Aussie reaches parity with Loonie

for the first time in six years, the Australian dollar was on equal footing with the Canadian dollar, widely referred to as the loonie because of the imprint of a loon on the dollar coin.


The Aussie was fractionally more valuable than the Canadian currency briefly overnight and this morning was fractionally lower. It is the first time the two currencies have been one-for-one since 2004.

The Australian dollar broke through the 97-US-cent mark yesterday afternoon and touched the 97.3 mark again in evening trade. This morning it was buying 96.88 US cents and about midday east-coast time it was buying 96.8 US cents after taking a drop on the news that building approvals were worse than had been expected.

The softer housing figures means there is now some doubt about the Reserve Bank's resolve to increase interest rates when its board meets next week.

(Source: Sydney Morning Herald)

Bull market or just bull?

"Foundations for a bull market are now as strong as they've been in years,
though an early and sustained uptrend can't be taken for granted"

"I think it is pretty well conceded that we have reached or passed the bottom of
this depression and from now on can look to gradually improving business"

Do these quotes from news reports sound familiar?

They probably should. Lately we've been hearing them as regular as clockwork. However, these particular ones aren't from last weeks papers or your favourite business show, they're from the Wall Street Journal back in October, 1930

This is not 1930 but back then, a few good months months lured investors back into the market, just like they're doing now. Hindsight is a wonderful thing and it tells us that the optimism apparent the year after the 1929 stockmarket crash soon proved woefully premature.

Back in 2009 and the Australian sharemarket has risen by more than 50 per cent since it bottomed in March. Even more incredibly, the troubled US market is up almost 50 per cent! What is driving these gains?

There are concerns we're becoming a bit complacent – and in some cases, even irrationally exuberant. Cautious optimism beats irrational exuberance in any market, but especially this one.

(source: Sydney Morning Herald)

BIS says rate increases a mistake

Chief economist for BIS Schrapnel, Frank Gelber, thinks the Reserve Bank has increased interest rates too soon. Glenn Stevens was as nervous as all hell about a cash rate at 3 per cent but rates in most other economies are going to be stagnant and hovering at less than 1 per cent for some time to come. Although a significant contributing factor, the Aussie dollar was rising independent of interst rates. Further increases in the dollar's value is going to have an real impact on a range of sectors beyond commodity exports.

Here is Gelber's argument;

We all know that interest rates have to rise, and rise substantially, at some stage. These are emergency rates resulting from the global financial crisis and intended to prevent recession.
Australian rates aren't nearly as low as overseas rates. Mind you, most of the Western world really needs low rates. They face severe recession. To turn around the old saying, America has a bad flu but we're only sneezing. The US, Britain and parts of Europe are experiencing financial crisis but we're experiencing a credit and equity squeeze.

I thought the rate rises would start later. But now that they have begun, the question is not so much how many more rises are to come, but when. One, or even several, rate rises won't be fatal. The damage would come from a series of aggressive rate rises, stifling recovery.
And there is still time for the Reserve Bank to postpone further interest rate rises until the economy does strengthen. By the end of the tightening process, cash rates will go back to a neutral rate of about 5.5 per cent. Indeed, we think they'll overshoot and end up at about 6.5 per cent. But we think that will be in 2012 when the economy is strong.

Timing will be important. As always, for the RBA it's a balancing act. The trick is to tighten from the current unsustainably low levels without damaging economic recovery.
Why did they raise rates so early? What are they trying to achieve? I hate trying to second-guess the RBA's logic, but this is important. The RBA obviously thinks the economy is a lot stronger than we do. Even in these more open and enlightened times, RBA statements tend to be vague, and open to several, often contradictory, interpretations.

Having said that, they seem to think that investment is recovering. It's not. The capital expenditure figures were boosted by the tax concessions on equipment investment. And government building and infrastructure spending, though strong, won't be enough to offset the prospective collapse of business investment.

The construction sector's direct and indirect contribution of about minus 2.5 per cent this financial year, won't be as bad as the negative 4.7 per cent that caused the downturn in 2001. But the shock will be hard to withstand. Worse, not only will investment decline this financial year, but it will happen when household disposable income is weak. Business profits have started to fall. The sector is just emerging from a credit squeeze and, when finance is available, companies face high interest rates. So business is in cost-cutting and cash preservation mode, curtailing unnecessary investment.

