Many Australians with home loans are aware of the ability to use the existing equity in their properties in order to further their real estate investment goals but many individuals aren’t actually utilising their equity as they could.
New research from Westpac shows that just 11 percent of Australian homeowners are planning to use their equity to upgrade.
That said, upgrading isn’t the only option. Those with sufficient equity in their properties can also use it to invest in real estate, too.
What is home equity?
A property’s equity can be calculated by deducting the loan balance from the home’s value. If homeowners have purchased real estate in high-growth suburbs, their equity will not only rise as they pay off their mortgages, but also in conjunction with capital growth.
This equity can be used for home renovations, property investment and more.
A report from analysts at UBS highlights just how focused Australian banks have become on real estate.
Looking at lending data from the Australian Prudential Regulation Authority, the UBS banking analysts Jonathan Mott and Adam Lee say the vast bulk of new loans have gone to property in the period since the US Federal Reserve launched its latest stimulus program – the so-called QE3 – in September 2012.
The analysts estimate that 95 per cent of lending growth has gone into residential or commercial property, with only 2.6 per cent of new lending, or $3 billion, going to non-property related business loans.
Credit growth has remained subdued over the period at just 6 per cent, but half of this new lending has gone to owner-occupied housing.
The boom in property investment has seen another 37 per cent of new loans going to residential investors.
The only strong area of business lending growth has also been in real estate, with commercial property loans accounting for 8 per cent of total credit growth.
The UBS analysts conclude that the concentration of bank loans into real estate is not a danger yet, but could cause problems later.
“We believe the changes to the banks’ loan books and further concentration into resi and commercial property are likely to lead to issues down the track,” the report cautions.
“However, near term, with ongoing improvements in asset quality, the banks’ earnings outlook remains robust.”
Story: Michael Janda Source: www.abc.net.au
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Australians have an unusual habit of paying off their mortgages much faster than borrowers in most other rich nations, a valuable trait that gives households a safety buffer were the economy to slow sharply.
Around half of all borrowers are ahead on mortgage payments, the Reserve Bank reported today, a level only reached by Canada among developed nations.
“In this way, many households have a buffer that they could temporarily draw on to stay current on their loan repayments if their incomes were to fall,” the central bank said in its semi-annual report on financial stability.
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Here’s a challenge. How fast could you pay your mortgage off? The sad realisation hit me earlier in the year that I’m not likely to get rich anytime soon. I know – why did I even think that would happen?
The only path to financial freedom is going to be to make sacrifices – some pretty big ones – and slash the mortgage as soon as possible. Then compound interest and investing will be able to actually earn us money. The sooner the mortgage is gone, or at least significantly reduced (given the size of mortgages these days!), the more money we will have to enjoy life.
Yes, it can be a little boring trying to pay a slab off the mortgage. But once you owe a lot less you’ll be able to use that spare money to do things that you want, instead of feeding it to the bank all the time. If you’re in deposit saving mode, the tips below will also be helpful.
#1 Stop Spending. Sounds simple, but do you find yourself wondering where all your money went? Does it leak out of your wallet like a bucket with a hole in the bottom? We’ve tried budgeting before but it just seemed too complicated. After a couple of weeks we’d get bored and the whole thing would go out the window. So now we’ve just decided to stop spending on pretty much everything – except the essentials, and a couple of luxuries we just can’t live without.
#2 No new clothes. In fact no new anything. Terrifying for some, I know. But we’ve decided to put a ban on buying any new clothes for two years, and most other goods too. I already have enough threads to dress the people of a smallish nation so it really shouldn’t be too much of a challenge. It’s just the boredom factor, really. Second-hand op-shop bargains are allowed and it has become surprising to see what you can actually find, if you have the time to look. And given we’re not heading out to pubs and cafes anymore, we have to do something with our time.
We’ve got little kids so obviously they can’t wear the same clothes for two years, unless we put bricks on their heads. But we’ve made it known that we welcome all hand-me-downs, and have also made a habit of perusing the op shops and second kids’ clothing markets. It’s amazing how many near-new clothes you find for just a few dollars, or items that even have the tags still attached.
#3: Lose the pay TV. It’s a luxury that is costing you a pretty penny. With the growing number of channels on free to air, there’s a lot more choice for nix on the box these days. And if you do the sums, you’ll probably find that even hiring a few DVDs a month is a lot cheaper than pay-TV. If there is something you must watch – sport for example – try to arrange to see it at a friend’s house who has got pay TV. As a last resort head out to the pub to see it – but be careful your beer bill doesn’t cost you more than your monthly pay-TV would have!
#4: Join the library. Now that you’re not watching as much pay TV you might have more time to read books – and you can do it for free from your local library. Check out their DVDs and CDs too. If your library doesn’t have what you want you can ask them to bring it in from another public library. In many areas this is free. In others they’ll charge about $2 or $3 to do it. Recently my three-year-old wanted me to get him a Gruffalo audio book. Instead of buying it, we asked at the library, and they got it from another library for us. We had to wait about two weeks, but it provided some great anticipation for my son, and cost us nothing.
