With last week’s change to the cash rate by the Reserve Bank, it is timely for Myrate to review the factors that the board takes into account to determine if the rate should change or not.

The Reserve Bank is solely responsible for formulating and implementing monetary policy, and setting the “cash rate” for money is the primary implement used to achieve the outcomes the Board desires. In determining the rate, the Board will consider the effect on the stability of the Australian dollar, the maintenance of a low unemployment rate, keeping inflation within the target range of 2%-3% and the economic prosperity and welfare of the Australian people.

The cash rate is the rate that banks pay on the money market for their overnight loans. Other interest rates in the economy are heavily influenced by the cash rate, although there are many other factors in play.

Changes in the cash rate have an immediate effect on other rates in the market such as money markets and bond yields, but changes to other rates in the market such as fixed and variable loan rates and deposit rates happen a little more slowly.

Also, because of the other factors influencing capital market rates, and fluctuations in the level of competition in the banking sector, deposit and lending rates do not always move in lockstep with the cash rate.

Banks these days source the funds they use for home loan lending from many sources, only one or two of which are influenced by the cash rate. Some of these other sources are deposits, bond issues and overseas borrowing. For banks, this is a radical departure from the traditional sources of funds such as savings account deposits and bond issues. In recent times, this has increased the cost of funds to lenders, and this is why home loan interest rates no longer stay in line with changes in the cash rate.

The MyRate Team / SH.

Today MyRate wishes to review the situation of self employed borrowers.

Obtaining a loan if you’re self-employed is can have its challenges, but it certainly can be done.

Self-employed borrowers are a minority, but a significant one. According to the Australian Bureau of Statistics 1 in 10 is their own boss - from tradesmen to IT professionals, from contractors to small business owners.

In the post-GFC lending environment, while there are different loan options available for self-employed borrowers, an individual applicant will not necessarily have access to all of them. Applying for the right loan is therefore crucial.

For those who can produce documentation covering their income and assets, a full documentation (‘full doc’) loan will generally be the most straightforward way to secure finance.

To qualify for a full doc loan, you will need to provide your past two tax returns. These will be used to verify your income as you won’t have upfront pay slips or group certificates like a PAYG employee. The lender will generally use the lowest taxable income from the two, the current year’s income, or an average of the two plus a percentage change between the two years, to calculate your assessable income and determine whether your application is approved.

Before you apply for a full doc loan, however, you should also ensure you are able to produce some additional records, including profit and loss statements, a list of all investments and their market value, and information on any debts.

Even though producing these documents will be time consuming and will call for you to be organised long before you apply for a mortgage, a full doc loan is generally the best option for a self-employed borrower.

This is especially so when compared to the rigmarole of applying for a low doc loan.

As a self-employed borrower, if you think you are unlikely to meet the stringent requirements of a full doc loan, you will almost certainly have to resort to option B – the low documentation loan – as a means to secure finance.

You will need both to have been in business and to have held an ABN for at least two years to be considered and will still require some form of income statement. This usually takes the form of a signed declaration, copies of your Business Activity Statements and possibly trading statements or a letter from your accountant as further evidence of income.

The interest rate charged will be higher because lack of income verification is perceived to heighten a lender’s risk.

Knowing what it takes and preparing ahead of time is essential.

The MyRate Team / GB.

So a few days ago, the RBA cut official interest rates by 50 basis points. The official cash rate now stands at 3.75%. We have already devoted a few posts to discussing the disconnect between the official RBA cash rate and the changes in cost of funds that all lenders must pay. But considering the size of the recent cut, this topic is worth revisiting.

In short, the official RBA cash rate is only one of a handful of variables that affect the price lenders must pay to borrow money to fund home loans they offer. In days of old (pre-the Global Financial Crisis), all the other variables were not very variable and as such, changes to the official RBA cash rate correlated directly with the change to the cost of funds lenders experienced, which therefore meant that changes to borrower rates tracked the changes in the RBA rate.

All this changed when the GFC hit in 2007 and the funding landscape shifted. It has not yet recovered and lenders continue to struggle to constrain large variances in their short and long term funding costs. Enter the RBA this month with a greater than anticipated 50 basis point cut to official cash rate. 

This decision by the RBA should be commended. Apart from the fact that consumers always want the biggest cut possible, this larger than anticipated rate move acknowledges that in order to deliver a sizeable cut to consumers, the RBA needs to deliver a sizeable cut to lenders in order to offset the higher cost of funds currently being experienced. So they cut by 50 basis points thereby allowing lenders to recover lost margin and consumers to still benefit from a meaningful reduction to their borrowing rates. As simple as this all sounds, it does not always play out quite as well.