Meanwhile, sluggish wages and employment growth means that household disposable income is weak, indeed negative in real terms, and that will constrain spending. Rising interest rates will further weaken household incomes. The run of good data will end. There will be some pretty weak readings towards year end as government stimulus recedes. The data will weaken with the economy. And confidence will sag with the data.

Confidence can't be sustained under its own steam. It's strong now with the improvement in the economic indicators and less fear of unemployment. But the world isn't a series of indicators in isolation. When news on the weaker economy comes through, the indicators will deteriorate and confidence will weaken.

Having said that, a few interest rate rises won't do a lot of damage. And just as well.
In this environment, households are tending to absorb much of the stimulatory effect of last year's interest rate declines by maintaining their mortgage payments, thereby reducing debt more quickly.

The other side of the coin is that this gives them more leeway to maintain (and not increase) payments in the face of rising interest rates, thereby cushioning the impact on spending. The cohorts most affected are recent housing buyers who stretched to finance large mortgages.
But it's bad for the dollar and competitiveness. And that's contractionary. Australia is tightening before other Western countries, raising the interest rate differential and boosting the Australian dollar.

That's a disaster for what's left of the domestically produced tradables industries -- in particular manufacturing, tourism and education for overseas students. And, while primary production and Chinese demand remain strong, the higher dollar hurts prices received for agricultural and minerals commodities. With weak investment, weak household disposable income and an overvalued dollar, I wouldn't be surprised to see a negative September or December quarter gross domestic product result.

Only housing is picking up. But we need the housing recovery to drive growth. And we need the housing. The rate rise will reduce household disposable income and therefore expenditure and reduce the affordability and hence demand for residential property. Maybe the RBA is trying to dampen the aggressiveness of housing owner-occupiers and investors so that there is less damage as interest rates do rise.

Meanwhile, there is no hurry to raise interest rates. With overseas rates likely to remain low, the resultant strong dollar will dampen already weak growth and perhaps cause structural damage to the remains of our tradables industries. I would have waited until well into next year.

US Consumer credit in retreat

US consumers are reducing their use of credit at a much higher rate than expected, casting doubt on recent hopes of a robust economic recovery.

Consumer credit, including credit cards, car, student and personal loans dropped at an annual pace of 10.4 per cent in July according to the US Federal Reserve. Economists say the data is an indication of bank write offs of bad debts, though consumers may also be using the higher savings created by reduced interest rates to pay down debt. Recent surveys suggest banks will maintain tight lending standards until at least the second half of 2010.

(Source: Australian Financial Review, 10 September 2009)

Prime borrowers start to default - US

In the US, the long recession and rising joblessness are taking an increasing toll on the nation's most credit-worthy borrowers, who are now falling behind on their mortgage and credit-card payments at a faster pace than people with poor financial histories.

This new trend signals more bad news for US banks. Rising delinquencies on prime mortgages helped drive the total delinquency rate to a record 9.24 per cent in the second quarter of this year, according to the Mortgage Bankers Association. The data reflect loans that are at least one payment past the due date.

The focus on prime borrowers comes more than two years after the housing meltdown took its first aim at subprime borrowers, who found themselves locked into unaffordable mortgages and weighed down by credit-card debt. These borrowers tend to have fewer financial levers to pull to stay ahead of their debt payments, so they default relatively quickly. Many of those bad subprime mortgages have already worked their way through the financial system, causing billions of dollars in losses to the nation's banks.

For prime borrowers, this recession has been especially tough because declining home prices have taken away one of the typical crutches for them, since it is harder to tap the equity in their homes to pay their bills if they lose their jobs.

In addition to cutting back on spending, strapped prime borrowers often can keep up with their bills longer than subprime borrowers by draining savings accounts, reducing contributions to retirement plans and turning to family members for money.

(Source: The Australian, from an article published in the Wall Street Journal)

Under-employment and unemployment

In spite of the global financial crisis, Australia’s unemployment rate is holding steady at around 5.8 per cent. Although high, it compares favourably to the continued rising unemployment in other countries such as New Zealand where the rate is 8.5 per cent or the United States: 10 per cent.

However, the Australian Bureau of Statistics has provided a breakdown of hours worked in the economy with this month's labour force data. On its estimates, Australians are working more than 35 million fewer hours than they were a year ago. This fall in working hours, with employment holding fairly steady over the past year, seems to confirm what the fall in full-time jobs and the compensating rise in part-time employment implied: that the downturn in Australia has revealed itself as under-employment rather than unemployment. If this is so we may yet see significant falls in consumer spending even in the absence of the expected rise in unemployment.

