RBA gives signs of increasing cash rate

RBA governor Glenn Stevens said Australia's economic growth has been robust and should be above trend in 2011, the low rate of inflation over past two years also expected to go up in coming years.

Obviously, the  central forecast might be wrong. Something could come out internationally or nationally that affects the outcome. But if downside possbilities do no materialise, cash rate will be depended on monetary policy to manage the robust upswing. Mr Stevens also believes the growth will continue to escalate due to high export prices and "the largest minerals and energy boom since the 19th century".

RBA rapidly increased the vash rate from three per cent to 4.5 per cent, in six increments between last October to May. While, the inflation rate fell from 4.7 per cent in September quarter of 2008 to 2.7 per cent at June 2010.

Australia Dollars Rises to New Record

The Australian dollar  made to new levels that had not seen since mid 2008 before the start of the global financial crisis - as traders felt more confident from ever-more encouraging economic data out of the US. The AUD touched a peak of 94.57 US cents, climbing almost a full US cent on September 15th. Its rise was largely on the back of a fall in the value of the greenback. 

It has come back a little in recent offshore trade but was this morning still buying 94.2 US cents after hovering around the high 93-US-cent range earlier. It was also trading at 72.32 euro cents, just off a record high achieved in recent sessions.

Since 3th of September, AUD has risen more than 4%. The AUD benefits when international investors and traders believe the signs are good for the global economy. US retail sales figures out overnight were a welcome sign, indicating a double-dip recession in the world's largest economy was less likely.

The Aussie dollar is closely linked to commodities prices - and commodities sales benefit when economies are growing  because demand is high. That in turn bolsters the value of the dollar against many foreign currencies. The AUD's worth depends heavily on the international factors and a fall in the value of the USD was a gift.

USD weakened against the yen, euro and British pound after Goldman Sachs economist Jan Hatzius predicted that the US central bank, The Federal Reserve, would probably begin buying $US1 trillion worth of Treasury bonds later this year.

The practice known as quantitative easing aims to spur growth in the US economy. But the flood of USD into economy weakens the currency and that in turn prompts traders to seek alternative investments, including gold and some other currencies.

Perfect Fit

Here are some types of loans that suit different borrowers

1. Standard Variable Rate

Suited to: Most Borrowers

How it works 

It allows borrowers to inject more money to repay loan so you can pay off your principal sooner and consequently reduce your interest repayments. This type of loan also easier to switch loans such as fixed rate. The variable interest rate is set with reference to the Reserve Bank of Australia's (RBA) official cash rate. 

The Upside

Flexibility: It offer borrowers flexibility with range of optional features, such as redraw facility, offset account, extra repayments or access to a line of credit. These features help to reduce the overall term and cost of your loan.

The Downside 

Higher Rate Than Basic: The interest rate is generally higher than basic variable home loan rate.

Unexpected Rate Movements: The rates sometimes are not aligning with RBA cash rate.  Some banks recently rose their interest rate beyond RBA levels.

2. Fixed Rate

Suited to: Those who want the certainty of knowing what their repayments are each month

How it works

It let you lock in an interest rate for a specified term from six months to 10 years. Fixed rate can save borrowers in a rising environment but if rates fall it will be more costly than variable rate.

The Upside

Certainty: Borrowers know exactly what will they pay regardless of market condition.

Specials: Lenders often have specials on fixed rate products

The Downside

Little To No Flexibility: Borrowers are locked into the loan for a set period of time so only commit if you are confident you can see the loan term through.

Exit Fees: These can be hefty if you decide to pay out the loan before the end of the fixed term.

Break Costs: This is usually the interest and fees you would have otherwise been required to pay during the fixed term.

Knowing When To Fix: Trying to beat the market with fixed rate is very though. Rule of thumb, the lowest fixed rates are usually available when variable rates are between three and nine months off hitting their lowest level.
A word from expert:

"While fixing can be considered an insurance policy against raising interest rates, borrowers might actually be better off paying a higher interest rate under a standard variable loan and simply inject more money into the loan during the loan term."

3. Basic Variable Loan

Suited to: Any borrower who is looking for a 'No Frills' loan solution with a lower variable rate

How it works

Basic variable home loans are not the same as standard variable loans. While a standard variable loan can be packaged up with an everyday savings account, offset account, credit card, and so on, a basic variable loan does not generally have these features.

The Upside

Lower Rates Than Standard: Basic variable rates have been known to be lower than their standard rate counterparts by as much as 0.5 % per annum.

The Downside

Rates Can spike: It can fluctuate depending on changes to the RBA's official cash rate. A basic variable loan may also have restricted flexibility, like limitations on rate fixing.

