Monday, 31 December 2012

2012 year in review


I’ll keep this post short, as I’m sure you have lots of items remaining on your to-do list to prepare for tonight.

I think it’s interesting to reflect back on my first month on this wealth creation journey.

My major focus in December has been on refinancing my mortgage, which is by far the largest opportunity for savings in my current budget.  I’m proud to announce that after my initial hurdles and poor customer service experiences, I’m very close.  My broker submitted my application to my lender of choice today, and assuming all is successful, I’ll lock in a ridiculously low fixed interest rate for three years, plus a cash back percentage of the broker’s commission.  It’s not as large a commission as I could have received with other lenders, but the loan I’ve applied for offers additional discounts that will save me thousands of dollars a year, which outweigh the benefits of any higher commissions.

So, overall I should be better off by more than $5,000 after tax per annum for the next three years – not bad for the first month’s work!  Things can still go off the rails, of course, but I’m keeping my fingers crossed for a positive result.

From next month, I’ll chart my progress towards my million dollar goal more officially.  To do that, I need to know precisely what my net worth is at present and what my monthly targets will be.  I’ll get on to that in January ... 2013.

Sunday, 30 December 2012

New Year's Eve cash earners (for the rest of us)

It may seem that New Year’s Eve is designed to extract as much cash as possible from you.  However, the flipside for anyone who is not interested in the festivities or willing to endure a bit of short-term effort for cash gain is that all the support staff making the celebrations a success for everyone else are remunerated at insane levels.

So if you need some quick cash, ideas to earn money on the night include:
  • Babysitting – the average going rate seems to be around $50 per hour, not bad for sitting on the sofa while the littlies are asleep
  • Casual bartending – the clubs, etc. will have their regulars doing this, but many private functions require support
  • Casual waitressing – a friend of mine does this regularly for private parties and makes heaps of cash.  A benefit is that many of the swankier parties are at homes sweeping harbour views, and you get to see the fireworks as well
While not cash earners, any activities not directly related to the New Year’s celebrations can be significantly discounted or bereft of other clientele, ensuring that you get better service.  One of my favourite activities is to take an overnight flight.  You will never see an aircraft so deserted.  I did this most recently flying from LA to Sydney.  There were only three people in the entire business class cabin, a couple in the front and me at the back.  We couldn’t even see each other, and we each had our own flight attendant.  While you have to pay for the flight obviously, you also get plenty of champagne and nibbles to tide you into the new year.

This is the New Year’s Eve in a while that I haven’t been on holiday.  So I’m still trying to prepare myself for having to go in to the office in the morning!  I’ll be sure to leave at a reasonable hour, though, in time for a private party with a few close friends.

Saturday, 29 December 2012

New Year's Eve entertainment (for party-going types)


The Millionaire on Heels’ wealth creation plans could get seriously sidetracked by blowing a few grand on a harbourside experience with endlessly flowing champagne and the fireworks close enough to touch.  Oh, I forgot to add in the cost of the dress and the shoes and handbag to match.  Seriously, there was an article on news.com.au the other day that featured a girl who had spent $2,500 on her New Year’s Eve outfit:

Young women say they're better off spending heaps on clothes than borrowing

Well, I’ve done pretty done it all on New Year’s Eve, from the glittering parties above the harbour, to the crushing crowds on the harbour, to low key gatherings to friends, to staying at home, and occasionally skipped the day entirely (I’ve flown a few times from LA to Sydney and you cross the international date line, expunging the day completely).  Pretty much all of these options have left me with a sore head and feet the next day, but some of them left certainly left more cash in my wallet than the others.

Friday, 28 December 2012

Returns

How are you going at the sales?  The Millionaire on Heels has not purchased a thing yet.  I’m contemplating a weekend trip to the shopping centre, but I’m put off by the pretty much certain parking dramas ahead.  I have been doing a bit of online browsing.

The more you purchase, the more likely you will end with something you didn’t need, don’t like, or just plain doesn’t work.  Your ability to return the item will depend on where the item is purchased and what’s actually the problem.

