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The ABS released the July Consumer Price Index (CPI) report earlier this week, showing that while inflation remains above the Reserve Bank’s 2–3 percent target, it continues to decrease.
The CPI rose 3.5 percent over the year to July 2024, down from 3.8 percent in June. Excluding volatile items like fuel and fresh produce, underlying inflation was 3.7 percent, a drop from 4.0 percent in June. The trimmed mean inflation rate also declined to 3.8 percent from 4.1 percent.
Key contributors to inflation included housing (4 percent), food and non-alcoholic beverages (3.8 percent), and alcohol and tobacco (7.2 percent). Housing inflation dropped to 4 percent, largely due to a 5.1 percent reduction in electricity prices following new rebates. Rents rose by 6.9 percent, slightly less than the 7.1 percent increase in June.
Although the CPI covers only part of the basket, it provides insights into potential quarterly trends, crucial for the Reserve Bank’s decisions on interest rates. It would seem unlikely in this evidence that the RBA would increase the cash rate when they next meet which is great news.
In this week’s newsletter, we do a comparison between a “regular” home loan and a construction loan.
When financing a property, it’s important to understand that a regular home loan and a construction loan operate quite differently, catering to specific needs:
1. Loan Disbursement:
Regular Home Loan: The full loan amount is disbursed upfront. You start paying interest on the entire sum from the beginning, regardless of whether the property is ready for occupancy or not.
Construction Loan: Funds are released in stages, known as progressive drawdowns or progress payments, aligned with the different phases of construction. You only pay interest on the amount that has been drawn down, not on the full loan amount.
2. Payment Structure:
Regular Home Loan: Typically, this is a principal and interest loan from the outset, meaning your repayments contribute both to paying down the loan amount and to covering interest.
Construction Loan: Initially, it is often an interest-only loan during the construction period (usually up to 12 months), reducing financial strain. Once construction is complete, it transitions to a standard principal and interest loan.
3. Use Case:
Regular Home Loan: Ideal for purchasing a ready-built property, whether it’s a new home or an existing one.
Construction Loan: Specifically designed for financing the building of a new home or major renovations. It allows for flexibility in funding based on the progress of the build.
4. Interest Calculation:
Regular Home Loan: Interest is calculated on the total loan amount from the time the loan is disbursed.
Construction Loan: Interest is calculated only on the drawn-down amount. This means your interest payments will start low and gradually increase as more funds are drawn down during the construction process.
5. Progress Inspections:
Regular Home Loan: No progress inspections are required since the property is already complete.
Construction Loan: Lenders typically require inspections at each stage of construction to ensure that the work aligns with the agreed building schedule before releasing the next tranche of funds.
Understanding these differences is crucial in choosing the right type of loan for your needs, ensuring that you manage your finances effectively throughout the property acquisition or building process.
Variable
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR.
1 Year Fixed
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR. At the end of the three year fixed period, the borrowers interest rate will revert to a standard variable rate for the life of the loan.
