Reserve Bank Interest Rate Announcement – August 2014

Yesterday, the Reserve Bank of Australia met to review the official cash rate. They have decided to leave this rate steady at 2.50% pa. The official rate has remained unchanged for 11 months now.  We expect that most lenders will leave their rates unchanged, in line with the Reserve Bank’s decision.

Harvest’s Interest Rates

At Harvest, we have our own credit licence which means we are able to assist clients to either obtain a new home or investment loan or refinance an existing loan. We have access to a panel of 30 different lenders which enables us to find the loan that best suits your needs.

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Sydney & Melbourne: Newest $1M Suburbs

The Sydney property market is booming with substantial increases in housing prices pushing the median property value in 31 suburbs to over $1 million in the last 18 months.

The Northern Beaches registered the largest number of new entrants to the $1 million group with nine suburbs in the region breaking through the seven figure median price barrier.

Sydney’s Inner West also continues to experience significant housing price growth with Hurlstone Park being the region’s most expensive suburb, recording a median house price of $1,166,500 according to data recently published by the Domain Group.

Sydney suburbs which have broken through the $1M Median
Price Threshold in the last 18 months

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Similar growth in Melbourne has pushed median house prices in 10 suburbs over $1 million in the last 12 months. Although inner eastern suburbs are still in the highest demand – where million dollar suburbs have become the norm, unprecedented growth was also recorded along a corridor of suburbs in the inner north.

Australian Property Monitors data shows that Princes Hill had the biggest price increase to $1,190,000 – growth of 26.6%. Strong growth was also recorded in Brighton East, where property value increased 13.3% to $1,110,000.

Melbourne Suburbs which have broken through the $1M Median
Price Threshold in the last 12 months

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Lender’s Mortgage Insurance

Lenders’ Mortgage Insurance was introduced in order to enable lenders to offer home loans with a higher Loan to Value Ratio (or in other words, where the borrower’s deposit represents a lower percentage of the purchase price of the property) by reducing the risk to the lender. The insurance often takes the form of a one-off payment made by the borrower to the lender.

The risk to a lender that a borrower may default on their loan repayments increases based on how high the Loan to Value Ratio is. Lenders’ Mortgage Insurance (LMI) is a form of protection for the lender on loans which carry higher risk of the borrower being unable to continue to meet the loan requirements and defaulting on the loan.

In most cases where a person defaults on their home loan the lender can make back the remaining value of loan repayments by selling the property. However, where the property market has decreased, the lender may not make back the entire value of their loan. In these cases, LMI will provide the buffer necessary to compensate the lender.

The circumstances under which a lender may require a borrower to take out Lenders’ Mortgage Insurance varies from lender to lender and is articulated to a prospective borrower during loan application process. As a general guide, if a borrower has a deposit of less than 20%, it is likely that a lender will require that borrower to take out Lenders’ Mortgage Insurance.

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LMI Example

According to data published recently by AMP Capital, the national median house price increased by 11.3% over the past year. This means that a property worth $460,000 12 months ago would be worth approximately $511,980 today – an increase of $51,980.

Although the specific of LMI that a borrower would have been asked to pay on a loan for that property 12 months ago would vary from lender to lender, it is likely that it would have been $5,000 and $10,000.

Thus, a purchaser who was interested in purchasing that property 12 months ago however did not have a high enough deposit at the time and did not want to take out Lenders mortgage insurance not only would have lost the capital value growth on the property over the last 12 months (a net opportunity cost of between $41,980 and $46,980 depending on the amount of LMI required at the time), but the property itself is now more expensive and requires an even larger deposit.

In the current context of rising house prices, those looking to buy a property but who do not want to take out LMI could be missing on opportunities to get into the property market. Usually, a property would only have to increase in value by between 1% and 2% in the first year to offset the cost of taking out LMI.

[jbox vgradient=”#fdf2ea|#fdf2ea” shadow=”7″ jbox_css=”border:1px solid #f26522;” title=”General Advice Warning“]© 2014 Harvest Employee Benefits. This Newsletter has been prepared for Harvest’s clients. The information contained herein is current and up to date at the time it was prepared. Harvest Employee Benefits Pty Ltd, ABN 74 107 226 693 is a Corporate Authorised Representative and Mario Isaias, Noel Hucker and Inbam Devadason are Authorised Representatives of Harvest Financial Group Pty Ltd, ABN 80 111 998 068 AFS Licence No 284909. Harvest reserves the right to correct any errors or omissions. Any advice contained herein has been prepared without taking into account any individual persons objectives, financial situation or needs. As such, before acting on any information contained herein, a person should consider whether the information is appropriate for that person, having regard to their objectives, financial situation and needs. The relevant Product Disclosure Statement should be obtained and read before making any decision regarding information contained in this Newsletter.[/jbox]