But what does this really mean for you the consumer? This post covers one of the most common questions we’re asked about the RBA. We’ll be covering off a few more questions in other posts too.

Does the RBA set interest rates for financial institutions?
The RBA does not set interest rates for Australian financial institutions, despite common misconceptions. The RBA sets a target for the interest rate on overnight loans between financial institutions in the wholesale money market. The wholesale money market is the market where financial institutions borrow and lend to each other.

The RBA then borrows and lends overnight money on the wholesale markets (i.e. influencing the supply of, and demand for, overnight money) to ensure the actual overnight interest rate remains as close as possible to its target rate. Other interest rates (e.g. on home loans, personal loans, term deposits etc) in the economy are influenced by this interest rate (and many other factors) to varying degrees, so that the behaviour of borrowers and lenders in the financial markets is affected by the RBA’s monetary policy.

Two other key influences on other interest rates are credit risk and tenor (term). Most interest rates have two key components, a risk free base rate plus a margin to compensate the lender for the credit risk they’re assuming (i.e. the risk that the money won’t be repaid). Overnight money, and particularly Reserve Bank funding, has low credit risk and therefore tends to form the base rate for short term interest rates.

The second key influencer on interest rates is term. For example, it is expected that a 30 year loan will have a different rate than a 1 year loan because of expectations/uncertainty about how interest rates might change over the longer term and the longer period over which the lender is exposed to credit risk. Government Bonds tend to form the risk-free base rate for longer term interest rates. These two factors will mean that the interest rate on, say, a 25 year home loan will be higher than the RBA’s official interest rate.

If you have any questions about the RBA or about interest rates feel free to leave a comment on this post and I’ll get back to you.

Wayne – Chief Financial Officer

•  The best place to start is to do your own research. Use the Internet to gather basic home loan information and to compare different types of loans. The main loans to look into include standard variable rate loans, fixed interest rate loans and parent equity loans. To help you decide, consider which option you think best suits your circumstances with a list of pros and cons for each loan type.
• Speak to your financial institution or a broker. This is an opportunity to ask questions and clear up any grey areas. Be aware that brokers are paid by the lenders they recommend. To ensure the recommended deal is best for you, research a range of lenders yourself and speak to a few different institutions.
• Compare the key loan terms and conditions. It can be difficult to know what to look for in a good loan and what terms and conditions are most important to compare. Most people compare the advertised interest rates, but you should also consider other fees, the loan’s flexibility, exit arrangements, repayment terms and redraw conditions. The Federal Government now requires lenders to provide Home Loan Key Fact Sheets on their products so that borrowers can make direct comparisons between loans. All facts must be presented in the same way, so you can clearly see the product differences between institutions.
• Think long term and consider your individual requirements. Consider the broader relationship with your lender. It is likely that you will be dealing with this financial institution for many years, so it’s worth considering things like the quality of service, branch locations, and wider product offering. Will these features suit you now and in the future?
• Don’t be afraid to negotiate a package deal. Most lenders are happy to offer a better deal if you transfer your entire banking relationship to one lender. Don’t be afraid to ask for a discount on interest rates, loan service fees or monthly account keeping fees if you bundle all your banking needs and deal with one institution.

Wayne- Chief Financial Officer

Most importantly ensure you choose a lender you are comfortable with, who is up front with you about all the costs involved and takes the time to answer your questions. A home loan lasts for a long time so it is important to have a good relationship with your lender and ensure that their after sales service is as good after you’ve taken out the loan.

1. What loan will suit me best?

Review all the loan features such as whether you can redraw or make extra payments.

2. What is the interest rate?

The interest rate will either be fixed or variable and is used to calculate your repayments. It will determine how much you’ll pay over the life of the loan.

3. How much can I borrow?

Depending on the loan provider you can borrow a maximum 80-95 per cent of the value of the property. However you should always consider how much you could comfortably afford to pay each month by discussing the monthly repayment amount.

4. What deposit do I need?

Most lenders require a minimum deposit of 5 per cent of the property’s value. If your deposit is less than 20 per cent, you may need to take out Lenders Mortgage Insurance. The higher your deposit the better as it will enable you to absorb fluctuations in interest rates which will impact on your repayment levels and the total amount of interest you pay on the loan.

