Category: Home Loan Guides

A cash rate can be described as the interest rate that a central bank like the Reserve Bank of Australia charges commercial banks for loans. This rate is also known as the base interest rate or bank rate. At the beginning of each month, the central banking authority announces if the official RBA Cash Rate will remain the same or change. This announcement has huge implications for lenders, banks, and everyday Aussies. So what does the RBA cash rate mean exactly? How does it work? And what ramifications does it have for you? Find out more in this blog.

What Exactly is the RBA Cash Rate?

The RBA cash rate is the rate set by the central banking authority, which represents the RBA interest rate at which lenders and banks in the country have to repay the money they borrow. The Reserve Bank of Australia describes the rate as an “overnight money market interest rate”. The justification behind this is that banks often issue loans to each other and the process to do so is done overnight. While the commercial banks in the country have the freedom to set their own interest rates for borrowing, the interest rates associated with loans and what they offer on savings are linked to the RBA cash rate.

What Does the Reserve Bank of Australia Do?

The RBA is the central banking authority of Australia and is responsible for drafting the basic monetary policy and maintaining the strength of the nation’s financial system. The RBA board has three main duties to quote the organisation's charter. Namely, to contribute to the best of its abilities to maintain the stability of the currency in Australia, maintain employment in Australia, and promote the welfare and economic prosperity of the Australian people.

One of the main responsibilities of the RBA board is to determine the official cash rate. On the first Tuesday of every month (excluding January), the board convenes to deliberate on the monetary policy and to discuss whether or not to bring changes to the prevailing cash rate. These meetings generally lead to one of three conclusions- lower the cash rate to stimulate borrowing and spending in the country, raise it to keep inflation in check or keep it at the same level.

How Often Does the RBA Change the Cash Rate?

Even though the RBA board has the power to alter the cash rate during each of its monthly meetings, the RBA cash rate increase announced in May 2022 was the first rate change in over a year. The previous RBA cash rate was announced in November 2020, when the rate was lowered to 0.10% from 0.25% to negate the prolonged effects of the Covid-19 pandemic. The cash rate remained steady until the rise to 0.35% in May 2022, which was succeeded by an increase of 50 basis points in June and July.

What’s the RBA Cash Rate History?

Until the recent cut, the RBA cash rate had been experiencing a steady decline since November 2011, when the rate was brought down to 4.50%. That is a stark contrast to some of the highs of the RBA cash rate from the 20th century when it reached its peak of 17.50% in January 1990. It wasn’t until September 1991 that the figure fell lower than 10% to 9.50%.

Why Does the RBA Change the Cash Rate?

The Reserve Bank of Australia considers several factors while deciding whether to change the cash rate. Given below are some of the factors that affect the RBA’s decision to change the cash rate:

Inflation

Inflation can be defined as the rise in the price of commodities and items from time to time; this is usually determined on an annual or quarterly basis and is the main indicator of an economy’s performance. The RBA has set a medium-term inflation benchmark of 2%-3%. If inflation increases too much, it usually raises the cash rate to help Australians to maintain their buying capacity. If the inflation rate is below the target benchmark, the RBA might lower or leave the cash rate unchanged.

Employment

The employment level in a country is a major indicator of an economy’s performance. If the unemployment rates in Australia are high, the RBA might lower the cash rate to encourage investment and spending in the economy. This will directly result in the creation of more jobs in the country. But when job creation is concerned, the unemployment rate is not the only thing that is taken into account by the RBA. Even if the unemployment rate is low, the RBA might opt against raising the cash rate if wage growth is also low. This is because slow wage growth tends to be in tandem with low inflation and sluggish economic growth.

Economic Growth

The RBA has stated that the economic growth in Australia is usually depicted as a percentage of the national gross domestic product- the cumulative value of all the goods and services produced in the country annually. If the economic growth shows signs of slowing down, the RBA might decide to cut the RBA cash rate as a measure of economic stimulus. This was last experienced in 2020 when the board decided to set the rate at its lowest value in history in a bid to counter the economic repercussions of the Covid-19 pandemic. In theory, this might be an added incentive for financial institutions and consumers to borrow and spend money, which might put the economy on an upward spiral.

Does the RBA Cash Rate Affect the Banks’ Interest Rates?

Even though the RBA’s monthly cash rate announcements are crucial in influencing how lenders and banks determine their interest rates, they are not the only things considered while making the decision. As the RBA dictates, three main factors determine how lenders and banks determine their interest rates and whether to raise or lower them. Given below are each of these factors:

Funding Costs

Funding costs can be defined as the interest rates applicable when the bank borrows money and provides on their savings account options. If the funding cost rises, a bank may be inclined to increase the interest rates it charges its borrowers to remain profitable. However, if the lending rates increase, it might lead borrowers to be more wary and borrow less. Therefore, banks must balance these factors to remain profitable.

