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                                                                    prosperity

Is Fixing The Answer?
W       ith three interest rate rises in 2006, some borrowers are looking                              and the economy, it is impossible to predict
                                                                                                       where interest rates will go. By fixing your
        nervously at their increasing mortgage repayments and asking                                   interest rate you could therefore be locking
– is fixing the interest rate a good idea?                                                             into a rate higher than the average variable
                                                                                                       rate over the period that you’ve fixed for.
                                                    More recently, though, some lenders are
                                                                                                       For this reason, many borrowers choose to
                                                    making their fixed rate products more flexible.
                                                    For example, in the past few years we’ve seen      fix for less than three years. Then, if variable
                                                    the expansion of split or combination loans.       rates do fall, they are only locked in to paying
                                                    This is where a proportion of the loan is fixed,   a higher rate for a fairly short period.
                                                    whilst the remainder is left as variable.
                                                                                                       Split Loans
                                                    Benefits                                           Another way to “hedge your bets” is to
                                                    The main benefit of a fixed rate home loan         consider a split or combination loan. This
                                                    is certainty – the amount of the regular           product allows you to have a fixed interest rate
                                                    repayment will not vary for the period that the    for a proportion of the amount borrowed, and
                                                    loan is fixed. For some people this is extremely   a variable rate for the rest. The split between
Traditionally, Australians have always favoured     important, and acts as an insurance policy or      the two is decided at the outset of the loan.
the variable rate home loan. It was reported        hedging against further variable rate increases.   Typically these splits are 50% to 70% fixed,
recently that some 80% of all home loans carry                                                         with the remainder left as variable.
a variable interest rate.                           For example, first home buyers or couples
                                                    starting a family tend to be on a tight budget.    The benefit of this type of loan is that you
Whenever variable interest rates increase,          Knowing that the repayments won’t go up for        get some of the advantages of each type of
however, borrowers understandably review            the next few years can provide peace of mind.      loan. You can have the flexible features of a
their options. Therefore there is a trend                                                              variable rate loan and enjoy the lower cost
towards fixed rate home loans, with some            Also, people may be concerned about                when interest rates fall, whilst still fixing the
lenders reporting up to 25% of new loans            potential changes to their job or income           interest rate on part of the loan as a hedge
being either a fixed or split loan.                 level, and so would welcome the certainty          against increasing interest rates.
                                                    of the repayment amount.
Features of a Fixed Loan                            Similarly, property investors may also             Wide Variations
The most obvious feature is that the interest       be seeking certainty on the costs of their         There are well over 100 fixed rate products on
rate is fixed for a set period, typically between   investment. By locking in the interest rate        the market and, as you’d expect, wide variations
one and five years. At the end of this period       and having a fixed rental amount coming in         in interest rates and features. For example, on
the loan will normally revert to the standard       from the property means that much of the           a three year fixed rate home loan the interest
variable rate product of the lender, although       cash flow is predictable.                          rate “spread” is over 1%, which can make a
you can usually renegotiate a further term at                                                          significant difference to the repayments. Also
the interest rates in force at that time.           For some, they may believe that variable
                                                                                                       the range and flexibility of the loan features,
                                                    rates will continue to increase in the future,
                                                                                                       and the size of the exit costs, vary greatly.
Traditionally fixed rate loans have had             and so are prepared to “bet” against this by
fewer features than variable rated products.        fixing their rate.                                 If you’d like to consider a fixed rate
For example, they may not allow for extra                                                              or split loan, then we can help you to
repayments to be made. Also, to get out of a        Future Direction                                   compare the different products available.
fixed rate loan before the end of the contract      However, unless you are an expert in money         Please feel free to get in touch for a
period is sometimes very expensive.                 markets and the future direction of inflation      “no cost, no obligation” review.
Buying A Property
At Auction
P      roperty auctions are a popular way of selling a home. Whilst some buyers are wary of auctions,
       with good preparation they can be a great way to purchase a property.