5. What fees do I have to pay up front?

Discuss all fees involved in taking out a loan, such as loan application fees and government charges – including stamp duty, mortgage registration, mortgage transfer and Certificate of Title search fees.

6. What other fees are payable?

Make sure you are aware of the all additional fees and costs associated with the loan. For example, are there any monthly fees or charges to redraw?

7. What is the total cost of the loan?

Ask for the Comparison Rate for the loan you are considering. This rate includes both the interest rate and most fees and charges payable during the life of the loan, which is useful when comparing loans.

8. Are there any benefits available to me when I take out a home loan?

Check if your lender offers any benefits for taking out a loan. For example, Community CPS offers its free pinnacle +plus program to members borrowing $200,000 or more, which entitles them to no transaction or loan establishment fees, discounts on loans and bonus interest on term deposit rates.

9. Can I pay the loan off early?

Chances are you may want to refinance your mortgage before the term is complete, so check whether a lender will charge you a penalty for doing so.

10. What will repayments be if interest rates increase by 3 to 4 per cent?

Ask your lender how much your repayments will be if this happened. It’s important to consider whether you would still be able to afford the loan if interest rates were to increase substantially.

Ross – General Manager Operations

Things you should know>

The Scheme is becoming increasingly popular, particularly with first homebuyers and young families. Because buyers only need to borrow the money for the house and not the land, it reduces the deposit required substantially. Without the Scheme the dream of owning a home would remain elusive for many.

As a mutually owned organisation housing affordability is an issue very close to our hearts, and we are pleased that, together with the ACT Government, we can help more people to break out of the rent-cycle and get into their own home sooner.

So far we have approved land rent loans to the value of $40 million, with loans advanced approaching $10million.

Wayne – Chief Financial Officer

The HLKFS have to be presented in the same format and layout regardless of the lender, and are designed to enable consumers to easily compare home loans provided by different lenders.

The HLKFS are prepared based on consumers’ individual requirements for their loan amount, loan term and interest type (fixed or variable) and summarises information about the loan, including:

• The interest rate (nominal and comparison rate i.e. including fees)
• Total amount to be repaid (including loan amount and fees)
• Amount repaid for every $1 borrowed
• Establishment and ongoing fees
• Repayments per month and per year

They also include information about how your monthly repayments will change if interest rates increased by one per cent and how much sooner you could repay the loan if you increased your repayments by $200 per month.

I’m pleased to see initiatives like this implemented that help people find the best product for their personal circumstances. Every lender uses a different language to describe its products and features it can be quite difficult for people to compare them directly to one another.

Buying a home is a big decision for most Australians, and they will spend a good time of their adult life paying it off – so it is very important to pick the right product. We feel the HLKFS are a great tool, empowering consumers in their choice of product without the bells and whistles distracting from the actual basic features of the loan.

If you’re thinking about taking out a home loan, make sure you ask for a HLKFS from several lenders to enable you to shop around for the best deal. Financial institutions are also required to make the HLKFS available on their website if they provide information about home loans or enable home loan applications online. You’ll find ours here:-

http://www.communitycps.com.au/calculators/homeloankeyfactsheet.aspx

 Wayne – Chief Financial Officer

 This trend has occurred for a variety of reasons such as the difficulty in saving up such a large deposit, required to enter the home buyers market.

Parent Equity home loans are designed so parents, parents-in-law or step-parents can help their children purchase their own home by using the equity in their property.

Depending on how much a family member is willing to guarantee, the homebuyer could borrow up to 100 per cent of the purchase price as well as an additional 10 per cent of the price to help with the associated costs of the purchase, such as stamp duty and other fees.

Using theParent Equity home loans home buyers may be able to avoid paying lenders mortgage insurance (LMI), which can amount to thousands of dollars.  When the property increases in value or when the loan is sufficiently reduced, the guarantor (the parent) can be released from the loan.

The Parent Equity home loans is a great product to help enter the home buyers market. Current market conditions are ideal for first home buyers, particularly with low interest rates and a stagnant property market.

It may make more sense to renovate than to move if your property is unique in its location, size or design qualities, or if you love your home but it’s just not big enough.

Renovating is a great way to get the house you want. You have the freedom to add design features that suit you and your family whether it’s for an addition to the family, the ensuite you’ve always wanted or a games room for the kids.