The Reserve Bank has made clear it is moving from loose monetary policy with an easing bias (expansionary) to loose with a neutral bias. Commentators have been quick to see this as the Bank signaling that rates are on the way back up. While this may ultimately prove to be correct, we need to see how employment performs before we make the call on increases to interest rates in the next few months.

Despite the welcome smattering of recent good news, the economy is still fragile. I would be keeping an eye on business investment which, due to tight credit conditions is still weak, and some areas of construction like multi-dwelling complexes, which is also showing signs of weakness.

Official rates will fall - retail rates may not

The Commonwealth Bank of Australia (CBA) is under fire from all quarters over its decision to raise its standard variable rate (SVR) loans by 10 basis points. Of the four big banks, CBA had the lowest SVR and even after this increase its SVR is still equal lowest. Prior to this, other banks had been quietly making adjustments to fixed rate loans. But this most recent increase has brought forth howls of gouging leading a federal senator to suggest a committee to investigate the incidence of bank gouging. However, what appears to be going on is just some good old fashioned speculation and supply and demand issues.

The speculation comes from the recent run of stronger than expected economic figures, including the 0.5 per cent GDP growth in the March quarter and last week's strong employment report. This has led financial markets to start trading on the basis that the Reserve Bank (RBA) will keep interest rates at 3 per cent this year before raising them to 4 per cent early in 2010. As a result, the cost of three-year funding for the major banks has increased by nearly 150 basis points, from 3.5 per cent to almost 5 per cent, over the past three months. Economists argue that it is this trading pressure that is forcing the CBA and other banks to raise their mortgage rates. In these circumstances the banks can either reprice the cost of lending to reflect their costs and continue to lend or they can leave prices where they are and restrict the amount they lend.

Now the government is within its rights to become indignant about all this. After all it wants to encourage spending and having the cost of borrowing as cheap as possible assists in this outcome. Also a little bank bashing goes down well with the electorate in any circumstances. But there are real implications for monetary policy if funding costs continue to rise. This will only be exacerbated as governments around the world continue to raise debt to fund deficits as part of their attempts to stimulate economies.

In the current economic conditions these pressures on the cost of retail lending rates are certain to push the RBA's hand. According to Macquarie Bank "[as] key lending rates [continue to rise] while unemployment is trending higher, pressure will build on the RBA to cut its policy rate below 3 per cent." How much they might cut and how much will be passed on by the banks remains to be seen.

In the short term a cut of 25 points seems most likely and we believe most or all of this will be retained by the banks to ease current funding pressure. The government will make noise about passing on these cuts to customers but what is more important is that credit remains as widely available as is prudently possible. The cost of borrowing to retail customers is at an all time low. Trying to make money cheaper now wont help the economy as much as ensuring (or even increasing) its supply.

In the medium-term rates are likely to stay low. A large part of the current specualtion about rising rates is mostly based on resurgent inflation. The minutes of the last RBA meeting indicate that concern about inflation in some markets to be unfounded at present stating, ''the outlook is for a fairly gradual expansion getting under way later in the year, with spare capacity tending to increase and inflation tending to decline''. Spare capacity means supply will outstrip demand so price pressure (inflation) will fall.

What concerns the board more is the continuing collapse in business invesment and its implications for unemployment. In its statement the RBA said:

''Business credit had fallen in the past few months, though other sources of funding had been stronger ... Many businesses were facing higher risk margins when loan facilities were rolled over or renegotiated, and many had experienced a significant tightening in the terms under which credit was available.''

Overall we believe the statement to indicate a contiuing bias towards easing monetary policy largely in support of business investment and its implications for employment. Though the cash rate is likely to fall, variable retail rates may not and fixed term rates may see modest increases. Although changes to official rates might provide an opportunity in fixed rate pricing for some banks to attempt to attract increased volumes. As always, we'll keep you posted.

(source: Sydney Morning Herald; News Ltd)

RBA keeps rates on hold

At its meeting today, the Reserve Bank of Australia has decided to keep rates on hold, continuing with a cash rate at 3.00%. RBA governor, Glenn Stevens, said Australia's economy was benefiting from the significant cuts to interest rates made so far, combined with the Federal Government's fiscal stimulus.

However, in his statement, RBA governor, Glenn Stevens made specific reference to the decline in business lending "as companies postpone investment plans and seek to reduce leverage, in an environment of tighter lending standards."