Three common situations are:
  • Faulty goods
  • Change of mind
  • Overseas purchases

Faulty Goods

When an item you purchase in Australia is faulty, unsafe, or does not work or appear as it should, you have the right under Australian consumer law to a repair, replacement, or refund.  This applies to both online and bricks-and-mortar purchases.  You may need to show proof of purchase, such as a receipt or bank statement, lay-by statement, or stamped warranty card showing the place of purchase.

There are also protections in Australia against unfair contract terms – e.g., contracts you might sign when purchasing a mobile phone or internet plan.

Thursday, 27 December 2012

Negotiating tips

If you’re shopping for larger items in the sales, no doubt you will need to so some negotiating.

The key to getting a good deal is first and foremost your mindset.  A lot of people find the process unpleasant.  Women in particular risk being perceived as overly aggressive or poorer negotiators.  In fact, a study I read in university showed that in negotiating with car salesmen, women were able to negotiate the same discounts as the men in the study.  The catch is that it wasn’t a level playing field to start with, and the salesmen without fail offered a lower price to the men to start with!

To shift the playing field in your favour, keep in mind the following points:
  • The seller has undoubtedly set his/her prices assuming that there will be negotiation.  They are an expected part of doing business.  You are not bankrupting them by asking for the discount they expected you to ask for in the first place.
  • If prices are not printed, the seller will size you up and charge you based on his/her perception of how much he/she thinks you will be willing to pay.  If you seem nervous about haggling, a seasoned seller will increase the starting price!

Wednesday, 26 December 2012

End-of-year sales guide

The sales are on.  I’ve found it hard this year to differentiate between when the pre-Christmas sales finished and the Boxing Day sales started.  Even though I regularly unsubscribe to some of the more pestering emails (some companies were sending me daily emails in December after I’d made a single online purchase), it seems as though I’ve received dozens over the last few days with nearly identical offers to the ones earlier in the month.

So, how does the Millionaire on Heels approach the end-of-year sales?  With much trepidation I have to admit.  From a financial perspective, I see the opportunity to stockpile items I will need during the year at reasonable prices.  But the downside is getting caught up in the fuss and buying things you don’t really need or worse buying additional items you “have to have” that aren’t even on sale.  Plus I don’t like the crowds and the endless circling looking for a parking space.

Here are my six golden rules to tackle the sales:
  1. See the sales as an opportunity to stockpile clothing and other items that you will need at some point during the year.  I find it far easier (and cheaper) to have a new pair of shoes or stockings in the wardrobe to pull out when their predecessor suffers irreparable damage.  In my case, clothes have a knack of falling apart the day before I have to go on a business trip, and replacing them at short notice pretty much guarantees paying full price for something that’s not exactly what you want or need.  I generally look for shoes, stockings, and other work clothes at the sales.  I also browse for T-shirts and summer clothes that can carry into next season.

Tuesday, 25 December 2012

Christmas shopping (... for next year)

Merry Christmas to all!
I’ll keep this short as hopefully everyone is suitably occupied with families and friends.  I’m away from my family this year, so I just had a quiet one with a few close friends.
I know that Christmas for many is a spiritual time, or a day away from commercial influences.  So I don't mean to offend anyone.  I do have to ask, though, who has been online to look at the early start to the Boxing Day sales?  This year it seems like all the major stores have launched early. 

Monday, 24 December 2012

Christmas preparations

Every year I hear horror stories about the preparations entailed for Christmas – endless cooking in the heat to try to satisfy the demands of streams of distant relatives who will never be satisfied.

Some of my favourite lower-key ways to celebrate include:
  • Christmas on the beach.  Everyone needs to do Christmas on Bondi Beach once in their lives.  The only requirements are a towel and swimmers … a Santa hat is optional.
  • A tropical getaway.  I spent Christmas in a lodge the Daintree once.  It was super casual and everything was organised for you.  It was a bit more expensive than DIY, but not over the top.
  • Quiet Christmas with close family members.  My parents live in the mountains, so Christmas is usually them, my sisters, and I.  Everyone has their roles in the preparations, which we have always had since we were kids.  I’m sure my mother still stresses about all the preparations, but to me it’s relaxing because it’s always the same!
  • BBQ with friends.  When I can’t be with my family, this is by far my favourite Christmas option.  Often, several of my neighbours and I will have a casual BBQ with everyone bringing a dish.  They are quite multicultural events, so there’s a bit of everything plus very good company.
I guess the theme here is that it’s not about the event itself, it’s about the people you spend time with.