Competition From Other Banks

Australia's banking and lending marketplace is highly competitive, and to remain profitable, they must compete for borrower’s money. This competitiveness can impact the interest rate movement; banks and other financial institutions may choose to lower their lending rates or raise interest rates on their savings account to attract new refinancers and customers.

Default Risk

Banks and other financial institutions are usually concerned with borrowing risk, so before lending money to a borrower, they will carefully analyse the default risk of the borrower. If the bank or lender determines a certain type of lending to be riskier, for example, lending to borrowers who plan to buy an investment property to rent out to tenants, they will typically raise the interest rate on that type of lending.

How Does the RBA Cash Rate Affect Home Loans?

While the RBA cash rate does not directly affect home loan interest rates, and banks and lending institutions are not mandated to follow RBA directives, most will consider the RBA cash rate while deciding their own interest rates. When the cash rate is low, lenders and banks in Australia can be expected to offer lower interest rates to first-time homebuyers and refinancers in the housing sector. However, an increase in the cash rate may mean that home loan rates can go up. This is because banks prefer to absorb and pass on the cost of the rate hike.

How Does the Cash Rate Affect Deposits?

Usually, the up-and-down volatility of the RBA cash rate has a similar effect on the savings account and term deposit interest rates. If the RBA cash rate increases, banks tend to increase the interest rates on deposits, encouraging people to make deposits in savings accounts to generate interest. Alternatively, if the cash rate decreases, banks will likely provide lower interest rates on deposits, implying that people will earn less interest from their savings.

Stamp duty is a tax levied on certain legal documents to make them valid. The most common stamp duty is charged on property transactions, such as selling a house or land. Stamp duty is also charged on other legal documents, such as leases, mortgages, and transfers of shares. In some jurisdictions, stamp duty is a transfer tax or registration fee.

The stamp duty payable depends on the value of the property being transferred. It is collected by the Office of State Revenue and funds various government services and programs. This blog pertains to the. stamp duty concession in NSW and what it entails.

How Much is Stamp (Transfer) Duty in New South Wales?

The amount of stamp duty payable on a document depends on the document type and the value of the documented property or transaction. The stamp duty rates applicable in New South Wales from July 2022 are tabulated below:

Property Value	Stamp Duty Rate
Up to $15,000	$1.25 for every $100 (minimum $10)
$15,000 to $32,000	$187 + $1.50 for every $100 over $15,000
$32,000 to $87,000	$442 + $1.75 for every $100 over $32,000
$87,000 to $327,000	$1405 + $3.50 for every $100 over $87,000
$327,000 to $1,089,000	$9,805 + $4.50 for every $100 over $327,000
Above $1,089,000	$44,095 + $5.50 for every $100 over $1,089,000

When to Pay Transfer Duty?

An individual residing in New South Wales (NSW) has to pay transfer (stamp) duty in the following cases:

• If an individual buys a property, investment property, vacant land, farming land, commercial property, industrial property, or a business that includes a land
• If an individual acquires land or interest in the land/property without buying the same.

How to Calculate Stamp (Transfer) Duty in New South Wales?

You need to know a few things to calculate New South Wales (NSW) stamp duty.

• First, you need to know the dutiable value of the property. This is the total value of the property, including any improvements made.
• Next, you need to know the applicable duty rate. This will depend on the type of property you buy and your circumstances.
• Finally, you need to calculate the stamp duty payable.

Stamp (transfer) duty is paid based on the property’s sale price or market value (whichever is higher). The standard and premium stamp duty are charged on residential properties worth more than $3 million.

Additionally, the Sydney Customer Price Index (CPI) annually renews the threshold amount. However, if the buyer and seller are related or if the seller is not transferring the whole property, in that case, a qualified individual must visit and value the property.

Stamp (Transfer) Duty Exemptions to First Home Buyers

Legislative consent was issued to the Property Tax (First Home Buyer Choice) Act 2022 on November 11, 2022. Buying a first home now allows first-time buyers to choose between paying stamp duty on the initial sale and annual property tax. The Revenue NSW website offers a refund facility after January 16, 2023, available to eligible first-home buyers during the transition period.

