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Chapter 1: What is the main topic discussed in this episode?
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This podcast contains general financial advice only. That means it's not specific to you, your needs, goals or objectives so don't act on the information until you've spoken with your financial advisor. You'll find our full disclosure, disclaimer and link to our financial services guide in the show notes.
Sam, welcome onto the Australian Finance Podcast today.
Hi, Kate. Yeah, thanks for inviting me.
Now, you have a lot of experience in the finance industry and you were just telling us off air before you've been working at Melbourne Business School for well over a decade, which as a young person is hard to imagine staying in one spot that long. But
Just to kick off this episode, it'd be great if you could tell us a little bit about how you got into the industry and what you do maybe day to day in your job as an educator.
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Chapter 2: What is economics and why is it important for consumers and investors?
Absolutely. And if we take your example of saving up for our first home, which I know many of our listeners are trying to do, one of the key terms that comes up again and again, and we see on the advertising from the bank is what the interest rate is. Are we able to unpack that term a little bit more and what we need to know about interest rates and how they impact our lives?
Sure. So first of all, let's start, Kate, with two types of interest rates. So floating or variable interest rates. Usually we call them variable interest rates, but sometimes floating. So interest rates that go up and down versus interest rates that are fixed. And you can get a mortgage of either kind.
You can get a mortgage where the interest that you pay is fixed for three years or five years, but it's more common, about 75% of mortgages in Australia are variable, floating interest rate. And so let's just take an example. Let's say that you want to get a mortgage for $500,000. So you saved $100,000. You're going to borrow $500,000. That would mean that you would have
a loan to valuation ratio, which was 500 over 600. Of the $600,000 apartment that you're going to buy, The bank's bringing $500,000, you're bringing $100,000. The loan, the $500,000, to the valuation, the $600,000, is the $500,000 over $600,000, which is about 85%. And that's pretty high, but that's sort of what you've got to do to get into the property market is to borrow a lot of money.
So let's say that we had a $500,000 loan, then you've got to pay interest on that. And let's imagine that the interest rate, your interest rate at the moment is, let's say that it's 2.4%. So you go and see a mortgage broker. Maybe you go to the bank. But the most important thing is to go and see a mortgage broker. So your mortgage broker can put you in touch with all the banks.
Because if you go and see a particular bank, if you just go to National Australia Bank, let me pick on NAB, they're a fine bank. But if you just go and see one bank, in a way, you're just telling the bank that you're not really going to search. You've got a, I don't need a very low interest rate sign on the top of your head if you just go to the bank branch.
Whereas if you go to the mortgage broker, and especially if you let the mortgage broker know that you're talking to another mortgage broker, And then you're going to have, I need the lowest interest rate possible sign on your head. And the mortgage broker is going to try as possible, hard as possible to get your low interest rate. So let's say that you've got a $500,000 mortgage. It's 2.4%.
How much is that? 1% of 500,000 is 5,000. 2.4 times 5,000 is $12,000 a year. So you'd have to pay $12,000 of interest per year on that mortgage. And then you'd have to pay the principal as well. If it was a principal and interest loan, which is what it's going to be, it's not going to be an interest only mortgage, interest only loan.
That's what you would want if you're an investor, investing in a property rather than buying one to live in. So it's going to be principal and interest. You're going to be paying the $12,000 interest and you're going to be paying back the $500,000. That's the principal part. that'll be on top of it.
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