The Advertiser www.adelaidenow.com.au Monday, July 14, 2008 29

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Building wealth by EARNING | SAVING | INVESTING

MONeYMAKINGNGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGG

Stick tobasics forthe homemortgage

ANTHONY KEANEMONEY EDITOR

THE evolution of Australia’s homeloan market has been fast, furiousand for most people confusing.

Make the most ofhome loan changes –PAGE 34

A huge range of products, optionsand repayment strategies todaycaters to first homebuyers and thoselooking to refinance, but financialexperts say the basics behind bor-rowing for a home remain the same.

It is estimated that today’s bor-rowers have more than 3000 differentloan options available.

This compares with just 26 mort-gage products that were availableback in 1980.

BankSA general manager ChrisWard said honeymoon rates, redrawfacilities, line of credit loans, pro-fessional packages and electronicbanking advances were just some ofthe changes in the past decade.

‘‘However, even with this rapidlychanging home loan market, thefundamentals of making your mort-gage work for you have remainedconstant throughout the years andstood the test of time,’’ he said.

‘‘It’s the standard equation of en-suring your expenses are less thanyour costs, building in a buffer for

increased costs and saving as muchas you can for a deposit.’’ Mr Wardsaid this was not always as easy asit sounded because of rising propertyprices and living costs.

‘‘It’s definitely worth spendingsome time working out a few budget-ing basics, including how much youcan afford to borrow and what youroutgoing expenses are,’’ he said.

Bourke Shaw Financial Servicesprincipal Lawrence Orlando saidfundamental principles behind home

loans had changed little in the past10 years. ‘‘It is all the added featuresthat the financial institutions haveincorporated into their home loanpackages that have made it moreconfusing for the borrower to decidewhich package suits their long-termneeds,’’ he said.

‘‘It is imperative that a home loanis correctly structured from incep-tion, as this can not only save theborrower many thousands of dollarsin interest repayments, but can alsosave the borrower many years inmaking those repayments.’’

Green loans take root – Page 32

Saving on credit - PAGE 31

Reducing personal debt- PAGE 59

It’s crunch time- PAGE 33

34 The Advertiser www.adelaidenow.com.au Monday, July 14, 2008 The Advertiser www.adelaidenow.com.au Monday, July 14, 2008 55

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MORTGAGES | Good debt vs bad debt, no-deposit vs low-doc – the variety of home loan options has never been greater

Evolution ofloans brings

benefitsANTHONY KEANEMONEY EDITOR

DEBT RECYCLERS: Paul and Lisa Rugari with daughter Mia. Picture: MICHAEL MARSCHALL

TEN years is a long time in the financial world,and home loans are no exception.

Strong growth in house prices has combined withintense competition among lenders to deliver homebuyers a seemingly endless range of choices todaywhen compared with a decade ago.

Borrowers have benefited from greater flexibilityand clever new strategies, but the flipside is homeownership is getting tougher as real estate pricesclimb faster than wages growth, and the outlookfor housing affordability remains dim.

The biggest and arguably most important changeto the market was the rise of the non-bank lendersand mortgage brokers in the mid-1990s.

Combined with the growth of credit unions,lenders such as Aussie Home Loans and the in-

creased use of mortgage brokers helped make themarket more competitive.

‘‘This forced the hands of all lenders to not justreview pricing, but also features and flexibility ofhome loan products – an area up until then thathad been controlled by the major banks,’’ said BradSmart, manager, Mount Gambier, for South Aus-tralian financial services group Zobel.

‘‘As a result of competitiveness between lenders,we have seen entry levels relaxed and productsdesigned to allow more flexibility,’’ he said. ‘‘Ironi-cally, the increased activity with the first homebuyers has assisted in property prices increasing.’’

BankSA general manager Chris Ward said loansizes had increased in line with the market, despitewages not always increasing at the same pace.

‘‘People these days are more willing to committo bigger loan sizes, which usually means lockingyourself in for longer periods of time. Before doingso, carefully consider how long you really want tocommit to a loan for,’’ he said.

‘‘The key is not to over-extend yourself, and whenyou budget for how much you can afford factor ina few interest rate rises and any possible changesto your financial situation.’’

Mortgage elimination specialist Peter Thomsonfrom Adelaide-based Your Focus said housing af-fordability fell as property prices climbed from 2000,and was declining further as interest rates rose.