To be eligible for the first home buyer stamp duty exemption, an individual must meet the prerequisites laid down by the government:

• An individual must be buying or building their first home
• The property (inclusive with land) must be valued at less than $750,000

The NSW Government offers a range of stamp duty exemptions and concessions for first home buyers. If you're a first home buyer purchasing a property in NSW, you may be eligible for a full or partial exemption from paying stamp duty.  You can visit the Revenue NSW site to learn more about thresholds, exemptions and how to contact your state office.  First-home buyers may also receive stamp duty concessions in NSW for

• New homes valued between $650,000 and $800,000
• vacant land valued between $350,000 and $450,000When is the stamp duty exempted in NSW?

An individual is eligible for stamp duty exemptions or concessions in the following cases:

• In the event of being a beneficiary of a deceased estate
• In the event of transfer between a married couple or de facto couple.

For a majority of Aussies, paying the price of a property upfront is implausible. It is precisely why millions of homeowners opt for a home loan that can be gradually repaid over time. When you play the game of loans, it is imperative that you have a deep understanding of the different trade-offs associated with each product. Educating yourself thoroughly on each loan type is a sure-shot way to ensure you have adequate information to make a well-informed decision. In this piece, we will take a look at the home loan product, its types, benefits, advantages and everything else you need to know.

What is a Home Loan?

In the simplest terms, a home loan is the amount of money an individual can obtain from a bank or loan provider in order to finance a purchase of a property. The borrower and lender come to an agreement to repay the loan amount over a loan tenure. The borrower is required to pay back the loan amount along with interest applicable throughout the tenure.

Types of Home Loans in Australia

Given below are the three main types of home loan products available in Australia:

Fixed Rate Loans

A fixed-rate home loan is a type of loan on which the interest rate is set on a pre-agreed amount and is typically fixed for a period of time between one year and five years. Since the rate is fixed, the amount you have to repay each month remains constant throughout the tenure and remains unaffected by fluctuations in interest rates.

Benefits

• Gives you the certainty that your repayment amount will not change over the loan tenure
• If the interest rate rises, you won't have to pay more till your fixed rate term expires
• If your fixed rate interest is low, you can end up saving thousands of dollars

Drawbacks

• Fewer home loan features
• You might not be able to make extra repayments
• It may be pricey or difficult to change your loan

Variable Rate Home Loans

What if the interest rates are not fixed for the particular loan tenure? That’s where variable loan rates come into effect. In these loans, the interest rates may be subject to change over a period of time depending on a number of factors, like how the lender responds to the changes in the RBA cash rate. It implies that you could end up paying more than you anticipated each month.

Benefits

• They have an introductory or teaser interest rate at the beginning of the loan tenure
• Homebuyers can opt for a more expensive home
• Provide more flexibility with the loan repayment

Drawbacks

• The repayment amount will rise if the interest rate increases
• The payments fluctuate over the loan tenure 
• Variable mortgage rates are more complex to understand

Split Home Loans

Confused between a fixed rate and variable rate loan? You can always opt for a split home loan; this is basically a mixed home loan alternative that provides the dual benefits of the flexibility of a fixed-rate loan and the security of a variable-rate loan. In this type of loan, you are required to choose a tenure of the loan you would like to keep at a fixed rate, and the remaining tenure is applicable for a variable rate of interest. 

Benefits

• The fixed portion of your home loan tenure will provide you with security against the rise in interest rates
• The variable portion allows you to save money when the interest rates fall
• Relieve the stress from constantly having to manage your household budget

Drawbacks

• You will have to pay more fees and charges on the part of the home loans that have been split
• You will potentially need to pay more variable components when the interest rate rises
• You can lose access to potential interest rate drops

What Is The Eligibility Criteria for a Home Loan?

Every lender has a set of criteria to process the home loan application. However, some basic criteria are the same with all the lenders, which allows them to determine if you will be able to repay the loan without any hardship. Given below are the eligibility criteria for a home loan in Australia:

• The minimum age of the home loan applicant should be 18 years old; there is no maximum age to make a loan application
• The applicant should be a permanent resident or citizen of India
• The house should have a clear title deed without any encumbrance 
• Most lenders in Australia prefer applicants who have a deposit of at least 20% of the property value 
• Lenders prefer an applicant with a high credit score of over 750

What Are The Documents Required to Apply for a Home Loan?