The aspects of a house most likely to capture buyers’ attention are bathrooms, the kitchen, entertaining areas and landscaped garden spaces.

Benefits of Renovating:

• You can stay in the house that you like and make improvements according to your individual choice and style
• Your renovated house may be worth a lot more in the real estate market
• You can avoid the costs associated with selling (such as stamp duty, legal and agency fees).

Benefits of Buying:

• Buying a new home is usually quicker and easier than undertaking a renovation
• When you buy you know exactly what you’re willing to spend and choose a house to meet your requirements
• You can avoid the risk of improving your current home beyond the increased value you might get from the sale of the home.

Before you make the final decision, look at the real estate market, get an appraisal on your house and look at prices of houses that you would consider buying instead. Ask a construction professional what your desired renovation is likely to cost. A small investment in good advice can really pay off when you decide to sell your home in the future.

Whether you decide to renovate or buy it is important to remain focused on your finances and more importantly, choose the right loan.

To obtain the best deal for you, it is important to shop around and compare interest rates, fees and the minimum loan amount required to be eligible for the offer.

Shopping around can save you tens of thousands of dollars over the term of the loan but it is important that you are comparing ‘apples with apples’ when looking at the different features.

Community CPS member, Elicia Williams of Pooraka SA, has recently refinanced her home loan from Commonwealth Bank and has experienced a saving of almost $90 per fortnight.

“This saving will assist with my everyday living expenses as the cost of living continues to increase,” said Ms Williams.

Make additional repayments

Making additional repayments beyond what’s required in your minimum monthly repayment is one of the best ways to reduce the total interest paid and term of your loan.

Consider either one-off lump sum payments when you have spare cash or commit to increasing your regular repayment amount. Even $5 extra each week can save you thousands of dollars in interest over the life of the loan and reduce your home loan term. However, make sure that your loan allows you to make additional repayments without penalty. Fixed-rate and basic (or ‘no-frills’ loans) often have restrictions on extra repayments or charge a fee for the privilege.

Make your surplus cash work harder

Use cash savings to help pay off your loan quicker.

If you have a home loan at seven per cent, every extra dollar you pay off the principal is another dollar you are not paying seven per cent on each year. If you instead put that extra dollar into a savings account you are only going to earn two or three, perhaps five per cent at the most.

Therefore putting savings into your loan earns you twice as much as a savings account. Redraw facilities available on most standard variable loans allow you to take back those extra payments if needed.

Save interest with offset accounts

Offset accounts not only save you interest paid on your home loan, but are great for tax purposes as well.

Savings held in offset accounts are subtracted from the outstanding loan amount each month so interest is charged only the net amount. Interest paid in cash to your savings account is taxable, but the same interest used to offset home loan interest is not – a tax effective way to reduce your home loan. However, to get the most from an offset account, look for accounts that offer a ‘full offset’, ie. paying interest at the same rate charged on your home loan. Redraw facilities and line-of-credit loans make use of your savings in much the same way.

Consolidate your debts

As interest rates rise on home loans they also rise on personal loans and credit cards. Consider rolling all debts into your home loan. There’s more than one benefit to this strategy.

Firstly you could end up paying less interest because home loan interest rates are often much lower than personal loan, credit card and store account rates.

And by reducing your monthly repayments into just one home loan repayment you could reduce your monthly commitments so that you have extra cash available to make additional repayments off your home loan. This option requires discipline around future use of credit cards and store account, such as reducing limits or closing the account.

Factor further rate rises into repayments

It is a good idea to factor in further rises in interest rates and, if possible, start making contributions at the higher rate. It will ease the stress when repayments do increase and will also put you ahead of the scheduled loan term – as will extra contributions. Alternatively, if rates decrease you should keep your repayments at the higher amount to enable you to pay off your loan sooner.