Tonight and tomorrow I’m going to have a bit of a break from blogging and enjoy some quality time with some friends.

Happy Christmas to everyone!

Sunday, 23 December 2012

Christmas gift ideas

Savvy Christmas shoppers will have bought all their presents months ago, but if you’re like the Millionaire on Heels, a few things have slipped to the last minute.

Because I don’t have any children to buy presents for, I try to clear of buying junk that will never see the light of day just to have lots of presents wrapped up under the tree.

Five suggestions to manage the costs of Christmas gift giving without losing the intent are:
  1. Homemade gifts.  People love homemade baked goods.  Other suggestions I’ve seen are homemade soaps and toiletries, baking mixes in jars, loose teas, coffee, etc.  The Millionaire on Heels is not a baker, but I was going to try my hand at baking for my team at work this year.  Needless to say I ran out of time …
  2. Give the gift of time.  Time is one of the most rewarding gifts possible to give.  Think of offers to babysit for busy parents, helping in the garden for an elderly neighbor, a night off for your partner, etc.  I offered to set up mobile broadband for my neighbor.  The prepaid package was inexpensive, but I knew she would have difficulty installing it herself.  The smile on her face was amazing!

Saturday, 22 December 2012

Mortgage tools and resources

Here’s a summary of some of my favourite mortgage-related resources.

Books

Anita Bell:  Your Mortgage - How to Save $50,000 to $250,000 per Property
Anita Bell:  Your Investment Property - How to Choose It, Pay for It, and Triple Your Returns in Three Years
Alex Brooks:  Mortgage Stressbusters
Peter Cerexhe:  Only 104 Weeks to Your Home Deposit
Maureen Jordan, Eric Tyson, and Ray Brown:  Finding and Managing Your Mortgage for Dummies


Magazines

Your Mortgage - http://www.yourmortgage.com.au/
Smart Investor - http://afrsmartinvestor.com/


How to guides and calculators

News - http://www.news.com.au/money/guides-tools
Rate City - http://www.ratecity.com.au/home-loans/guide
Infochoice - http://www.infochoice.com.au/home-loans.aspx

MoneySmart (from ASIC) - https://www.moneysmart.gov.au/tools-and-resources/life-events/buying-a-home

Interest rate comparison websites

(Remember lenders pay for inclusion on most of the “independent” comparison websites and even more for star ratings)

Canstar - http://www.canstar.com.au/
Rate City - http://www.ratecity.com.au/
Infochoice - http://www.infochoice.com.au/


Friday, 21 December 2012

Mortgage repayment tips - part 5

This is the last of a five part series on mortgage repayment tips.  Today’s topic is “Eliminate (or at least manage) fees and charges.”

Fees and charges may seem trivial relative to the size of your mortgage, but over time they can add up, as I explained previously:
http://www.millionaireonheels.com/2012/12/the-things-banks-and-brokers-dont-tell.html

The best time to negotiate fees is before you sign the mortgage contract.  Remember every fee is negotiable.  Sometimes lenders will waive annual package fees or at least the application and settlement fees for a new loan or refinance.

Also, at the time of application, it is helpful to think ahead as to how you want the loan structure to look in the future.  Some loan features may be free at the time of application, but cost several hundred dollars after settlement – e.g., loan splits.  If that’s the case, consider taking the features even though you don’t need them yet.

Finally, once your loan is settled, ensure that you manage your ongoing fees diligently.  If you have a package loan, you shouldn’t have too many fees, but check your loan statement for any errors.  On my current loan, the package fee is meant to be waived, but in practice it never is, and I have to ring up every year to have it reversed.

This just about concludes my series on mortgage savings.  Tomorrow, I’ll conclude with a final post on mortgage tools and resources.

Thursday, 20 December 2012

Mortgage repayment tips - part 4

This is the fourth of a five part series on mortgage repayment tips.  Today’s topic is “Make extra repayments.”

