Mortgage Rates

So my 12 year old daughter asks, “Why is it that any time there is good news about the economy they also say that there is pressure on mortgage rates to rise? Why does the good news also mean bad news?”

A fair question in my opinion. Scan the headlines – “Jobless Numbers Down – Pressure on Mortgage Rates”, “Promised Tax Cuts may see increase in Mortgage Rates”, “Third Successive Quarterly Economic Growth figures see Mortgage Rates set to Rise”. Then, of course, there are other factors totally out of our control which can also affect mortgage rates such as the recent global liquidity and credit crisis emanating from the US economy.

Mortgage rates are influenced by the official interest rate or Target Cash Rate as set by the Reserve Bank. When the Reserve Bank changes the official rate and in turn, mortgage rates, it is attempting to influence expenditure in the economy. When expenditure exceeds production, inflation results. Therefore mortgage rates are used as a tool to control inflation as a part of monetary policy.

Higher mortgage rates affect borrowers’ cash flows and reduce the amount of money that consumers are able to spend on goods. Lower mortgage rates have the opposite effect. And because lower mortgage rates mean that people have more to spend it puts pressure on prices due to increased demand it puts further inflationary pressures on the economy.

In the dizzy days of the late 1980s inflation was rampant and mortgage rates peaked at 17% per annum. The high mortgage rates severely limited housing affordability. Since those days governments and the Reserve Bank have tended to micro manage the economy to avoid major peaks and troughs. Small increases in mortgage rates, although politically unpopular, are an effective means of stabilising the economy. A little research into the history of mortgage rates in this country will reveal that, at current levels, they are still relatively low.

It should be noted, however, that when we talk about mortgage rates we are generally referring to “nominal” mortgage rates (as nominated in loan contracts, advertising etc). Economists, on the other hand, talk in terms of “real” mortgage rates. So what is the difference between nominal and real mortgage rates? Real mortgage rates take into account the effect of inflation so that Real Mortgage Rates = Nominal Mortgage Rates minus Inflation Rate.

In 1989 when the nominal mortgage rate was 17%, inflation was running at approximately 8% per annum. Therefore the real mortgage rate would have been 9% per annum. Today nominal mortgage rates are approximately 8% per annum and inflation is running at around 2% per annum so that the real mortgage rates are 6% per annum.

In fact if we research real mortgage rates in Australia over the last 25 – 30 years we find that they have hovered within 2% per annum and 10% per annum, compared to nominal mortgage rates which have been between 6% per annum and 17% per annum over the same period. Obviously it is much sexier for politicians to spruik about massive reductions in nominal interest rates.

So in summary, to answer my daughter, an occasional little pain with mortgage rates may lead to a huge gain in the overall scheme of things.

Why Remortgages And Secured Loans Make Good Debt Consolidation Loans

The words remortgages and secured loans are fairly well known to most.

It is important to start by explaining the different uses for these three home loans.

Whenever a person makes up his mind that he wants to buy his first property or to move from one bought property to another, a mortgage is the order of the day, as in fact it is the means by which an individual buys a home.

Normally homeowners choose to move home every two or three years, and in general their property will be worth considerably more when they leave it than it was at the being, due to the fact that properties have the habit of doubling every seven years approximately.

In the past, many more people were in the position of being able to get a mortgage than now a days, due to the restricting of loan to values, in addition to much less relaxed underwriting in general.

Up to the start of 2007, 125% mortgages were available from quite a number of lenders, but over the course of the next three years loan to values were 85% maximum from most lenders and from 90% for a few.

Although, as already stated, many people opt to move house every few years, others prefer to stay put and choose to change mortgage every so often that usually corresponds with the end of their mortgage tie in period.

This changing from one mortgage provider to another is what is known as a remortgage which is sometimes for the same amount as the current mortgage, while at other times a larger balance is requested to raise funds for any number of reasons, including weddings, home improvements, debt consolidation etc.

Just like mortgages, remortgages fell, as they have the exact same underwriting as mortgages.

Mortgages and remortgages are first chages on a property, and this is the main difference between them and secured loans, as a secured loan is a second charge that ranks behind the mortgage.

Secured loans have a vast array of purposes, and are to a great degree all purpose loans that can pay for cruises, school or college fees, or also makes excellent consolidation loans.

A few years ago secured loans were an extremely popular way for homeowners to borrow, but due to the same reasons as the other two home loans, these homeowners loans also decreased.

Now at last however, matters are improving with a slight relaxing of loan to values, acceptable status etc, all meaning that homeowner loans in general are in a much better shape than they have been for many years.

Identifying Best Home Mortgage Rate

One of the best ways to fund purchasing of your home is to go in either for a mortgage or a home loan. It is necessary for you to control your expenditures to ensure that you are financially strong enough to finance a home loan. This requires you to compare the competitive rates offered by various lending institutions and also the cost of mortgage to obtain the best home mortgage rate. A judicious comparison of various mortgage rates will enable you to obtain the best mortgage rate that suits your needs.

This is essential because taking extra efforts of comparing the costs of mortgage for various lenders will enable you to select the best mortgage lender thereby saving your hard earned money.

Before taking the step of identifying the best mortgage rate, it is necessary for you to prepare a cash flow statement to present to the financial institutions. Next you must collect the necessary mortgage data from lenders, banks, thrift institutions, mortgage companies and credit unions. You should not overlook the option of engaging a mortgage broker if you find it difficult to prepare a cash flow statement on your own. You will find that the mortgage broker has ready information on various mortgage offers that the financial institutions give and this will help in you identifying the best home mortgage rate.

You can find out the financial institutions that offer the best home mortgage rate by tabulating the institutions vs. current mortgage rates and sorting them out either in the descending order or ascending order. This will help you in locating the institution with low/ high interest rates or in between interest rates. It is advisable to check on the fixed as well as adjustable interest rates so that you have an idea about the fluctuations in the market regarding mortgage interest. 

In addition to the low mortgage interest rates, there are a number of other things that you should consider before making your final decision. These are annual percentage, fees to be paid to the lenders and points that are required to get lower home mortgage interest rates. A number of other expenses are involved in taking the home mortgage loan such as underwriting fees, fees that are to be paid to brokers, transaction settlement and any other closing costs levied by the institution. In order to negotiate with the financial institutions for getting the best mortgage home loan, the above information are vital.

You will find that the various lending institutions offer different interest rates for the mortgage loan for mortgages that are similar in nature and these rates vary on a daily basis. In order to get the best home mortgage rate you should negotiate with various lenders so that you can get reductions in your mortgage interest rates and also get waivers by doing a bit of comparison shopping.

The home mortgage calculator is one of the most powerful tools available for calculating the best home mortgage rate and also to find whether a particular mortgage is affordable to you or not. This will reduce your headache in calculating this data without the calculator.

After selecting the best home mortgage rate as well as the lender, you must enter into a legally binding agreement with the lender; in addition, you should take a written lock-in from the mortgage broker. Comparing various mortgage rates offered by different financial institutions and conducting hard negotiations with these institutions is the key to identify the best home mortgage rate.