Because of these concerns, the consensus among economists is that further rates will still be required later this year as unemployment falls. In confirmation of these views Mr Stevens said,

"Monetary policy has been eased significantly...Business loan rates are below average. Much of the effect of this is yet to be observed...the prospect of inflation declining over the medium term suggests that scope remains for some further easing of monetary policy, if needed.

Our view: The RBA should cut rates sooner rather than later to help restore business investment that is obviously in retreat. The effect of this will be seen in the unemployment figures over coming months. A lower cash rate would also take pressure off an overvalued currency that has the potential to diminish exports and further damage company profits... but that's another story.

Bigger slice of less competitive pie

According to a report just released, two mergers in Australia's banking sector may be reshaping the home loans market. The report shows the merged entities Westpac and St George and that of the Commonwealth Bank and BankWest claimed a whopping 85 per cent share of new mortgages written in the first quarter of 2009.

The banking industry review by Brandmanagement – a market research firm specialising in the finance sector – shows $22.7 billion of the $26.6 billion growth in mortgage books by the big four banks (ANZ, CBA, NAB and Westpac) in the March quarter was achieved by CommBank/BankWest ($15 billion growth) and Westpac/St George ($7.7 billion), as reported by The Australian Newspaper.

The Australian Competition & Consumer Commission chair, Graeme Samuel said advice from other regulators in late 2008, at the height of the global financial crisis, to allow the merger of Commonwealth Bank and BankWest was followed only reluctantly. Mr Samuel said yesterday that the approval the commission had given to the merger between CommBank and BankWest was "not one we had been very happy about." But given the crisis in the international banking sector and on advice from the RBA and APRA "we felt we had no choice", he said.

(this article can be found at Business Spectator)

Bank service is reaching horror levels

The past 12 months have seen a tremendous shift in Australian banking. Despite the fact our banks are much better off than in other contries, many banks are no longer in the mortgage market. I personally believe this has taken the banking industry back fifteen to twenty years. As a result of the turmoil in credit markets, consumers won't be able to count on serious competition from non-bank lenders for some time.

Recent aquisitions (RAMS and St George to Westpac and Bank West and part of Aussie to CBA) has given the four major banks a huge opportunity to capitalise on a situation where they are handling almost ninety-five percent of all loan applications. The downside of this is that service levels are at an all time low. If you need to use a major bank, please understand that they can take up to 2 - 3 weeks just to look at your application. Refinances are taking an inordinate amount of time as there is not the same urgency as there is in a purchase. Genuine pre-approvals (I'm not talking about the rubbish-waste of paper-internet ones) are not even available. If you're about to purchase a home, please don't be cajoled by your real estate agent into offering a contract that only has a 14 day finance clause on it. It's almost certain you will need to arrange an extension through your solicitor. 21 days should be the minimum in the current environment.

Despite all this there is opportunity for some borrowers to use lenders other than the majors. After being knocked about early on, these second tier lenders are determined to make a come-back, offering good and timely service and pricing their loans similar to those of their cartel-like competitors. But, as always, don't just look at the rate. In some cases we have clients taking a rate which is only 0.10 per cent lower than someone else but unfortunately, we are not seeing the service they require.

Big Aussie banks control 95% of all lending

A Federal Treasury analysis has revealed the extent to which competition in the Australian lending market has been eroded by the current financial meltdown in the US. While officials are at pains to explain that Australian banks are in nothing like the situation of their US counterparts, cost of funds has seen competition in the banking sector return to almost pre-deregulation levels.

Non-bank lenders' share of new owner-occupied loans has shrivelled from more than 20 per cent in July last year to around 5 per cent currently, after the financial crisis all but choked off the supply of cash available to smaller lenders. Non-banks comprise mortgage managers like Aussie, Wizard and RAMS as well as building societies and credit unions.

While the Federal Treasurer, Wayne Swan has repeatedly urged disgruntled home buyers to "vote with their feet" and switch to cheaper loans, the growing dominance of the big banks means there is now little scope to do this. Residential mortgage-backed securities (RMBS) - the key source of funds for the non-bank sector - are now being issued at a rate of about $830 million a month, compared with $6 billion a month before the crisis. The Treasury analysis showed if the lending market were to return to normal, home buyers would be able to access interest rates about half a percentage point lower, saving $80 a month on the average mortgage.