The difference between an auction and other
ways of purchasing a property is that you are
in a “high-pressure, one time only” selling
situation which can be very emotional. The key
to controlling the emotions and achieving a
successful result is preparation.

Do Your Homework First
It is important to know what similar properties
in the same area have been sold for. There are
several Property Reporting Services that
will sell you a report of recent sales, capital
growth history and projections, etc in the same
postcode for around $50.
Nothing beats first hand research, though. Try
to attend a few house inspections in the area,
talk to the agents, and get a feel for the market.
Attending several property auctions, in
your “target area” if possible, will give you
more confidence in the auction process and
the pressures and emotions you’re likely
to experience.
Once you’ve identified an actual property
that you’re interested in that is being sold at
auction, then it’s important to make sure that
the property is inspected by reputable building
and pest inspectors and any problems are
known. Depending on the problems, walking
away now might be the most prudent decision
– not always easy if you’ve already spent time       The Auction Day                                    Remember your maximum price limit. It is
and money on looking at the property.                                                                   easy to get carried away in the heat of the
                                                     Allow yourself plenty of time to get there,
Get your solicitor to review the contract                                                               moment, but then regret it afterwards.
                                                     and arrive early. Take another look around the
documentation before the auction. Whilst             property and pay particular attention to those     If you are successful you will normally be
this may cost some hundreds of dollars, you          aspects that you have concerns about. Ask any      asked to sign the sale contract and pay the
could be risking thousands of dollars by not         last questions of the agent.                       holding deposit straightaway, so make sure
picking up some issue before purchasing.             Look at the information on the auction, the        you have the cheque or deposit guarantee
                                                     rules of the auction, etc. You may be required     with you. Remember, there is no cooling-off
Get Your Finances Organised
                                                     to register as a potential buyer, so make sure     period when you buy at auction.
Make sure that you have your home loan               you do so. This gives you the right to bid: it
approved before the auction day so that you          does not mean you must bid.                        If bidding does not get above the reserve
are 100% confident that you can purchase                                                                then the property will be “passed in”.
the property.                                        The Auction Itself                                 This means that the property won’t be sold
                                                                                                        at the auction. The highest bidder (and
Also, you will typically need to put down up         Remember that the property seller will have        sometimes others) will normally be given
to 10% deposit on the day. This can be cash          set a Reserve Price for the property. Bidding
or via a deposit guarantee. The guarantee                                                               the opportunity to negotiate separately with
                                                     will normally start below this figure. Once this
means that the purchaser’s own cash won’t                                                               the sellers to see if a price can be agreed.
                                                     figure has been met then the auctioneer will
be used at this stage, so helping to manage          announce that the property is “on the market”,     At the end of the day, remember that
cash-flow in the short term.                         meaning that it will definitely be sold.           you’re making one of the biggest financial
Prior to attending the auction you should            Bidding is normally made in similar                decisions of your life. By preparing
determine what your maximum price limit is.          increments to the previous bids (e.g. $5,000       properly, investing a little money upfront
This will be based on what you can afford, and       a time). You will be assumed to bid higher         with the legal and inspection experts, and
how much you have been approved to borrow            by that same amount unless you specifically        keeping a cool head on the day, then you’ll
from your lender.                                    state otherwise at the time you make the bid.      end up with the right result.
Consolidate To Get Ahead
D      ebt consolidation is often portrayed as a way out of trouble. But for many it’s actually a smart way to
       get debt-free more quickly by reducing the interest being paid.
Many of us have several loans and debts.           A good example is to watch out for low              Similarly, by refinancing a car loan of
For example we may have a home loan, a             interest or even interest-free balance transfers    $25,000 at 12.75% you could see interest
line of credit, car financing, a personal loan,    that are regularly offered by credit card           savings of approximately $1,200 per annum.
a few credit cards, and some store finance for     providers. You can apply for a new card and         Of course in both of these examples the
furniture or renovations. These commitments        then transfer the balances from other credit        amount of saving would reduce over time as
will all be charged at different interest rates,   cards, which will then be charged interest at a     some of the debt principal is paid off, but it
perhaps with account fees and other charges.       very low rate or even interest free, at least for   would still be substantial.
