like you, and it’s almost always only if you’re opting for a variable rate rather than a fixed rate. Plus if you do switch from a broker to the branch, you need to go through your financial situation again, fill in the application form again and provide your documents again. More work to save maybe 0.05%!

I’d say the choice is yours.

  • Go to a broker for convenience so you don’t need to talk to 5-10 banks, explain yourself 5-10 times and get multiple follow-up (harassment) phone calls from 5-10 lending specialists (on top of the 10-100 real estate agents you need to deal with).
  • Go to 5-10 banks if you like hard work and a bit of adventure, and you may luck out with a super great deal.
  • But please don’t go to a broker and then go to the bank directly. It’s not nice because the broker doesn’t get paid a single cent until the loan has commenced (and then the commission may need to be refunded if the loan is refinanced or paid off within 2 years). A broker does not get paid hourly salary like a bank employee. They truly make $0 if you don’t go ahead with the loan. In fact, some brokers have admin workers who still need to be paid, even if you don’t go ahead with the loan!

Disclaimer:
This is not a financial advice and is not any form of advice. It is an entertainment article which may not be well researched. No responsibilities are taken for any financial or non-financial loss.

Does a dog impact your home loan borrowing power?

Thinking of getting yourself a cute little puppy?

Like this Japanese Spitz winter dog here?

Think again! It may reduce the loan amount you can get to buy your first home 🤕

Pet care is looked at by most banks as additional living expenses, on top of the “bucket” they use to group everything else (and apply a minimum benchmark for). This means, even if you eat instant noodles every day and literally amass huge amount of savings every week you get paid, the banks will still penalise you and consider that your pet care is causing you to spend more than the average Australian who doesn’t eat instant noodles every single day.

According to https://www.budgetdirect.com.au/blog/real-cost-owning-pet-australia.html, the average cost of owning a dog is $1475 per year, or $123 per month. This will reduce your maximum home loan amount by around $20k.

In reality though, if you love your dog, you will spend more than $123 a month. A single dog wash at a quality pet shop is probably already almost $100. Your home loan amount will probably drop by $50k.

Life is tough…

Disclaimer:
This is not a financial advice and is not any form of advice. It is an entertainment article which may not be well researched. No responsibilities are taken for any financial or non-financial loss.