EMail Newsletter

August 2006

40-Year and 50-Year Home loans

Last weekend we were away at Ayers Rock and I didn’t get to read the weekend paper until Friday. Only then did I realise why people had been asking me about 40-year and 50-year loans all week.

Firstly, don’t believe everything you read. The Sun Herald article claims that GE Money is the first Australian Lender to offer 40-year home loans. We actually did our first 40-year loan about 18 months ago. (The purpose was to complete a deal that was “outside the square” rather than get the client into a lifetime of debt.)

At present, 40-year loans are outside the guidelines of most Australian lenders and are therefore considered to be “non-conforming” loans. This means that they have higher than normal interest rates and higher fees than most loans.

A better option might be to get an interest only loan. With interest only you pay the same regardless of whether the loan is 10 years or 50 years. This allows you to purchase the property now, and tackle the principal in years to come as your financial circumstances improve. Of course, paying interest only means that you end up paying more in the long run.

You can simulate a 40-year loan by getting an interest only loan and making a payment equivalent of a 40-year Principal & Interest payment. Given that the average loan only lasts three to four years, having a 40-year loan is more of a marketing gimmick than a serious option to consider.

Anyway, GE Money achieved their purpose and got a free advert on the front page of the paper, and the Herald got a front-page story with little or no effort on their part. And I got a lead story for this month’s newsletter, so I guess everyone is happy.

However, if you want balanced advice without all the marketing hype, please give me a call on 02 9629 1888

[For the record, GE Money is on my panel of lenders and we have successfully used their products with a number of clients].

If you've Seen One Rock you've Seen Them All

Last week The Mortgage Bureau had their annual conference at Ayers Rock. If was a great opportunity to see one of Australia’s icons, as well as a chance catch up with other members of the group and discuss the future of the industry.

It was fantastic to see The Rock up close…but after a few days you pretty much get the idea. The “tour desk” sums it up:

• See the Rock by coach

• See the Rock by helicopter

• See the Rock by Harley

• See the Rock by Camel

• Etc etc

On the home loan front, the general consensus was that the days of the “product floggers” are numbered. Many of them didn’t make it through the market downturn anyway, and the clients are now starting to see the value of a broker with a bit more business sense, rather than the mass-market operators who use a bit of software to “find you a better interest rate”. Overall, I think we are quite well placed for the future with the business model we have adopted.

Of course, every franchisee had their horror stories of lenders who had stuffed them around in one way or another. Unfortunately, the horror stories were evenly spread over most of the different lenders. The real value is in the lenders that fix the problems when they arise.

95% Low Doc Loans

The major banks tend to dominate the mortgage market in Australia. In recent years they have moved into Low Doc loans that were previously the domain on the non-bank lenders. This has caused the non-bank lenders to continually introduce more adventurous product lines to maintain market share.

One recent innovation is the 95% Low Doc loan. It has a higher interest rate so it’s not for everyone. I originally thought it would attract business owners who may be struggling and needed to consolidate debts. However, so far we have had more interest from self-employed borrowers who have found it difficult to get a deposit together.

Perth Property Booming

While the Sydney market continues on its sluggish way, the Perth market is still booming. One client recently purchased a property on the outskirts of Perth using a 95% Low Doc loan (see previous story). Five months later we had the property re-valued and the property had increased by around 20%. The client was then able to switch to an 80% Low Doc loan at a greatly reduced rate.

We have also seen similar rises in Geraldton on the back of the resources boom. Maybe someone could discover copper in the Sydney basin. We could do with a resource boom over here too.