‘‘People are time poor, debt is at an all-time high,and housing prices look to be increasing,’’ he said.

‘‘From 1993 to 2003, the number of bank branchesdeclined by about 30 per cent while electronicbanking increased to take the branches’ place. Thishas left a gap in the market to service residentialmortgage customers which was filled by the mort-gage broking industry. During the 10-year periodfrom 1993 the broker market more than doubled.’’

But today mortgage brokers are under threat,with industry predictions that up to one-third ofthe state’s 1200 mortgage brokers could disappearin the next two years because of shrinking homeloan volumes and commission cuts from banks.

Non-bank lenders have also been struggling be-cause they don’t have the big deposit bases of thebanks to help fund their mortgages, but the benefitsthey have brought to borrowers remain.OFFSET ACCOUNTS

National Australia Bank state general managerretail banking Ann-Marie Chamberlain said theintroduction of 100 per cent offset accounts hadgiven borrowers the chance to cut their interest

costs. ‘‘Your savings account can be linked to yourhome loan, with interest calculated on the balance,’’she said.

Bourke Shaw Financial Services principalLawrence Orlando said these accounts were a mustwith any home loan.

‘‘For example, a borrower with a $250,000 mort-gage and $25,000 sitting in a 100 per cent offsetaccount will only be paying interest on $225,000,’’he said.

‘‘Salaries, investment income and rental incomeshould be credited directly into the offset accountto immediately reduce the interest being charged.You can improve this facility even further throughthe use of a credit card with an interest-free period.’’NO-DEPOSIT LOANS

‘‘In the past, most banks required a minimum 10per cent home loan deposit,’’ Ms Chamberlain said.

‘‘With the introduction of no-deposit loans, homebuyers can now borrow up to 100 per cent of theproperty purchase price, enabling them to get intotheir own home sooner.’’

Mr Smart said the first home buyers grant – now

$11,000 – could also assist. ‘‘Most banks will allowthis to be used towards deposits and fees,’’ he said.

REDRAW FACILITIESBorrowing back against your mortgage through

a redraw facility or line of credit to fund investmentsand lifestyle purchases has become much easier todo, but can be dangerously tempting for manypeople. Slick marketing campaigns have not helped.

Mr Thomson from Your Focus said he expectedthe trend of redrawing on home loans to fundlifestyle improvements and ‘‘keeping up with theJoneses’’ to continue, and with property pricesrising, more people had more equity to draw upon.

‘‘This, along with debt being easier to obtain andthe broker distribution model and refinancing cul-ture, is very similar to the problems that led to thesub-prime crisis in the U.S. which is now affectingglobal markets,’’ he said.

LOW-DOC LOANS‘‘Traditionally, self-employed people found it dif-

ficult to access home loans as they didn’t always

have the required documentation,’’ NAB’s MsChamberlain said.

‘‘Low-documentation loans, also known as low-doc loans, were developed by banks to overcomethis,’’ she said.

Low-doc loans represent a tiny portion – about2 per cent – of the Australian mortgage market. Inthe U.S. they formed part of the sub-prime sectorwhich was about 20 per cent of the U.S. market,leading to a house price collapse there and thecurrent credit crisis.HONEYMOON LOANS

Mr Orlando said lenders generally gave a dis-counted rate of up to 2 per cent below the standardvariable rate for the first 12 months, but thenreverted to the standard variable rate for theremaining term of the loan.

‘‘Short-term they can be beneficial in assistingwith cash flow, but not a wise choice long term asrates can rise during the honeymoon period,’’ hesaid.

Ms Chamberlain said some banks now offereddiscounts for the first three years of the loan.PROFESSIONAL PACKAGES

‘‘Financial institutions offer discount rates toprofessionals, high-income earners, or borrowersapplying for larger loans,’’ Mr Orlando said.

‘‘These discount rates are usually on a tiered level.For example, on borrowings from $150,000 to$250,000 a 0.4 per cent discount can apply to thehome loan rate, where borrowings between $500,000and $1 million may be eligible for a discount rateof up to 0.7 per cent,’’ he said.

‘‘Application and loan service fees are generallywaived, although some institutions may apply anannual ongoing fee in the vicinity of $300.’’

Most people who crunch the numbers on theinterest saved versus the professional package feewill find they are better off with the professionalpackage.INVESTMENT LOANS

Mr Smart said in the past, loans for investmentpurposes had a higher interest rate than those forresidential purposes, but this had changed.