#5 Quit the gym. Go for a walk/run/ cycle/swim instead. Now we are coming into spring, there should be ample chance to get out and about and exercise without having to pay for it. If you need motivation, try to arrange with a friend to exercise with. Make a date for something active, such as tennis, swimming or walking.
#6: Ditch the car. Get a bike, or opt for two feet and a heartbeat. I don’t mean sell the car, I just mean avoid using it when possible. Of course if you have two cars and think you can survive with just one, it might be worth offloading your second. Otherwise keep your fuel costs down by jumping on a bike when you can or for very short trips, walk. We have a Christiana trike, which is great for carting the kids around and also for heading to the markets on a weekend. If you live in an area where there are organised car pooling groups, it might be worth checking them out as an alternative to owning your own car.
#7: Entertain at home. Going out can be pricey, especially if you are buying alcohol too.
Entertaining at home can be just as much fun, and stress-free (and cheap) if you ask everyone to bring a little something to contribute. If you do head out for a meal, look for cheaper restaurants where you can BYO alcohol for a low corkage fee.
#8: Home brew is a go-go. Since my hubby started home brewing a year ago, I reckon we’ve saved a small fortune in beer. If you’ve got a green bent, it’s potentially better for the environment too, because you’re reusing the bottles and not paying for all that heavy ready-made beer to be shipped about. If you are a wine drinker, try to save money by buying wine in bulk.
#9: Holiday close to home. Look for cheap options, such as camping, staying in caravan parks, or house-sitting for friends and family. Try to get something with kitchen facilities where you can make most of your meals – eating out can be a significant cost of holidays.
#10: Grow a few vegies. It can be pretty simple to grow some herbs in the garden (or pots) and a few basics such as spinach, lettuce and tomatoes. Pottering about watering and weeding them can also be relaxing after a stressful day at work.
#11: Babysitting circle. If you’ve got young kids, considering swapping babysitting services with friends. We have a magnet system where we use magnets as payment. Each family starts with four magnets. We often babysit the kids in their own home, in the evening. So one parent stays at home with their own children, while the other minds the second family’s children. It works a treat. You can arrange for the circle to work with several families or you could have your own arrangements with a couple of different families, as we do.
#12: Limit your mobile phone calls. If you’re bursting out of your mobile phone plan each month it might be time to examine your habits. Can you limit your conversations or cut down your texting to save money? Or could you email or skype someone instead?
#13: Pre-made is pre-paid. Go for fresh with food where you can. Don’t get caught out buying pre-made things such as soup. It’s pretty easy to chuck a few vegies in a saucepan along with some stock powder and boil it up. Pre-made sauces (the add meat and vegies variety) can also be an expensive choice that could be replaced with a few basics such as stock powder, cornflour and garlic. It’s always good to make sure you’ve got a few basics in the fridge or cupboard so you’re not tempted to get take-away – even if it’s as simple as tinned fish, a cheap packet of pasta and sauce, or baked beans on toast as a stopgap.
#14: Buy a water bottle – and use it. Buying bottled water is crazy when you can refill from a tap. And resisting soft drinks, juice and flavoured milk will also save you plenty of money over time. Drink some water and eat an orange instead. It’s a lot cheaper, and better for your waistline too.
#15: Pack your own. Whether it’s work or an outing, there’s no doubt that food brought from home is going to be cheaper than lunch on-the run. It can get a bit tedious at times, so allow yourself to go really wild on occasion and buy takeaway. Otherwise bring your own and watch your mortgage start to be whittled away.
Original story by Carolyn Boyd, a property journalist and keen follower of Australia’s housing market.
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Australian banks’ preference for writing home loans rather than lending to business may pose a risk to the banking system and the overall economy, according to a leading banker.
Joseph Healy, business banking head of National Australia Bank, said the bias of banks toward retail mortgage lending could hobble the economy’s long-term growth by skimping on loans to small businesses. The money flowing into housing may create other distortions such as fuelling excessive investment, he said.
”With the apparent bias towards to the household sector, we shouldn’t discard the possibility of asset bubbles being created there,” Mr Healy said.
”We’re not saying we believe there is an asset bubble but shouldn’t close our minds to the possibility of that happening.”
Since the emergence of the global financial crisis, small businesses have complained that they have borne the brunt of tighter lending requirements, with interest rates on their loans falling less than other borrowers. In addition, competition among banks has been reduced as several smaller lenders either exited the market or where swallowed up by bigger rivals.
Mr Healy said banks’ tilt towards home loans meant fewer loans are available for business, effectively crimping the economy’s growth engine.
”This is ultimately bad for growth, bad for competition, bad for jobs, bad for business and in the end bad for Australia,” he said.
In 2000, every $1000 of home lending was matched by roughly the same amount for business. That ratio has since shifted so that today, for every $1000 of home lending, only about $600 is available for business, according to NAB research.
Home lending comprised 43 per cent of the lending of the big four banks – Commonwealth Bank, Westpac, NAB and ANZ – in 2000, but rose to 57 per cent this year. In the same time, business lending has dropped from 46 per cent to 35 per cent, according to NAB’s figures.
”The lack of access of finance has been a problem but also the cost of finance,” said Peter Strong executive director of Council of Small Business of Australia.