Stupid, stupid vendor

Sydney newspapers are reporting that vendors are increasing the prices of their properties in anticipation of an increase in vlaue caused by the recent changes to the First Home Owners Grant Scheme (FHOG). The grant was recently increased from $7,000.00 to $14,000.00 for existing properties, and a whopping $21,000.00 for newly constructed homes. The Sydney Telegraph calls these sellers “Greedy” but I would be more inclined to call them Stupid.

In case you haven’t noticed, the property market is really depressed. Forget all the kybosh that the various real estate bodies are pedaling, nobody’s buying. In other words – it’s a buyer’s market. So it’s a bit of a surprise that some vendors would think to put their prices up. They haven’t been able to sell their properties at their current asking price so they think the best idea is to increase the price? Right - good idea. Not.

I wrote this off as a one off but last week I was helping a client to restructure their loan to assist them with an investment purchase. They had their eye on a renovator near the beach on the Sunshine Coast which had been on the market for a while. After we had finance in order our clients went back to the vendor to make a cash offer (subject to valuation and building inspection) but guess what? The asking price was now $30,000.00 more than it was a week ago. What had happened?

During the process of arranging the pre-approval, the FHOG went up. So somehow, in a severely depressed market where house prices are clearly falling, the seller thinks this house is now 12% more valuable. Our client, and their cash offer, walked away. Stupid, stupid vendor.

RBA to flag rate cuts

We think the Reserve Bank of Australia (RBA) will leave its key interest rate unchanged after its monthly board meeting today. However, in a measured response they will announce that they are moving to an "Easing Bias" and may even suggest lower rates are on the way. In no uncertain terms, that will be welcome news to borrowers coping with interest rates at a twelve year high.

So the RBA will leave its key cash rate at 7.25 per cent for a fifth straight month. Rates were last raised in March this year, the fourth of four straight increases that started in August 2007. However, depsite inflation still running above the RBA target of 3 per cent, it is expected the central bank will highlight the downside risks to economic growth after several weeks of dour readings on economic activity.

Despite calls in some quarters for a rate cut today we think they are more likely to stay on hold at least one more month. A rate cut today would send an ominous signal about the outlook for the economy in the short term. Also, as the ANZ reminds us, “We do have to remember inflation is at a 16-year high, so the RBA is not going to be rushed into cutting interest rates".

However, while inflation will be a key focus, we feel there are two important issues (among the many) playing on the RBA’s mind. One is the interest rate increases that have been added to bank margins in addition to recent increases in the cash rate. The other is the further deterioration of credit conditions due to continuing fallout from the US credit crisis. Both these will begin to have a significant impact on demand as they play out in the domestic economy and put significant downward pressure on future inflation.

The RBA has raised the cash rate 12 times since May 2002, and last cut it in December 2001. My eldest boy was only 8 back then!

5 year fixed rate blues

Recently we had a bit of a blue with a customer about the interest rate he was being charged. We wrote his loan shortly before the onset of the US financial crisis and, all things considered, the rate was very competitive. But he was with a non-bank lender and his rate has climbed a bit lately – about the same as other non-banks but slightly more than the standard banks. He has since been approached by another bank (a reputable and substantial bank) about fixing his interest rate. Nothing wrong with a little bit of competition between lenders.

However, this discussion took place about 8 to 10 weeks ago when (strangely) some financial analysts were still forecasting a rate rise or two. We haven’t been thinking this way for a while and urged our customer to take time and consider because what the intervening bank was proposing was a 5 year fixed rate marginally lower than that which he was currently being charged.

In view of recent economic data, some commentators have suggested the Reserve bank will need to cut the cash rate to 5 percent from the current 7.25 (see previous post). This morning Alan Kohler said “the cash rate will need to be around 5 per cent this time next year, possibly in the 4s”.

To cut to the chase, our customer was panicked and took the advice of the other bank and moved to a five year fixed rate at close to 9 per cent. I wonder how a fixed rate of nearly 9 per cent will compare to the prevailing discounted variable rate in 12 months time and how the advice of the other bank will be viewed.

Bravo Messers Carr and Cooke!

In February this year, we ran an article on our website about the prospect for interest rates. Counter to the arguments at the time it was titled “Interest rates to ease by end of 2008”. We based this claim on statements by two economists - Adam Carr of UBS and Andrew Cooke of Goldman Sachs-JBWere.