Making extra payments is the most challenging of the mortgage repayment tips because it requires sacrifice.  However, I try to remind myself that a small sacrifice now can have a big impact over the life of a loan due to the impact of compounding interest.

It’s helpful to use an online calculator and estimate the value of a one-off additional $100 payment now over the remaining term of the loan – e.g., at 5.15% over 20 years, that $100 will save you $180 in interest; at 6.15%, the savings will be $242.  If you do this regularly when contemplating a new purchase, you might find that you can sway yourself away from making non-essential purchases.

Wednesday, 19 December 2012

Mortgage repayment tips - part 3

This is the third of a five part series on mortgage repayment tips.  Today’s topic is “Minimise the contracted loan term.”

I explained the importance of having the shortest loan term possible in an earlier post:
http://www.millionaireonheels.com/2012/12/the-things-banks-and-brokers-dont-tell.html

The best tips I can think of to achieve this include:
  • Obtain the shortest term possible upfront – Some sources recommend taking a 30 year term to minimise your required repayment and then paying extra.  However, I think this just opens up the opportunity for you to fritter away the money before it ever makes its way into the mortgage.
  • When you refinance, always keep your loan term at least as short as the previous term you signed up to minus the number of years you’ve had the loan – e.g., if you signed up to a 30 year term five years ago, ensure your refinanced term is for a maximum of 25 years.  If you don’t do this and you refinance a few times, you’ll be paying off your mortgage well into retirement!
  • Keep all your savings and day-to-day funds in an offset account – A balance of just a few thousand dollars can reduce your loan term by months.
  • If you don’t have an offset account, make your repayments weekly or fortnightly – As interest is calculated daily on your loan account, making your repayments early will reduce the interest accumulated.  However, having an offset account has the same impact.
Most banks and interest rate reference sites have a few calculators that you can use to determine the possible time savings on your loan by following these tips.

Tuesday, 18 December 2012

Mortgage repayment tips - part 2

This is the second of a five part series on mortgage repayment tips.  Today’s topic is “Negotiate the lowest possible interest rate.”

I’ve provided numerous tips on getting the best interest rate for a new loan in previous posts, including:
http://www.millionaireonheels.com/2012/12/search-for-lowest-possible-interest-rate.html
http://www.millionaireonheels.com/2012/12/cash-back-mortgage-brokers.html


They can pretty much be summarised as “negotiate, negotiate, negotiate.”

Once you have your loan in place, I would also recommend that you review your lender’s interest rates regularly against the market.  If you have a fixed interest loan, start a detailed review of your options several months before the end of the fixed rate period.

Monday, 17 December 2012

Mortgage repayment tips - part 1

The total amount you will pay over the life of your mortgage is a function of:
  • The amount borrowed
  • The interest rate
  • The loan term
  • Any fees and charges applied by the lender along the way
So my tips on how to lower your total mortgage repayments logically fall into five categories:
  • Borrow less upfront
  • Negotiate the lowest possible interest rate
  • Minimise the contracted loan term
  • Make extra repayments
  • Eliminate (or at least manage) fees and charges
I’ve cover each of these over the next five days.

Today’s topic is “Borrow less upfront.”

As I highlighted earlier in the month, it is in the interests of lenders and brokers for you to borrow as much as possible:
http://www.millionaireonheels.com/2012/12/the-things-banks-and-brokers-dont-tell.html

However, the lower the loan amount you agree to, the more money you will be able to pump into the account from your savings from Day 1.  This will immediately reduce your principal and hence ongoing interest payments.

Sunday, 16 December 2012

Managing an investment property/portfolio

OK – you’ve bought the investment property.  Now what’s the best way to go about managing it?

I think in terms of three key areas: managing revenue, costs, and risks.

Tips to manage your revenue include:
  • Maximise your weekly rent upfront when the tenants are still starry-eyed and competing with others for the property.  It can be much more difficult to get the property manager to push through a rent rise later.
  • Sign good tenants up to longer term leases.  This strategy helps to minimise vacant periods and ensure a consistent revenue stream.
To manage your costs:
  • Evaluate a range of property managers.  Rates are very competitive in most areas of the country, and you can usually get a good manager at a reasonable rate (or get them to match another quote) if you shop around.
  • Secure a property manager who is not “too” nice in meeting tenants’ demands.  If he or she is really nice to you, that could be a giveaway.  My property manager let my tenants get away with having the handyman tighten a loose screw on the toilet roll holder … which I paid for.  How difficult is it to operate a screwdriver yourself?