A word from expert:

"Basic variable loan is suitable for those who are looking to borrow a smaller amount of money. But be careful, some lenders won't allow you to fix the whole amount under basic variable loan."

4. No Deposit or Low Deposit Loans

Suited to: People with little or no deposit 

How It Works

It is designed for borrowers with good income but lack of full deposit. Some lenders have tightened their lending policies due to global financial crisis, there are still 100% loans on the market - but they are tough to secure. Typically, 95% loan is the highest loan that likely to get. Any loan above 80% requires additional cost of lender's mortgage insurance (LMI) but this may be worth the expense if it means getting into your property sooner. Family pledge loans also allow you to use the equity in relative's property to cover your deposit, and borrow the rest to buy the property.

The Upside

No Savings Required: For those who pay rent, or are simply struggling to save up a 5 or 10% deposit, using family equity means you may still be able to secure a home loan.
The added benefit is that by reducing your loan with family equity, you can capitalise the LMI on top of the borrowing amount.
Concurrent Loans: Some lenders may offer a personal loan on top of a home loan to cover purchase costs such as stamp duty and legal fees. This loan may attract a different interest rate to the home loan and reduce the amount you will have to borrow under the home loan - and therefore, reduce your LMI risk.

The Downside

High Risk: It carry more risk to the borrower and his family.
Terms and Conditions: There are strict terms and conditions that apply to a no deposit loan.

5. Introductory Rate

Suited to: First home buyers

How It works

"Honeymoon" rate loans provide borrower with cheaper interest rate (up to 1% off the standard rate) for the first 12 months. They may be fixed, variable or capped and usually revert back to the lender's standard variable rate after the introductory period.
The Upside
Low Initial Interest Rate: The lower repayments in the early stages of your home loan may help you to better allocate your money when you buy your first home, allowing you to either pay more towards your mortgage or cover other buying expenses.

The Downside

Cut Corners: it has reduced features
Higher Fees: Introductory loans can have higher early repayment or exit fees, higher establishment and ongoing fees, and limited extra repayment options during the introductory period than a standard variable home loan.
Time Periods: Lenders can be strict about how long you must stay in the loan after the honeymoon period is over. This means borrower have reduced ability to refinance and may have to pay extra fees if you decide to do so.

EENY, MEENY, MINY, LOAN

Here is some tips for First Property Buyers !!!!

Typical borrowers often fall into the trap of thinking that the cheapest  loan is the best. But this isn't necessarily the case. There are other features from the right product than price alone that should be considered. Mortgage rates also have a nasty habit of changing and so there is no guarantee the cheapest loan today will still have the lowest rate in a couple of years.

"If you choose the wrong product it is possible to change your lender but that can be expensive and may even run into thousands of dollars"

Know Thy Self

The first step is to determine exactly what your needs are; what may be an appropriate product for one borrower may be entirely unsuitable for another. One of important considerations is what you plan to do with the property and what are your personal circumstances. Do you plan to live in the property, or are you buying it as an investment? Are you buying an established property or building your own home? Are you employed by an organisation or self employed? Once you have established the basis on which you would be borrowing, you can then consider some of your other some of your other circumstances and goals.

A Matter of Interest

Generally speaking there are some fundamental differences between the goals of investors and owner occupiers. This is reflected in the loan products that are tailored to each circumstance.   

Buyers who plan to live in their properties typically look to pay off their mortgages as quickly as they can afford to. That means a principal and interest loan is ussually the most effective strategy for achieving this. This type of buyer try to decrease the overall ineterest through faster loan repayment.

On the other hand, investors have other objectives. For example, they seek out a tax efficient loan that also maximise their cash flow, which is why interest only loan is often favoured by this segment. An interest only loan minimises the investor's monthly outlay as they only repaying the interest on their loan, not any of the principal amount. Interest only loan are usually taken for for short term - up to five years. Generally the investor would then switch to a principal and interest structure for an agreed term.

While there are tax incentives for investors in a flat - or even falling property market, there is a risk that they could find they have little or no equity in their property after a few years, and have not reduced their laon at all. Furthermore, if you plan on building your own place you'll need a construction loan. This type of loan differs from finance for established properties as the loan is paid down at different stages of construction, with the final instalment paid upon completion.

Personal Circumstances

Employment status also has a bering on what loan you will be eligible for. 