1. Review your mortgage – check the interest rate and regular fees on your mortgage and compare it with other providers to determine if now is a good time to refinance to save costs. Keep in mind that refinancing and switching financial institutions can incur fees, so make sure you include this in your calculations.
2. Check your credit card’s interest rate and interest-free period. If you only get 30 days interest-free, look at changing to a card with 55 or 60 days. And if you can’t pay it all off, take advantage of a balance transfer to a lower interest rate credit card.
3. Pay off your debt – know what interest rates you are paying on your loans and work to reduce the balances of those charging the highest rate of interest first.
4. Get insurance quotes from various insurers to see how much you can save on your home and car insurance. Many providers will offer a discount if you take more than one policy with them.
5. Investigate whether bundled services for your home phone, mobile phone and internet might save you money.
6. Switch to compact-fluorescent bulbs, and turn them off when not needed. Turn off TVs, computers and other electrical appliances when not in use.
7. Use shades, blinds and drapes to regulate your home temperature: Keep them open in the winter to let in light and drawn in the summer to block the sun’s rays.  Also, turn up your cooling, or your heating down, a degree or two.
8. Wash only full loads of dishes or clothes.
9. Bring lunches and snacks to work.
10. Organise a car pool to travel to and from work, and try to avoid expensive car parking.

2. To make it easier for you to find exactly what you want, here are the top 10 questions you should ask when choosing a home loan.

1. 3. What loan will suit me best? Review all the features of the loan such as whether you can redraw or pay extra.
2. 4. What is the interest rate? The interest rate will either be fixed or variable and will be used to calculate your repayments. It will determine how much you’ll pay over the life of the loan.
3. 5. How much can I borrow? You will be able to borrow a maximum 80-95 per cent of the value of the property but consider how much you can comfortably afford to pay each month by discussing the monthly repayment amount.
4. 6. What deposit do I need? Most lenders require a minimum deposit of five per cent of the property’s value, and if your deposit is less than 20 per cent, then you may be required to take out Lenders Mortgage Insurance.
5. What fees do I have to pay up front? Make sure you are aware of all the fees involved in taking out a loan, such as loan application fees and government charges including stamp duty, mortgage registration, mortgage transfer and Certificate of Title search fees.
6. What other fees are payable?  Find out if there are any monthly fees or charges for redraw so that you are aware of the costs.
7. What is the total cost of the loan? Ask for the Comparison Rate for the loan you are considering, as this rate includes both the interest rate and most fees and charges payable during the life of the loan which is useful when comparing loans.
8. Are there any benefits available to me when I take out a home loan? It is a good idea to check if your lender offers any benefits for taking out a loan, such as reduced transaction fees and if there is a fee for these benefits.
9. Can I pay the loan off early?  Chances are you may want to refinance your mortgage before the term is complete, so check whether you will be charged a prepayment penalty for doing so.
10. What will repayments be should interest rates increase by three to four per cent? Ask how much your repayments will increase by if interest rates go up by three or four per cent so you can see whether you would still be able to afford a loan if interest rates were to increase.

Establish a plan – how much will you need?

Do some calculations and figure out how long it will take to save your ideal amount.

Break down your goal into monthly or weekly amounts, so you can track your progress. To ensure saving doesn’t seem like a never-ending ordeal, set yourself a time limit to save for a deposit.

Seek as much advice as possible from experts such as financial planners, accountants and your financial institution. Rather than simply saving, you may be able to negatively gear into investments such as managed funds, thereby using the tax advantages to help your savings grow.

First things first – clear those credit cards!

Credit cards can be an expensive means of borrowing, and you should eliminate credit card debt if you are serious about your savings plan.

Cut down those expenses

Set yourself a budget and keep records so you can track exactly where your money is going.

Small sacrifices along the way certainly help. For instance, using public transport, taking your lunch into work and controlling the use of your mobile phone.

Establish a good savings history

Start a separate savings account to the one you use on a daily basis, so you are not tempted to use it for everyday living and transactions. Think of it as a deposit account and choose one that rewards your savings with a high interest rate return, such as a term deposit. Make sure there are no account keeping fees that will eat into your savings.

Getting to know your financial institution

Establish a relationship with your financial institution so that they are aware of your disciplines, repayment capability and employment history.

Borrow within your means

Make sure you borrow within your means. Speak to your financial institution and work out what you can really afford to pay as a monthly repayment. You need to be able to still enjoy your life – purchasing a property is a great achievement, but it is not worth sacrificing your happiness. 

Understand the financial matters within home ownership

The first home owners grant of $7,000 provides a great start for first time borrowers. However, you also need to allow for associated costs such as borrowing fees, conveyancer costs and other adjustments. A good financier should willingly provide you with guidance and advice in planning for these and other ongoing costs of first home ownership.