Banks are currently charging as much as 2 percentage points more than the standard mortgage rate to many small businesses, Mr Strong said.
Among the big four banks, NAB has the largest small-to-medium business loan book and the smallest residential mortgage book.
In contrast to the trends in most rich nations, Australia’s house prices have continued to rise even during the global economic slowdown. Analysts have cited loan availability but also a relatively strong economy and a shortage of affordable stock for the divergence.
Some of that price fizz is coming off, though, with home price growth moderating in the past few months. Even so, the recent prices gains have pushed the national city median home price to $468,000, according to RP Data-Rismark.
The Economist magazine last week said a ”fair value” analysis of global property shows Australian property the most overvalued of any of the 20 countries the publication tracks, based on a comparison of the current ratio of rents to prices to a long-term average.
Mr Healy’s comments come as analysts speculate that Australia’s major banks may be squeezed in coming months by rising off-shore funding costs, with the banks’ exposure to the residential mortgage market drawing greater scrutiny on global markets.
Mr Healy delivered a speech on business lending to the American Chamber of Commerce in Sydney this afternoon.
Professor of Economics & Finance at the University of Western Sydney Steve Keen lauded Mr Healy’s comments.
”I’m delighted to see somebody in the banking sector come out and say this because it’s really about speculation being funded by the banks rather than investment.”
”To me the essential thing banks should be doing is providing working capital to firms.”
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Standard variable loan popularity hits 18-month high
Despite the cost difference between fixed and variable interest rates dropping, June saw a higher percentage of Australians turning their backs on locking in their home loan rate.
According to the latest loan approval data from Mortgage Choice, Australia?s largest independently-owned mortgage broker, only 2.6% of new borrowers chose a fixed interest rate for their home loan. This compared to 3.3% in May and 1.8% in April.
“Many people in the industry were expecting a rise in fixed rate demand last month but that hasn’t happened with our customers. Instead we’ve seen this product’s popularity reduce by one fifth,” said Mortgage Choice senior corporate affairs manager, Kristy Sheppard.
“Further, our June data shows fixed rate loans have represented less than 5% of all new approvals for the past 10 months and less than 10% of approvals for two years now.
“It was interesting to note the proportion of fixed loans to new borrowers dropped in all states apart from Western Australia, which was a complete reversal of last month’s trend.
“So, although we’ve seen a swift rise in rates from October through to March and the cost of fixing a loan continues to decrease, demand for variable interest rates remains at near-record highs. Perhaps the price tag is still too high when potential borrowers weigh up the advantages and disadvantages of fixed versus variable.
“Or perhaps whispers of a much steadier cash rate are seeping through and wielding influence over borrowers? decision processes.”
Standard variable loan demand reached 50.1% of June loan approvals, which was an increase on 47.8% in the month prior and the highest level reached since October 2008.
One of the key reasons for the popularity of standard over basic variable loans is the plethora of quality professional packages’ on offer with these products, which attract customers with benefits such as rate discounts, ‘Gold’ credit cards and other special features.
Other key home loan choice trends for the first month of winter were:
Basic variable: fell to 41.9% from 43.5%.
Line of credit (often popular with investors): fell to 5.3% of approvals from 5.4%.
Bridging (for those selling property while purchasing another): remained well below 1%.
Note: Mortgage Choice’s annual loan approvals are approximately 40,000 nationally and therefore provide a clear insight into the product preferences of housing loan borrowers generally.
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S&P credit ratings expert confirms the strength of the housing sector but questions the benefit of high home prices for society
A managing director of a credit ratings agency responsible for scoring the quality of Australia’s mortgage debt has questioned the social impact of the nation’s soaring house prices, even while she confirms the strength of the sector.
Standard & Poor’s managing director of rating services Fabienne Michaux said the strength of Australia’s mortgage quality is a success on the capital markets but the high valuation of homes underlying the debt presents a long-term risk to the basic fairness in society.
“The social implication of house prices in the longer term is a key issue,” she said. “One of the things people were proud of was that (Australia) was fairly egalitarian and even and everybody had basic rights to housing and basic education and good healthcare.” “Those are the sorts of things that start to chip away when you’ve got people who can’t afford to actually to find somewhere to put a roof over their head.”
The median national city median home price was $468,000 in May, according to RP Data-Rismark, following years of nearly uninterrupted increases in value, driven by a shortage of available new land, a cumbersome building approvals process and tax incentives that reward owners to purchase and hold second homes.
There is an estimated 200,000 home shortage in the nation, expected to worsen as a recovery in building stalls. Ratings agencies such as Standard & Poor’s grade the quality of the mortgage debt that is repackaged and on-sold by local lenders to institutional investors.
While confirming the strength of assets underlying Australia’s residential mortgage backed securities market, which has issued $352 billion since 2000, Ms Michaux noted home owners are unwise to take too much satisfaction in becoming property millionaires.
“Ultimately the utility of the house is still that you’re living in it,” she said. “When you pass it on, it’s still one house. If you’ve got two kids you’ve got half a house each.”
Story by Chris Zappone Fairfax Digital
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