Lower rates help keep the economy ticking along during slower times when consumers are doing it tough. In recognising the global effect on all financial market participants, the RBA has done right by all involved and will hopefully continue to do so should the economy require it.

At MyRate, we review and monitor changes to borrower rates across the industry and continue to work hard to ensure our product is competitive for all our borrowers.

Since the state governments has put in place new home schemes and concessions in order to stimulate the construction of new homes in Australia, I thought MyRate would help review the eligibility conditions to benefit from these concessions.

The government incentives generally apply in the form of a grant and/or stamp duty concessions to people who are buying or building a new home.

To be eligible you need to purchase a brand new home or a land on which to build a home. 

Eligibility criteria and concession amounts vary depending on the states.

Queensland, one of the most generous states, is giving a $10,000 Building Boost Grant to individuals building a new home or new investment property while in NSW, the Home Builders Bonus only applies to new homes not exceeding $600,000 and vacant lands not exceeding $400,000.

Other states such as Victoria, Tasmania or South Australia only offer these new home incentives to First Home buyers while Western Australia does not have anything in place as yet.

For more information and to find out what help is given out by your state government website, visit our Education centre  

For more information and to find out what help is given out by your state government website, visit our Education centre.  

Since forever, Australian home or investment loan borrowers have always pinned their thoughts and decisions on what the bank interest rates will do based on the RBA announcements. In the past, if RBA announced a rate rise then generally the lenders would follow immediately and sometimes they move even higher than what the RBA announces and then on the converse, if RBA announced a decrease in rates then banks have mostly followed but certainly not as quickly as when they apply rate rises……BUT…….things are now changing! The new trend announced by one of Australia’s major 4 lenders is that it will no longer follow RBA movements because the RBA cash rate has no bearing on the cost of loan funds to the lender. This same bank announced that they will assess all client home loan interest rates on a monthly basis and will increase or decrease (but do not hold your breath for the decreases) property loans according to the bank’s cost of obtaining their loan funds.

This was a very bold move but welcomed by many other lending institutions as the benchmark has now been set whereby it may be totally irrelevant whatever the RBA announces (from a borrowing perspective). This has certainly ruffled a lot of feathers and no doubt as more banking institutions adopt this same practice, there will be a massive outcry but the reality is upon us and the sooner borrowers accept this new direction, the sooner the pain will go away and life will go on as normal with RBA announcements previously having been our benchmark becoming a thing of the past and simply a fading memory.

Financial change is in the wind!

The information covered above is relevant to variable interest rates and it still appears that many borrowers have no concept of the fact that RBA and or variable rate rises and drops have little to no bearing on fixed interest rates. Fixed rates are based on financial market analysts (crystal ball reading) re what is happening around the world, economies, exchange rate and future assumptions on the potential cost of loan funds and the availability of said loan funds. If you monitor most lender fixed rates, you will see that out of the blue today a lender may suddenly increase their fixed rates at different levels for different fixed rate terms and this may be as a result of news that something, somewhere in the world may occur that could potentially cause an increase in the cost of loan funds. Then in a weeks’ time, mysteriously the lender may change their fixed rates by actually dropping them because the analysts have now received news that the pending influence to increase loan funding costs has dissipated and the market sentiment becomes positive for a decrease in funding cost……so in a nut shell, never expect fixed interest rates to follow any pattern or in the footstep of variable interest rates.

I think an important lesson is to accept the fact that interest rates will constantly fluctuate up and down so do not become fixated on what may happen to interest rates but make sure you allow yourself a budget buffer of at least 2% increase so that when you ultimately take out your new loan, expect the worst and be prepared for the worst so you do not place yourself into an unnecessary position of financial hardship. Should I buy now or wait till the interest rates come down….well unless you are someone that can read the future, MyRate advises to review your situation :if you decide to buy now, make sure you shop around for the best rate at the time and if you want some form of security for a set time frame then select a fixed rate but either way waiting for the rate to come down could be your worst mistake because despite all your knowledge that you have obtained in the news and financial forums indicating that rates are on the move down, all of a sudden the unexpected happens and the rates actually starts going up so you will have then unfortunately made a grave error in not purchasing at the moment. If you have ever traded stocks, shares or currencies, you will know there are no certainties that a stock, share or currency will move in the direction that all the gurus on earth predict.

One certainty is without question and that is the fact that interest rates will continue to go up and also continue to go down so simply accept this fact and make allowances for this fact.

The MyRate Team, KM.