Community CPS Australia general manager mem-ber services Daryl Bateman said the proportion ofhousing loans for investment purposes had grownfrom 15 per cent in 1990 to 34 per cent in 2005.

‘‘Deregulation and competition has allowed manyAustralians to unlock the hidden value in theirbricks and mortar investments,’’ he said.REPAYMENT HOLIDAYS

The arrival of a new baby or an extended timeout of the workforce can now be managed better.

‘‘If you have made sufficient additional repay-ments you can now apply to take a holiday fromyour home loan,’’ Ms Chamberlain said.

‘‘As long as you have enough additional funds inthe loan account to meet the regular repayments,

you may be able to apply to take a short break ofup to 12 months from your repayments,’’ she said.

FAMILY GUARANTEES‘‘Family guarantees were introduced in recog-

nition that many parents want to help adult chil-dren buy their first home,’’ Ms Chamberlain said.

‘‘A family guarantee enables a parent or immedi-ate family member to act as a guarantor on an adultchild’s home loan by using the equity in their ownhome or a term deposit as security for the loan.’’

DEBT RECYCLINGGrowing in popularity, this involves borrowing to

invest and then paying the investment income offnon-deductible debt, such as your home loan.

‘‘Debt recycling is, without doubt, the mostefficient method of paying off a home in the fastestpossible time – when used correctly,’’ Mr Orlandosaid.

Mr Bateman said more borrowers were aware ofreplacing ‘‘bad debt’’, which was not tax-deductible,with ‘‘good debt’’, where investment loans receiveda tax deduction.

‘‘We are seeing more people in tune with strategiesto repay their home loan from investment earnings,’’he said.

Recycling debt saves moneyPAUL and Lisa Rugariuse a debt-recyclingstrategy to help repaytheir mortgage faster.

The Woodville Southcouple has a daughter,Mia, and another child onthe way, and says thestrategy is expected tocut the length of theirhome loan down from 25years to 10 years.

Mr Rugari said thefamily preferred variableloans to fixed rate loansbecause of the costsinvolved and picking theright time to fix could bedifficult.

‘‘On top of the homeloan and 100 per centoffset account we alsohave a line of credit whichwe use for investment

purposes. We haveinvested in a managedfund, wholly in Australianshares,’’ he said.

‘‘We set this up as aninterest-only loan asrecommended by ouradviser, LawrenceOrlando. We also havethe quarterlydistributions from ourinvestment paid into our

offset account to furtherincrease the rate ofpaying down the loan.

‘‘We use credit cards formonthly living expensesand only withdraw cashfrom our offset account ifneeded. We try to leave asmuch in the offsetaccount for as long aspossible, as it is in ourbest interest to do so.’’

Recycling debt saves moneyPAUL and Lisa Rugariuse a debt-recyclingstrategy to help repaytheir mortgage faster.

The Woodville Southcouple has a daughter,Mia, and another child onthe way, and says thestrategy is expected tocut the length of theirhome loan down from 25years to 10 years.

Mr Rugari said thefamily preferred variableloans to fixed rate loansbecause of the costsinvolved and picking theright time to fix could bedifficult.

‘‘On top of the homeloan and 100 per centoffset account we alsohave a line of credit whichwe use for investment

purposes. We haveinvested in a managedfund, wholly in Australianshares,’’ he said.

‘‘We set this up as aninterest-only loan asrecommended by ouradviser, LawrenceOrlando. We also havethe quarterlydistributions from ourinvestment paid into our

offset account to furtherincrease the rate ofpaying down the loan.

‘‘We use credit cards formonthly living expensesand only withdraw cashfrom our offset account ifneeded. We try to leave asmuch in the offsetaccount for as long aspossible, as it is in ourbest interest to do so.’’

Recycling debt saves moneyPAUL and Lisa Rugariuse a debt-recyclingstrategy to help repaytheir mortgage faster.

The Woodville Southcouple has a daughter,Mia, and another child onthe way, and says thestrategy is expected tocut the length of theirhome loan down from 25years to 10 years.

Mr Rugari said thefamily preferred variableloans to fixed rate loansbecause of the costsinvolved and picking theright time to fix could bedifficult.

‘‘On top of the homeloan and 100 per centoffset account we alsohave a line of credit whichwe use for investment

purposes. We haveinvested in a managedfund, wholly in Australianshares,’’ he said.