Whilst it may have been logical to set-up          a period of six months and occasionally for
                                                   the lifetime of the balance transferred.            Now here is the important point. By keeping
and keep these commitments separate, it can
                                                                                                       the new consolidated payment the same as
mean that you are paying more interest than        This can be a good short term solution, but         the sum of the various payments being made
you have to.                                       often the interest rate then reverts back to a      previously, then the debt will reduce much
Credit Cards                                       (comparatively) high rate. So then the whole        quicker as less interest is being paid.
                                                   process of application and balance transfer
For example, the Australian Consumers’             has to start again. Also, this doesn’t help         Words of Caution
Association monitors 250 credit cards on           to reduce the interest rates on some store          This strategy does work, but you should
a weekly basis. They currently list cards          finance, personal loans and car financing.          watch out for the following:
with interest rates varying from 8.99% to
                                                                                                       • Cancel The Old Debts or Cards. If you
18.99%, with annual fees ranging from $0 to
$395, and interest-free days from nil to 55.
                                                   “It’s a good way of reducing                          transfer the debts (e.g. from credit cards) then

Whilst some of the more expensive cards                interest and clearing                             you are at risk of building up new debt in its
                                                                                                         place, which isn’t the idea. By cancelling the
will have rewards and loyalty programs,
these may not make up for the differences in
                                                       debts more quickly.”                              old credit cards and loans this won’t happen.
                                                                                                       • Early Repayment Costs. Some loans may
interest charges, fees and interest-free days.                                                           incur a penalty if paid out early, which can
                                                   Smart Debt Consolidation
Personal loans, car loans and store finance                                                              negate some of the benefit of refinancing
also show wide variations, with some very          A more comprehensive solution is to                   the debt.
high interest rates. For example, interest-        consolidate all of the debts into a relatively
                                                                                                       • Establishment Costs. Organising a top
free finance through a store is an attractive      low-interest product such as a home loan.
                                                                                                         up on your home loan, or refinancing
option provided that the debt is cleared           This can be done by either using an existing
                                                                                                         altogether, will incur some costs. Again
within the term. If not, these loans often         capacity, for example using available redraw
                                                                                                         you should check what these costs are and
revert to extremely high interest rates –          or an unused line of credit, or by refinancing
                                                                                                         factor them into your calculations.
20% and higher are not uncommon.                   the entire home loan.
                                                   This can often result in halving your average       Conclusion
Balance Transfers                                  interest rates. For example you could refinance     If used correctly and by keeping the new
The smart way to reduce this debt more             a credit card at 18.75% to a standard variable      payment at the same level as the sum of the
quickly is to minimise the interest rate and       mortgage rate of under 8%. On a debt of             old payments, then using your home loan to
fees being charged, whilst maintaining the         $10,000 this represents a reduction in interest     consolidate your debts is a good way of reducing
same monthly payment as before.                    of nearly $1,100 per annum.                         interest and clearing debts more quickly.
A Message From Us
                                                        Five Years Off
                                                        For Good Behaviour!
                                                        W    ith the recent rises in interest rates, many of us will focus our
                                                             attention on reducing our home loans. This article looks at
                                                        how to take five years off the life of your loan.
                                                        There’s nothing like an interest rate rise
                                                        to grab our attention. It makes us all think
                                                        about how to reduce our biggest debt – the
                                                        home loan – as quickly as possible.