Saturday, 15 December 2012

Guide to buying an investment property

The Millionaire on Heels had an investment property up until a year or two ago.  It was not a conscious acquisition, but rather a byproduct of my decision to upgrade from an apartment to a house.  Here are a few pointers that I would heed myself before embarking on the investment property bandwagon again.

The process of financing an investment property is reasonably similar to that outlined previous posts on mortgage refinancing and buying a first or new home.  If you haven’t read them already, you can find them at:
http://www.millionaireonheels.com/2012/12/mortgage-refinancing-guide.html
http://www.millionaireonheels.com/2012/12/mortgage-application-process.html
http://www.millionaireonheels.com/2012/12/guide-to-buying-your-first-home.html


However, I thought I should share a few additional tips specifically related to investment property:
  1. Do a business case upfront, considering the revenue, cost, and risk of several different property options.  What is easy at the time may not be the best financial investment.  In my case, I thought I’d just rent out my previous home until I found a new one.  I didn’t look at any alternatives in different suburbs, cities, or states that could have been much more profitable.

Friday, 14 December 2012

Tips for saving a deposit

Some people have it easy with obtaining the deposit for their first home – a gift from their parents, an inheritance, etc.  For the rest of us, it requires some years of hard effort. 

The key steps you need to do to build your deposit include:
  • Set a realistic target amount and timeframe – a couple of years is usually a good balance between saving enough money and driving yourself crazy with deprivation from life’s little luxuries
  • To achieve your target, plan to both increase your income and decrease your expenses
  • Allow for glitches along the way – some months you’ll have unexpected expenses that eat into your savings, so you need to plan to overachieve your targets in other months
  • Invest the savings appropriately in a high-interest savings account, preferably one that is difficult to access in times of mental weakness at the shops
Here are a few ideas to increase your income and decrease your expenses.

Thursday, 13 December 2012

Guide to buying your first home

The financing process for a first home is generally the same as outlined in my post on the mortgage application process:
http://www.millionaireonheels.com/2012/12/mortgage-application-process.html

The main differences that you’ll see as a first home buyer are that typically:
  • Your target equity in the property will be lower
  • You won’t have a track record in paying off such large loans
  • There is additional support for you from the state and national governments such as the First Home Owners Grant, which will also require additional applications
The Millionaire on Heels bought her first property nearly a decade ago.  Here are a few things I learned:
  • The best thing you can do is have a small loan size.  The incentive when you are looking for that first property is to borrow as much as you can possibly afford to make repayments on.  However, unless your salary increases a lot in the short term, this will result in you struggling to pay off much more than the minimum repayments.  A better strategy is to borrow a bit less, to allow you to pay off some of the principal and build up equity so that you can upgrade to your next home sooner.

Wednesday, 12 December 2012

Post settlement - changing bank accounts

The Millionaire on Heels has lots of bank accounts.  I’ve accumulated them due to previous home loan providers, a one off need for a high interest account, you name it.  And then they’re difficult to close, or you just need the account on the once in a blue moon chance you need to write a cheque.

If you are like me, by streamlining your bank accounts, you can:
  • Reduce fees (if you have any … if you do, you should really bank elsewhere, as there as hundreds of financial institutions with no-fee accounts)
  • Reduce paperwork – all the account statements, etc. in the mail each month or quarter
  • Reduce the hassle of adding up all your tiny balances to track your savings or at tax time
Some people find it challenging to move accounts because they have direct debits hanging off their accounts.  If this is the case for you, the government has introduced banking reforms from 1 July 2012 that are supposed to make the switching process a lot easier.  Basically, you can ask your new bank to help.  This article describes the process:
https://www.moneysmart.gov.au/managing-my-money/banking/switching-bank-accounts

Tuesday, 11 December 2012

Post settlement - put your ongoing structures in place

Once your home loan is settled, you will find yourself in the dichotomous position of trying to pay down your mortgage as quickly as possible, while the bank is in parallel trying to get you to keep your loan balance as high as possible so that they can maximise their profits.  Generally any loan feature that they describe in glowing terms (e.g., offset accounts, line of credit loans) is a money winner for them, as it is likely to encourage you to spend any additional funds you’ve worked hard to save. 

