Last weeks decision by the Reserve Bank to raise interest rates by a further 25 basis points has been met with mixed reaction. First Home buyers and low income households will feel the pinch the most while other parts of the market aren’t as likely to be affected – those who have budgeted prudently (or at least those who have taken our advice) will have built a more normal rate of mortgage payments into their financial plans and investors are probably thankful for the rate rise as it means less competition in the market place for relatively scarce real estate stock.

If the financial markets are anything to go by, the tightening cycle of interest rate rises has some way to go. As can be deduced from our interest rate chart by February next year financial markets are suggesting the cash rate will be at 4.0% and by June about 4.75%. If banks move in line with the cash rate, this means the average standard variable rate will be about 6.8% in February and 7.55% in June. A long way from where we were a couple of months ago.

However, in the interests of relativity as the graph below from RP Data shows the average mortgage rate over the last 10 years has been 7.25% which highlights the fact that mortgage rates are still well below average and are likely to remain so well into 2010.

On the day where we all get together and pin our spare change on a horse, the RBA pulls the reins and increases the official cash rate by 0.25%.

The RBA argues that increases are needed to cool the pace of the economy and let some steam out of the housing market, so that inflation stays on course for its target in the years ahead.  So who wins when rates go up?

The Winners: Cash holders earning more interest.

The Losers:  The Mortgage Belt. It’s another $15 a week on a $300,000 home mortgage.

Ok, I hear you….its not as simple as that. What about the effect this will have on home buyers in the market, what about house prices, the Aussie dollar, exchange rates, inflation, unemployment? How do you really know if you win or lose?

Well, it’s a bit like explaining how $15 a week less in your pocket means you don’t buy your wife a bunch of flowers this week, and whether or not she still makes you breakfast in the morning and how that impacts you getting to work on time, and how your boss frowns when you arrive late, and then he doesn’t give you a pay rise next month, and then you don’t buy your wife flowers again.

In an interconnected economy, it all goes around in circles…just like the runners in the Melbourne Cup.

So put your money in wise investments and make sure you have enough savings to run the RBA interest rate race in the coming year, with more rate rises expected.

P.S. Don’t forget the flowers.

The Federal Government initiated several incentives for First Home Buyers to improve construction activity in the new home market. With recent changes to Grant amounts, there are still quite a few healthy Grants on offer. Below is a quick summary for NSW property purchases:

Grant Offer 1) First Home Buyer purchasing an established home to live in:

v  $7,000 First Home Owner Grant until 30/6/2010

v  $3,500 Commonwealth Boost available until 31/12/2009

v  First Home Plus Stamp Duty Exemption up to $500,000 (up to $17,990), and sliding scale to $600,000 up to 30/6/2010

Example 1: Total Benefit if you exchange on a $500,000 property by 31/12/09 = $28,490

Example 2: Total Benefit if you exchange on a $500,000 property by 30/06/10 = $24,990

Grant Offer 2) First Home Buyer purchasing a new home to live in:

v  $7,000 First Home Owner Grant until 30/6/2010

v  $7,000 Commonwealth Boost available until 31/12/2009

v  $3,000 NSW Supplement until 30/6/2010

v  First Home Plus Stamp Duty Exemption up to $500,000, and scaled to $600,000 up to 30/6/2010

Example 1: Total Benefit if you exchange on a new $500,000 property by 31/12/09 = $34,990

Example 2: Total Benefit if you exchange on a new $500,000 property by 30/06/10 = $31,990

Grant Offer 3) Any Home Buyer or Investor….. up to 31/12/09     50% discount on Stamp Duty for a new home/unit.

v  The NSW Housing Construction Acceleration Plan (HCAP) halves your Stamp Duty on a purchase of a new home up to $600,000. It is available to anyone who doesn’t qualify for the First Home Buyer grant, and it is unlimited so you can buy 50 new homes and pay half the stamp duty on all of them.

Example 1: Total Benefit if you exchange on a new $500,000 property by 31/12/09 = $8,995

Things to look out for: There are conditions to receiving the grant, deadlines to meet, and all states have different amounts on offer.

Need more info? : If you are thinking of buying property in the next six months, Call Plan Assist’s Loan Advisor Team on 02 9449 2333 to learn how you can receive these Grants.

The Reserve Bank (RBA) has increased interest rates by 0.25 of a percent (25 basis points) taking the official cash rate to 3.25%. This is the first time rates have gone up since March 2008.

Strong retail sales, rising consumer confidence and a rebound on share markets worldwide has the RBA at the ready to lift rates.

”Economic conditions in Australia have been stronger than expected and measures of confidence have recovered,” Glenn Stevens, governor of the RBA said.

”The global economy is resuming growth, with economic policy settings likely to remain expansionary for some time, the recovery will likely continue during 2010 and forecasts are being revised higher.”

”Growth in China has been very strong, which is having a significant impact on other economies in the region and on commodity markets.”
The central bank does not want the economy’s overall health to be threatened by underlying inflation or unsustainable borrowing activity, which can be triggered by low rates.

Following the announcement all four of the big banks – Commonwealth Bank, Westpac, National Australia Bank and ANZ – said they have placed their variable interest rates under review.  CBA, NAB, and ANZ all have today passed on the 0.25% increase which means an increase of $40 per month to the average monthly payment for the typical $300,000 mortgage. The extra cost may stretch some household budgets at a time when unemployment remains on the rise.

Analysts say that more increases are on the way, with many predicting the official interest rate could be as high as 4.0% to 4.5% by the end of next year.
Mortgage holders, if they have not already done so, need to prepare for the predicted increase in rates.

To find out how to prepare for the coming increases, call Plan Assist on 02 9449 2333 to speak to our Loan Advisor team.

In the past, self employed borrowers and investors were able to declare their income using Low Documentation Home Loans. Proof of income was simple by signing a “Low Doc Declaration Form” replacing the need to provide any proof of income such as 2 years business and personal tax returns.

This week we have been notified that most of the Low Doc Home Loan lenders that supplied this product have joined the other major banks and now require copies of BAS Statements for 6 to 12 months as additional proof.

This will impact many self employed business owners and professional investors in the coming year who may have complex tax structures, or multiple source of income that aren’t recorded on BAS statements. It could stop quite a few investors with their next purchase, or anyone who has used this policy in the past.

It’s extremely important for any client considering a property purchase to talk to an exeprienced Loan Advisor BEFORE they exchange on a property as many changes have occurred throughout the finance world in the past twelve months.

To discover alternatives for your next purchase and strategies around this policy change, call 02 9449 2333 to speak to our team of experienced Plan Assist Loan Advisors.