The documents you will be required to submit in Australia depend on the loan you are applying for and your home-buying circumstances. Given below are some of the common documents that you will be required to submit:

Identity Documents:

Primary Documents	Australian passport  Foreign passport Australian Driver’s License Australian learner permit
Secondary Documents	Australian birth certificate Australian citizenship certificate Medicare card ATO assessment notice (less than 12 months old)

Income Documents

Salary or Wages	Bank account statements Latest payslips Employment letter detailing salary and employment Tax returns statement not older than 18 months
Self-employed Income	Tax returns statements and Notice of Assessment not older than 18 months
Government Income	Bank accounts statements showing the credit of payment A letter from Centrelink outlining the payments

Advantages and Disadvantages of Types of Home loan

Given below is a quick look into the differences between each loan type and their advantages and disadvantages:

Type of Loan	Advantage	Disadvantages
Fixed-rate Home Loans	Repayments do not increase with a rise in interest rates Makes budgeting easier and more accurate At the end of the loan tenure, you can get another home loan at the fixed interest rate or switch to a variable interest rate for the remaining tenure	Early payment of a loan can be penalised Repayments of loans do not decrease with a fall in interest rate The scope for additional repayments is limited
Variable Rate Loans	These are ideal to pay consistently pay off an amount over the loan tenure They come with additional features and flexibility Repayment amounts are lowered when the interest rates fall	The repayment amount will increase when there is a rise in interest rates They are not ideal to pay off loans quickly Have fewer loan features as compared to standard loans
Split Rate Loans	Tackles concerns about rising interest rates Additional repayment options are available Is ideal for more accurate budgeting	Limited options for additional repayments The repayment amount will increase when the interest rates rise

Fees and Charges of a Home Purchase

Homebuyers usually incur two types of expenses; upfront costs while applying for the loan and ongoing costs when they have obtained the property. It is important to know your mortgage finances to understand both of these expenses:

Upfront Costs

Here are some costs a borrower will have to bear while obtaining a home loan in Australia:

• Lenders Mortgage Insurance
• Legal and conveyancing fees
• Building and pest inspections
• Stamp duty
• Buyer's agent
• Removalist costs
• Home loan fees

Ongoing Costs

Here are some of the expenses that a homebuyer will have to bear once they have purchased the concerned property:

• Council rates
• Strata and body corporate
• Regular maintenance and repairs
• Home and contents insurance

There could be numerous reasons why you might be struggling to repay your loans/mortgages. But there is one solution– refinancing of mortgages. It will help you refinance your existing mortgage sooner. Mostly, loan refinancing shortens the payment term of the loan and lowers the interest rates.

Read further to know what refinancing is, the need for refinancing the loan, how the process can be done, benefits, and more.

What is Refinancing?

Refinancing refers to getting a new loan to repay one or more existing loans. Typically, borrowers refinance to reduce their monthly payments or to achieve lower interest rates.

Refinancing can also be utilised to obtain a loan with a longer duration and lower monthly payments for borrowers who are having trouble repaying their debts. The overall amount will rise as interest must be paid over a more extended period in certain situations.

Why is Refinancing of Mortgages Needed?

There are various reasons why refinancing housing loans is essential. Some of them are as follows:

• There are multiple kinds of loans available for refinancing.
• The borrowers receive a lower interest rate on the refinancing of mortgages. 
• The borrowers can use their equity to borrow more funds.
• The tenure of the loan can be shortened. 

How to Refinance Your Mortgage?

There are eight simple steps to refinance the loan. They are as follows:

Step 1: Define Your Financial Goal

The first step to starting any process is to establish a goal. If you are refinancing, there should be a valid reason you need it — whether you are refinancing to reduce the loan tenure, lower your monthly payment, or pull out funds for debt reduction or home improvements.

You may have to pay less every month if you reduce your interest rates but restart the amortisation period on a 30-year mortgage. However, over your entire loan tenure, you will be paying more. This is mainly because you will pay most of your interest in the initial years of your loan tenure.

Step 2: Keep Track of Your Credit History and Score

As you did for your previous home loan, you must meet the requirements for a refinance. The better refinance rates lenders will offer you depend on your credit score, as do your chances of having your loan approved by underwriters. Your credit score must be at least 620 for a standard refinance, while some lenders may accept 580 for an FHA or VA refinance. However, they will only let you borrow a little.

While it is possible to refinance your mortgage with adverse credit, it is advisable first to try to improve your score for a few months.

Step 3: Gauge the Amount of Equity You Have

Home Equity equals the overall value of your home minus your total loan amount. You can review your mortgage or loan statement to determine your current balance. Then, find a real estate agent or go through online home search sites to evaluate the current market value of your home. Your home equity represents the difference between the two. For instance, if you still owe $250,000 on your home and it is worth $325,000, your home equity will be $75,000.

You might be able to refinance a traditional loan with as little as 5% equity, but if you have at least 20% equity, you'll get better loan terms and pay lesser fees (and won't have to pay Private Mortgage Insurance, PMI).