So it’s really important that you structure your financial affairs in a way that discourages dipping into your additional loan repayments.  The best way I can think of to do this is to have four separate accounts:
  • Home loan account (this is where your regularly monthly loan payments go; you’ll have multiple loan accounts if you have split fixed/variable components to your loan)
  • Offset account for additional home loan repayments (this account you will never, ever withdraw from until you repay the loan)
  • Offset account for savings (this account you will withdraw funds from as you meet your savings goals – e.g., for renovations, cars, travel, etc.)
  • Transactional account

Monday, 10 December 2012

Mortgage application process

I’ve outlined the steps in a typical mortgage application lifecycle below.  For personal amusement, I’ve also included the days each step should take according to one mortgage broker’s website, slightly modified based on my experience.  I’ve found that the number of days varies widely across lenders and is highly dependent on the quality of your broker and the individuals the lender assigns to your case.

Step 1 - Home Loan Lender and Product Selection
Several days to several weeks or months (depending on how much effort you put in)

During this phase of the process, you do your own research and/or the broker will recommend products and home loan lenders to meet your needs.

Step 2 - Loan Application
0-3 days

In this phase, either you complete your preferred lender’s loan application, or the broker does it for you with information you’ve supplied.  This can be paper-based or electronic.  You must also send in a few (or a lot of, depending on the lender) supporting documents, such as verification of your income, assets, and liabilities.  If you are a first home buyer, you also submit a First Home Owners Grant (FHOG) application.  Once the application is lodged, you or your broker should receive a confirmation receipt from the lender.  For electronic applications, this could be immediate.  For paper-based applications, it could take 24 hours.

Sunday, 9 December 2012

Private banking

This isn’t a topic particularly pertinent to mortgages in general.  But I think it’s relevant as an example of how you can get lured into signing up to a higher cost mortgage based on sexy features that you do not need and/or will not use.

When the Millionaire on Heels was researching mortgage offerings prior to purchasing my latest property, I looked at the typical sources I’ve mentioned in previous posts: my financial institution at the time, comparison websites, a cash back mortgage broker, etc.  I focused most particularly on the total cost of each package versus any unique benefits (which there weren’t a lot of – most packages are quite similar).  Then I attended a presentation from one of the major banks to the partners and directors of my employer at the time.  They left an attractive brochure outlining their private banking offering for us.

I rang them up one day and, after a series of meetings, was ushered into the rarified world of private banking.  The fees were waived as part of the arrangement with my employer, but the interest rates on offer were slightly higher than I could get at the other major banks via a broker – by maybe 0.05% to 0.10%.  So I thought it would represent good value for money.  I imagined regular consultations in their offices, discussing my individual needs, the best strategies to address them, etc.  The reality has been a bit different.

Saturday, 8 December 2012

Cash back mortgage brokers

As I’ve discussed previously, using a cash back mortgage broker can be one of the best ways to save on your mortgage.  Banks pay upfront (typically 0.5%-0.7% of the loan amount) and trailing (typically 0.15%-0.2% of the loan amount) commissions to mortgage brokers for sourcing your loan.  If you don’t use a broker, you don’t save on the commission – the bank takes it.  And if you use an ordinary broker, they keep all the commission to themselves.  Cash back mortgage brokers offer to rebate a percentage of the upfront or trailing commissions or both.

The following website provides an indication of what the typical upfront and trailing commissions are across the major financial institutions:
http://master.connective.com.au/flex/commSchedReport.asp


Now I say “can be” because first and foremost the broker has to be a good broker – the cash back is then a bonus.  If the broker does not have good relationships with the banks’ business development managers or is not able to negotiate better discounts than you could as a retail customer, you could actually end up worse off with their services.  These brokers may also be suited better to more basic property transactions.