                                                        Whilst there are a multitude of products,
              Shirley Ferris
                                                        formulas and complex ways of structuring
                                                        your finances to reduce the debt, there
At Foster & Blanchard Finance we
                                                        are also the timeless, proven and simple
are committed to delivering to you the
                                                        methods of achieving big reductions on your
best finance solutions based on your
                                                        home loan. Here’s a few of them.
own personal circumstances. It is this
fundamental approach that separates
                                                                                                                     “Save five years and up to
                                                        Allow For A Higher Rate
us from your local bank. We go further
                                                        We all know that interest rates move up and
by providing a “personalised” service
to ensure our clients’ ongoing financial                down. One way to allow for this fluctuation                 $72,000 in interest charges.”
needs and goals are catered to.                         is to calculate the repayment at 1% higher
                                                        than you’re currently paying. This gives you              there are 26 fortnights in a year, which means
The greatest compliment a business                      two benefits:                                             you’re making the equivalent of 13 monthly
can receive is a referral from an existing                                                                        payments each year.
client. Should you know someone                         1. Certainty. You know that you can absorb a
                                                           series of rate increases without having to             Taking our example the minimum monthly
who would benefit from our services,
                                                           increase your repayments.                              repayment, divided by two, becomes $893
including a free subscription to this
                                                                                                                  (about $70 more than the minimum fortnightly
newsletter, please contact this office.                 2. The “Gap” between the rate being charged               repayment would be). Paying this amount
Warmest regards,                                           and the rate you’ve decided to pay is all              would save five years off the term of the loan.
                                                           additional payments, reducing the interest
                                                           and the life of your loan.                             Lump Sum Repayments
                                                        As an example let’s take a 25 year $230,000               To save five years off the loan term you’d
                                                        mortgage at 8.07%, which is the average                   need to pay in a lump sum of $18,000 at
Shirley Ferris
                                                        standard variable rate of the big banks.                  the beginning of the loan.
                                                        Your minimum monthly repayment would
                                                                                                                  Whilst this may not be practical, smaller
                                                        be $1,785. An extra 1% interest rate “buffer”
                                                                                                                  lump sums (eg a bonus from our employer
                                                        maintained over the life of the loan would
                                                                                                                  or a refund from the tax office) paid in on
                                                        mean you’re paying an extra $150 per
                                                                                                                  a regular basis will have a similar effect.
                                                        month. This would save five years off the
                                                        loan term and $72,000 in interest.                        Taking our example again, paying a lump
             Shirley Ferris,                                                                                      sum of $3,000 into your home loan each
                                                        If paying an extra $150 per month is hard
                                                                                                                  year for the first eight years would achieve
Director, Principal Mortgage Consultant                 to do straightaway, try increasing the
                                                                                                                  the five year reduction.
    Foster & Blanchard Finance                          repayments in small amounts over several
                                                        months, for example by adding an extra $25                Putting a lump sum into your home loan rather
         220 St Vincent Street                          each month for the following six months.                  than an investment (eg shares) can be a better
        Port Adelaide SA 5015                                                                                     financial decision. For example, take someone
          Mob: 0408 821 119
                                                        More Frequent Payments                                    paying 40% income tax plus 1.5% Medicare
                                                        This is simply another way of making                      levy with an average variable rate home loan.
          Fax: (08) 8241 1633                                                                                     They would need to get over 13.5% gross
                                                        extra repayments.
 E-mail: shirley@fbfinance.com.au                                                                                 return on an investment in order to make it a
                                                        Many people pay their home loans monthly,                 better decision than reducing their home loan
                                                        but for those who are paid more frequently                interest bill.
                                                        you could make the repayments each
                                                        fortnight (or even each week).                            Conclusion
                                                        Rather than ask the lender to recalculate                 A home loan is normally our biggest single
                                                        what the new minimum repayments should                    financial commitment. By increasing the
                                                        be, simply divide the monthly figure by                   repayments by relatively small amounts we
                                                        two. This will effectively increase your                  can easily save years off the life of the loan
                                                        repayments by about 8%. This is because                   and thousands in interest.

  DISCLAIMER: This newsletter is provided for general information only. Please do not rely on this newsletter as a substitute for specific legal or financial advice.
                         Before making any decisions you should consider your specific objectives, financial situation and needs.

								
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