Higher costs of funding?

In a bid to determine whether or not Australia’s lenders were appropriate to move their rates independently of the cash rate, the Reserve Bank of Australia has launched an investigation into the true cost of funds.

Earlier this month, all four of Australia’s majors moved their rates independently of the Reserve Bank, blaming “higher funding costs”.

ANZ chief executive Phil Chronican said the bank could no longer “absorb the additional funding costs in the hope that funding pressures would ease”.

“Margins in retail and business banking have now been squeezed for a number of months and we’ve taken the difficult decision to pass on part of the higher costs to customers while we also get on with taking action to reshape the bank for tougher times,” he said.

As such, the Reserve Bank is now set to interview banking executives and release a report on the true cost of funds next month.

The investigation comes one week after French Bank Société Générale labelled Australia’s funding cost problems “dubious”.

According to research by Société Générale using publicly available data from the Reserve Bank and the Australian Prudential Regulation Authority, nearly all funding costs are falling.

“What we have seen over the last six months is that overall funding costs for Australian banks have absolutely come down. Research suggests that effectively pretty much every source of funding that they use – in terms of domestic deposits, short-term funding onshore, long-term funding onshore – has actually gone down,” Société Générale’s head of strategy in Asia Christian Carrillo told the ABC.

Source: The Adviser

Establish the true value

Whether you’re a home buyer or an investor, if you’re contemplating buying a property, understanding its true value is crucial.

Finding yourself facing a barrier to financing is one of the most serious setbacks you can experience if you pay over and above what your lender believes to be the true worth of the property.

For example, if you agree to pay $450,000 for a property, but your lender’s valuation comes in at $400,000, they will only finance you based on that amount. And if you haven’t got the cash to cover that shortfall, this could cause you serious problems.

Organising a proper valuation of a property you are serious about buying is a must.

Several valuation products and services are available to buyers, from instant online varieties to thorough on-site inspections.

Typically, an online valuation is a very useful guide for buyers but should really only be used as a starting point. A more thorough valuation is the best indicator of a property’s true worth.

In addition to providing you with a more accurate price guide, a full valuation can also deliver an assessment of the local area, market trends and the local market conditions’ likely impact on the property’s value at future sale.

It’s a worthwhile investment.

Do keep in mind that a valuation doesn’t prevent you from spending more than you expected on a property, but it will give you an idea about the implications of doing so.

Moreover, with the real estate market so volatile, just because a valuation might indicate a certain price range for a property pre-auction, a valuer may be willing to reassess this subsequently.

Say, for example, that a valuation suggests your target property is worth $520,000 but you agree to pay $550,000 at auction. If there are several other bids over and above $520,000, this demonstrates strength in the market and may see the valuer suggest a new valuation.

Generally speaking, it will be up to the lender’s valuer to assess the situation, taking into account a broader view of the market.

Whether you are willing to commit to a price over and above your own valuation will depend on your financial circumstances. If you know you simply don’t have the cash, it is certainly a wise idea to avoid bidding any higher than the valuation you receive.

Breaking the Rules

With the Australian property market an increasingly hard nut to crack, success now requires a little bit of fresh thinking.

All too often, people complain that they’ll never be able to break into the market because it’s just so expensive to buy a house in their neighbourhood. Others dream of property investment, but the idea of another $500,000 mortgage on top of their own home loan is too much to bear.

Little do they know, it is not the cost of real estate that is stopping them from cracking the market, but the way they’re thinking about it.

Property investment needn’t break the bank. Moreover, the best investments are not always found in the top-end markets.

One strategy that is growing in popularity among investors – both first-time and experienced – is investing in suburbs at the edges of our capital cities, where it’s easy to pick up apartments and houses for under $300,000.

Many such markets offer a great investment selection as they not only offer an affordable entry point but also compelling returns.

Take a $250,000 property, for example, that brings in a rental income of $350 per week. This equates to a gross rental yield of more than 11 per cent.

A $600,000 property by contrast, though more expensive, may bring in a rental income of $600 a week, equivalent to a gross rental yield of just over five per cent.

Less expensive property is also much less cash-intensive, making it easier to fund and generally a much lower risk strategy.

For first time buyers, this can be a great way to dip your toes in the property market, while continuing to rent in the location you love.

The rental income will go a long way toward paying down your debt and you’ll be building up that much needed equity to get your property investment portfolio or dream home aspirations on track.

The same goes for existing home owners. Just because you can’t afford a fancy unit in the CBD, doesn’t mean you can’t buy an investment property.