Friday, 7 December 2012

Mortgage brokers versus direct sales

Many people looking for a new mortgage or refinancing will automatically consult a mortgage broker.  This is definitely the “easy” option, but doing a bit more of the work yourself can in certain circumstances get you a much better deal.

It makes sense to use a mortgage broker when:
  • You are looking to take out a loan from a major bank (or some large building societies).  Most mortgage brokers have a panel of only about 20 lenders that they work with, and that will include a number of low-doc-type lenders
  • You prefer package deals on which a broker may be able to get a higher than advertised discount
  • Your preferred product is fairly standard and pays the broker a reasonable commission.  Some brokers won’t deal with “affinity”-type loans, which offer a good deal to the borrower, but not to the broker him/herself
  • You like someone else to complete the application forms, etc. for you and deal with the lender on your behalf
  • You would like a cash back rebate on some of the commission (see tomorrow’s post for more details)
You should consider other options if:
  • You are looking at non-bank lenders, building societies, credit unions, etc.
  • You want a basic, highly discounted product that does not pay commission
  • You are member of a professional society that negotiates special offers with lenders on behalf of their members.  These can be quite attractive
  • You are independent and like dealing with lenders directly
Across my home loan history, I’ve had three different lenders.  In each case, I consulted brokers, but they couldn’t match the deals I was offered directly.  In my current refinancing efforts, however, I’ve found that brokers are able to offer better deals.  So I would recommend exploring both alternatives. 

Thursday, 6 December 2012

Banks versus non-bank lenders

Something like 90% of all new mortgages in Australia at the moment are being signed with the major banks.  It doesn’t make a lot of sense to me, as people complain constantly about the level of customer service provided by the banks.

So, why would you consider a bank for your mortgage financing?
  • Their ability to offer greater non-advertised discounts for attractive business
  • Cash back mortgage brokers offer further discounts on bank products
  • Banks seem to offer better fixed rates for large % fixes (the non-bank lenders are advertising low fixed rates at the moment, but they generally seem to be for <50% fixed and <75% LVR)
  • Their additional package features
  • The breadth of their other services – e.g., private banking (see my post later in the month on this)
If you don’t want to deal with a bank, why not a credit union/building society?
  • They offer more personable service – often they only have a few staff that you will get to know by name
  • They have a good range of low fee banking products
  • They offer low interest rates and fees on personal and car loans, credit cards, etc., which are generally more competitive than the banks
  • They can have very attractive home loan rates

Wednesday, 5 December 2012

Search for the lowest possible interest rate

Every 0.1% reduction in the interest rate you pay can have a dramatic difference over the life of the home loan due to compounding.  For example, for a $1 million loan over 20 years, the total repayment at 5.5% interest is $650,929, whereas at 5.4% it is $637,403 – a saving of $13,526.  So it pays to shop around and negotiate keenly.

Some suggestions to ensure you get the best possible interest rate include:
  1. Look at as many lenders’ websites as possible.  There are hundreds of lenders out there, so it may not be feasible for you to look at all of them, but it can be the key to finding the best possible rate.  One of my home loans was with a credit union, who at the time was not listed on the Canstar-type websites.  I found them by literally looking at every credit union in Australia’s website.  They offered the lowest interest rate I could find and provided fantastic service to boot.
  2. Regularly check rate research sites like Canstar, etc.  I’ll list a few in my mortgage resources post later in the month.  Note that these are paid advertisements, so they don’t include every product in the industry and certainly not always the lowest priced products.  But they do provide valuable insights for your decision-making process.

Tuesday, 4 December 2012

To fix or not to fix

The financial press is generally lukewarm on the subject of fixed rate mortgages.  Studies cited by the press appear to show that on average customers are better off financially under variable rate loans.  I suspect these studies are skewed by the human tendency to panic when variable rates are rising.  In their panic to mitigate the rising rates, people lock in a fixed rate loan at the top of the interest rate cycle.  In fact, by taking a contrarian view and locking in a fixed rate at the bottom of the cycle, you could be better off with the fixed rate.