‘‘We set this up as aninterest-only loan asrecommended by ouradviser, LawrenceOrlando. We also havethe quarterlydistributions from ourinvestment paid into our

offset account to furtherincrease the rate ofpaying down the loan.

‘‘We use credit cards formonthly living expensesand only withdraw cashfrom our offset account ifneeded. We try to leave asmuch in the offsetaccount for as long aspossible, as it is in ourbest interest to do so.’’

Recycling debt saves moneyPAUL and Lisa Rugariuse a debt-recyclingstrategy to help repaytheir mortgage faster.

The Woodville Southcouple has a daughter,Mia, and another child onthe way, and says thestrategy is expected tocut the length of theirhome loan down from 25years to 10 years.

Mr Rugari said thefamily preferred variableloans to fixed rate loansbecause of the costsinvolved and picking theright time to fix could bedifficult.

‘‘On top of the homeloan and 100 per centoffset account we alsohave a line of credit whichwe use for investment

purposes. We haveinvested in a managedfund, wholly in Australianshares,’’ he said.

‘‘We set this up as aninterest-only loan asrecommended by ouradviser, LawrenceOrlando. We also havethe quarterlydistributions from ourinvestment paid into our

offset account to furtherincrease the rate ofpaying down the loan.

‘‘We use credit cards formonthly living expensesand only withdraw cashfrom our offset account ifneeded. We try to leave asmuch in the offsetaccount for as long aspossible, as it is in ourbest interest to do so.’’

HOME LOANSIN 1998

■ First home buyers had

to demonstrate 5 per cent

of the purchase price as

genuine savings over a

minimum six-month

period.

■ No grants or

concessions for first home

buyers.

■ Self-employed people

looking to borrow had to

be in business for a

minimum of two years.

■ Parent guarantees

were unheard of.

■ Interest rates for

investment purposes were

often higher than those

available for residential

purchases.

■ Housing loans only had

basic features, and

generally banks put

restrictions on the ability

to pay extra off fixed rate

loans.

■ Bank managers had

more to do with the

approval of a loan, and

loans could be approved in

bank branches.

■ Credit-impaired

borrowers were given

little or no chance of

borrowing money for a

house without at least a 20

per cent deposit.

Source: Brad Smart, Zobel.

HOME LOANSTODAY

■ 100 per cent home

loans are available for any

region in Australia.

■ The first home buyers

grant has now been

increased to $11,000 and

most banks will allow this

to be used towards a

deposit and fees.

■ Any shortfall on

deposits or fees can be

obtained from any source,

and is not required to be

from genuine savings.

■ Loans are available for

self-employed people,

regardless of how long

they have been trading.

■ Parents have the ability

to assist their children into

a housing loan by way of

guarantees or providing

extra security for the loan.

■ Loans offer greater

diversity such as redraw,

offset accounts and line of

credit facilities.

■ Bank managers have

little or no influence on

loan approvals. All loans

are approved through a

credit department.

■ Allowances made for

credit-impaired to give

them a second chance, but

there is usually a higher

interest rate.

Source: Brad Smart, Zobel.

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Homeowners refinanceas cost of living rises

ANTHONY KEANE

GROWING numbers of homeownersare restructuring their mortgages tocombat higher interest rates and risingliving costs, an Adelaide finance com-pany says.

Oracle Lending Solutions directorAngelo Benedetti said despite homeloan approvals dropping to a three-year low this year, he had seen a 30per cent increase in the number ofloans being restructured.

‘‘Just as the banks and lenders arehaving to restructure their debt tomeet the challenges of a volatile mar-ket, so are their customers,’’ MrBenedetti said.

‘‘Borrowers are also looking closelyat their repayment plans and exploringways to offset rising costs.’’

Mr Benedetti said more people werelooking at consolidating their debt by

moving personal loans and credit carddebts to their mortgage, which had alower interest rate.

‘‘Interestingly though, despite inter-est rates being high, borrowers appearto be sticking with variable rate loans,anticipating that rates will fall later inthe year or early next year,’’ he said.

‘‘Borrowers appear to be cautious offixed rates, fearing they may getcaught at the top of the cycle if ratesfall.’’

Mr Benedetti said flexibility was in-creasingly important for people withhome loans, and many investors werestreamlining their investments ‘‘to cutcosts but also freeing up capital fornew projects’’.

‘‘With the market slowing down, in-vestors know it’s a good time to buy,’’he said.