• Full time workers on a permanent contract will genereallly find it easier to qualify for a mortgage as long as their financial situation stacks up. 
• For self employed borrowers and business owners, securing a mortgage can be a bit more of a challenge. The problems lies in the shortfall in documentation that self employed and contract workers face, which rules them out of most mainstream products. However, there are products that specially tailored for them. A product called low doc (low documentation) loans where fewer financials have to be provided. Low doc loans tend to attract a higher interest rate unless the LVR is 60% or lower of the property's purchase price, so they may be out of reach of many first time buyers. Self employed borrowers who can't provide full documentation will face higher interest rate.
• Borrowers who have broken loan or credit agreements in the past are likely to have problems securing  a home loans for most lenders. Fortunately, some lenders specialise in lending to credit impaired borrowers will assess the nature of the borrower's past problems and make a decision based on their current situation. Credit impaired borrowers will pay a premium for their loan of three percent higher than standard rates and in some cases a lot higher.

The Right Loan Term

The simple term is the faster the borrowers repay the mortgage the less interest they'll pay to the lender. One thing that borrower is ussually miss out is how little of their repayment actually goes towards driving down their loan in the early stages of repayment. The longer the loan term, the longer the bulk of your repayments will be interest rather than principal. There are only three ways to reduce the cost of your home loan and cut the life of your loan:

• Get a cheaper interest rate and pay only for the features you need
• Make your repayments more often
•  Make payments greater than the required amount. Pay back as much as you possibly can

Refinancing
Once you have scured your loan you may want to change your lender, product or change the structure of the loan for some reasons. While it is possible to change but it's important to understand the potential costs and have a good reason for making any changes. 

When borrower sign up with any lender there will be clause written into the contract that detail what penalties may be imposed if he break the agreement early. First time buyers should be wary of breaking fixed interest loans and should also look carefully at the terms and conditions associated with honeymoon rates. They should also look at break fees that may be charged.

 

Housing Starts Grind to a Halt

Builders worry that the phasing out of stimulus package will hinder growth prospects.Quoted from Dan Hall's article.

New building development is in danger of stagnating for the next two years, while calls growing stronger from the building industry for the government to spend more on public building and remove planning bottlenecks on private building (remove limitation on the number of private building).

The future of construction will be impacted by the fading effects of stimulus program and the hope that apartment construction will take the strain off industry growth if interest rates stay reasonable.

Federal government stimulus were largely responsible for the strong 15% rebound in the national value of total building commencements in 2009-10. However, federal government spending will be expected to fall away during 2010-11 and 2011-12.

The effects of the stimulus already can be seen from the decrease in first home buyers by 50% over first half of 2010 compared with the first half of 2009 and non-residential building approvals have trended down sharply over the past six months. There are also two factors that will drags on economic growth in 2010-11. The first is a 27% decline in net overseas migration to 175,000 people, which will constrain retail sales growth. The second is a 3% drop in private sector non-residential construction.

Tumultuous year ahead

Accountants and financial planners face big challenges as reforms to the self-managed superannuation funds industry are formulated. Report: John Wasiliev

The sum of accountants, auditors, administrators, financial planners, lawyers, stockbrokers and other advisers is around 27,000 financial services that involved in the $400 billion-plus self-managed super sector.

Typically, all of them are facing a hard year due to big reforms proposed in various government reports. The main theme of the reforms is the imposition of higher standards and greater competency on do-it-yourself service providers, although there are also changes that yet to come.

Accountants who have worked as administrators, general advisers and auditor of the 425,000 funds will be mostly affected. The effect of accountants, who don't seek separate qualifications will be turned into bookkeepers. Accountants also need a full Australian financial services license to be able to give advice on the establishment of a DIY (Do-It-Yourself) fund. Nonetheless, there is still uncertainty whether the accountants need a license to issues such as basic administration, valuation and winding up funds. The major solution for accountant to stay involve in establishing funds is doing some training  and aligning themselves to an AFSL license holder.

DIY fund auditors  also face a whole set of new rules that will require not only greater competence but also a much higher level of independence. Other in spotlight are financial planners who face the prospect of requiring specialist skills to discuss basic super strategies, such as salary sacrifice, with clients under more restrictive tax advice requirements.

Point of Low Return

Australian investors are yet to accept strong probability that returns will be lower in the coming decade than in the previous one. One of the cause of this optimism is high rates of term deposit that are around 6-8%. This creates an equity return of 12-15%. Macquarie private manager Jeffrey Wrightson says "Local investors sailed through the global financial crisis in fairly good shape, but Austalia is not immune to the ills of the world economy."

One of trigger that may shake local market would be a fall in the property market. Banks argued " the symptoms of an unsustainable bubble in the property market is real; from excessive household debt and low levels of affordability (based on high house-price-to-income ratios)". As a result, estimates of Australian house prices being 20-50% overvalued have become commonplace during past decade. However, Macquarie expects price correction will not occur in the near future due to rapid population growth, strong labour market condition and favourable lending composition.