There are two primary reasons why you would want to fix your interest rate:
  • You want certainty over future payments
  • You think you can beat the market and that the fixed rate will be less on average than the variable rate over the fixed rate period
And in both cases, you would need to be comfortable with the restrictions that generally come with a fixed rate loan, namely:
  • Potential for early repayment penalties
  • Limited ability to make extra repayments
  • Lack of redraw and/or offset accounts
Some lenders have introduced fixed rate products with more flexibility, so you should definitely read the terms and conditions.

Monday, 3 December 2012

The things the banks and brokers don't tell you

The Millionaire on Heels has dealt with most of the Big 4 banks and a number of other financial institutions and mortgage brokers over the years in her quest for the perfect mortgage.  Here are 10 useful tips I've learned that the banks and brokers seem reluctant to pass on themselves.
  1. The banks and the larger building societies that brokers have on their panels may not have the best home loan for you.  The loans brokers have on their panels are the ones that pay them commission.  So it's important that you consider a range of products from other lenders.  Those that are less advertised may be better value (the lender is not paying for the advertising and can pass some of the savings on to you!).
  2. No matter what they say in their marketing material, brokers are influenced by the commission they receive.  If you don't believe this, ask a broker for a NAB mortgage.  They will offer you a Homeside (NAB subsidiary) product because it pays trailing commission and the NAB branded product does not.  Many of the best loan products out there, such as affiliate loans, have low or no commissions and the brokers will not touch them.  So as I said above, it's essential to do some of your own research.

Sunday, 2 December 2012

Home loan features (and jargon)

For someone looking for a mortgage for the first time, the terminology can be confusing.  I’ve outlined some the main features and types of home loans typically offered below, but a glossary of home loan terms.

Home loan features

Variable rate v. fixed rate v. split loan

With a variable interest rate loan, repayment amounts vary during the term of your loan, as economic conditions change. They will increase or decrease according to whether the rate moves up or down.

A fixed rate loan can offer protection against rate changes, as your repayments will be for a fixed period of time.  Fixed rate loans are only for a limited time (usually up to five or seven years) after which time the loan converts to a variable rate loan.  Fixed rate loans are generally less flexible than variable ones and can have significant early repayment penalties.  I’ll discuss fixed rate loans in another post later this month.

Split loans combine some of the certainty of a fixed rate with some of the flexibility of a variable loan.

Line of credit

A line of credit consolidates a number of debts (home and personal) into one account.  It can simplify your repayments and reduce the headline interest rate you pay (e.g., if you consolidate high rate credit card balances into the account).  However, a line of credit can be very dangerous if you do not have a good track record in paying off your debt.

Saturday, 1 December 2012

Mortgage refinancing guide

The Millionaire on Heels is becoming an expert at mortgage refinancing.  Unfortunately, all I want to do is refinance the mortgage on a single property in which I have a lot of equity and far more than enough income to service the loan.  It should be easy, but the broker and lender I have dealt with predominantly to date have turned the process into a circus over the last few months!

Theoretically, it should be easier to refinance an existing property than to finance a new property.  The process goes generally like this.
  1. Research possible home loans.  There are hundreds of lenders in Australia, each offering multiple loan products, so there are literally thousands of possibilities.  Your initial goal should be to get down to a shortlist of say five to ten products that could meet your needs.  Things to consider include:
    • Bank or non-bank lender – 90% of Australian home loans are sold by the banks at the moment, but non-bank lenders may offer better interest rates and service, depending on your needs
    • Fixed or variable or split loan – fixed rates are really attractive at the moment, but fixed rate products are generally less flexible than variable ones

Upcoming December posts



December is mortgage month for me, as I've been trying to refinance my home loan and hope to get it all (or mostly ...) finalised this month.

And it couldn't be December without some focus on Christmas and New Year's Eve, and of course the end-of-year sales.

So my plan for December posts includes:
  1. Mortgage refinancing guide
  2. Home loan features (and jargon)
  3. The things the banks and brokers don't tell you
  4. To fix or not to fix
  5. Search for the lowest possible interest rate
  6. Banks versus non-bank lenders
  7. Mortgage brokers versus direct sales
  8. Cash back mortgage brokers
  9. Private banking
  10. Mortgage application process