Step 4: Compare with Other Lenders

Don’t settle for the first lender you find. The right way to proceed is to compare various lenders. Request quotations from at least three to four different loan companies. Check their interest rates, loan tenure, and processing fees, discuss the right time to lock in your rate and then decide on a lender. By doing so, you won’t have to worry about increasing interest rates before your loan closes.

Besides this, consider comparing different loan fees and whether they should be paid later as part of your new loan or be paid fully now.

Sometimes, lenders provide no-closing-cost refinances but add to the loan balance to compensate or impose higher interest rates.

Step 5: Keep Your Paperwork Handy

Gather all the supporting documents, such as federal tax returns, recent pay stubs, brokerage/bank statements, and other papers your lender demands. Your lender will also examine your net worth and credit. Therefore, it's crucial to reveal all your liabilities and assets upfront.

Keeping your paperwork handy before indulging in the refinancing process will make it quick and smooth.

Step 6: Prepare for Your Home Appraisal

To assess the current market value of your home, mortgage lenders usually require a home appraisal. The process is the same as when you bought the home.

An outside appraiser will assess your home based on specific standards and comparisons to the cost of comparable properties recently sold in your neighbourhood.

The assessment will cost you a few hundred dollars. Any upgrades, expansions, or significant repairs you've made after buying your house should be disclosed to the lender or appraiser to receive a better evaluation.

Step 7: Come to Closing with Cash If Required

The closing disclosure and the loan estimate detailed additional charges for closing costs necessary to complete the loan. At closing, you might have to pay between 3 and 5 per cent of your total loan.

You may be able to finance the expenses—which can run into the thousands of dollars range—by amortising them over the term of your loan.

However, you will probably pay more for it over time due to a higher interest rate or total loan amount, which adds to more interest. (Yes, they will likely charge you a price as well.) If you have the money, it's frequently more logical financially to pay in advance.

Step 8: Keep Track of Your Loan

Store all your important documents related to the mortgage or loan in a safe place and set up automatic payments to ensure you stay updated on your mortgage/loan.

Certain banks will also give you a lower rate if you set up autopay. What to think about Your loan could be resold by your lender or servicer on the secondary market soon after closing or years from now. Therefore, keep an eye out for mail advising you of such changes. It also means that you will now owe mortgage payments to a different firm. However, the terms themselves should remain the same.

Benefits of Refinancing

The following are the benefits of refinancing mortgages:

• Your interest rate can be decreased.
• Your monthly budget could be expanded and your home payment reduced.
• You could shorten the loan's term to make early repayments.
• You could withdraw money from the equity in your property at closing.
• You might combine your bills into one easy payment; some homeowners utilise refinancing to combine their college loans or other debts.
• You might switch from an adjustable-rate mortgage to a fixed-rate one or the other way around.
• Private mortgage insurance premiums may be cancelled, so you won't have to pay them.

Accessing Equity to Refinance

You can access your home equity for many purposes, including renovating and improving your home or visiting your dreamy destination.

Why Refinancing a Home Loan Can be a Sensible Step?

Refinancing home loans could be beneficial in the following ways:

#1: Save More with Lower Interest Rates

New borrowers get the finest discounts from lenders. Therefore, your lender might not extend the same incentives if you are an existing borrower. Consequently, it makes sense in these situations to transfer or refinance your mortgage.

Remember that you can benefit from a windfall gain even if home loan interest rates are reduced by 0.5%. PNB Housing is renowned for providing some of the business's lowest interest rates on house loans. The rates vary from 8.00% to 10.50% and can help you save more money.

#2: Become Debt-Free by Reducing the Loan Tenure

If you've had a house loan for a while and your financial condition has improved, you might want to refinance it with a shorter term to reduce your monthly payments and get rid of the "debtor" label more quickly. Financial institutions typically allow you to prepay a loan in parts as and when you like. Most financial institutions will enable you to modify your tenure or EMI. You can also consider refinancing or transferring your balance.

Raising the EMI might shorten the loan length by refinancing a home loan. If the new lender's rates are lower than your current lender's, you can pay off the loan much sooner than the agreed-upon term and raise your credit score.

#3: Change Your Lender to Get Better Service Quality

Borrowers sometimes complain that their lender is unresponsive to their needs. The company's executives in charge of customer service are unfeeling, unable to communicate effectively, or rigid. Additionally, some lenders impose higher costs or need to provide flexible payment options.

#4: Get More Money

A costly endeavour, buying or building a house has a considerable risk of cost inflation. If your current lender declines to provide more funds, you might apply for a home loan refinance.

Use a home loan eligibility calculator to determine whether your monthly income can support the increased burden before requesting more funding from a lender. PNB Housing offers a free home loan EMI calculator on its website to make figuring out your monthly obligations easier.