Speaking at a conference in Sydney in February this year, Cooke said he would "throw out the controversial point" that rates may be easing as we get to the end of 2008 even though the Reserve Bank (RBA) has signalled very strongly that further interest rate rises are likely. He argued that "as we go through the remainder of the year, consumer demand may slow too much…so things [might] change pretty quickly.

At about the same time Adam Carr, senior economist at UBS, was making similar, wild claims stating, “inflation isn't really our [the consumers] fault and that crunching demand through tighter monetary policy [higher interest rates] is only part of the answer". At the time Carr was concerned that to curb inflation the nation was faced with the challenge of a significant, policy induced slowing of growth (and rising unemployment) just as the global economy is slowing and credit markets are contracting in the wake of the US sub-prime mortgage crisis. Talking later on the ABC Radio program, “Counterpoint” Carr was concerned that the RBA would be faced with the need to quickly reverse its stance on monetary policy to avoid stalling the economy.

This indeed is what now seems to be happening. On the back of some seriously bad economic data, several commentators are now saying we can expect rates to fall by the end of this year. Some are even talking recession. Although it should be noted that many of these same commentators were predicting that rates would still be rising at this time. Remember it was only several weeks ago that ANZ came out and said that we were facing one or two more rate rises before this Christmas. While the ANZ still feel that rate cuts are not due until early next year, they have certainly backed away from their earlier forecast.

Conditions now are looking so different to that of a few weeks ago that Terry McCrann believes that when the RBA meets on Tuesday next week what we are likely to see "is a very clear statement that the economic and policy cases have now been made for a shift to lower interest rates” and that “a rate cut at the September meeting …is certain. [Further] it won't be the last and it could be a half of 1 per cent[!]”

However its not yet that clear a picture. In the same week of the news about the sharp slump in retail sales, a fall in borrowing, decreasing house prices, and stretching payment terms, The TD Securities-Melbourne Institute monthly inflation gauge was released stating that inflation rose 0.4 per cent in July, after a 0.5 per cent increase in June. Annual inflation ticked down to 4.6 per cent from a record high of 4.8 per cent the previous month – still well above the RBA target band of between 2 and 3 per cent.

Earlier this year the RBA needed to tap the interest rate brake on inflation. Painful though it has been no one would argue with that. What seems to be happening now is that they have come to the conclusion that they may have tapped the brakes once or twice too many. To stop the economy coming to a halt and perhaps even going into reverse (a recession), we’re going to get a nice little surprise just before Christmas – if the pundits are right, the RBA will lower rates sometime between September and December this year. Bravo Mr. Carr! Bravo Mr Cooke!

(references: EquityLend.com.au, Feb 14 2008; HeraldSun, 1 Aug 2008; smartcompany.com.au, 1 Aug 2008)

Low-Doc Loans

Although some banks offer Lo Doc loans to PAYG earners, they are generally designed for self-employed customers who are not able to produce documents to substantiate their income. If you take out a low documentation loan, you won't need to give your lender as many documents to prove your income. You still have to apply in writing and sign your loan agreement, but you genrally are not be required to produce things like pay slips and tax returns. With most Low- Doc loans you are simply asked to state your income in a declaration know as “self-verification”.

Generally, any bank or other type of lender that offers these products will want to see proof of your assets and liabilities. In most cases they will attempt to make some comparison between the amount of income you are declaring and your asset position. If you are stating a very high income to service an expensive loan, a potential lender will expect to see a reasonably good net-asset position.

It's vital that you understand what you're getting into and not use a Low-Doc product to obtain a loan you simply otherwise couldn’t afford.

While some banks offer lo doc loans at rates equal to the prime lending rate (the rate offered to customers who fully verify their income), others charge a premium of around a half to one per cent higher. We are all familiar with the fact that banks have been increasing interest rates in advance of that levied by the Reserve Bank. Recently however, lenders have been moving the rate charged for Low-Doc products even higher. There are customers of several major banks who took out Low-Doc loans at near prime rates that are now being charged 10.50 per cent.

In wake of the recent wholesale funding difficulties (usually referred to as “the US sub-prime crisis) many lenders have withdrawn from the Low doc market. According to Cannex there were 180 Low-Doc loans being affered by46 lenders in January this year. This has shrunk to 153 loans from 38 lenders. Those that have exited include Bluestone, Virgin Money and big banks like HSBC and Macquarie.

The good news? Low-doc products made up 1 per cent of all loans in Australia last year, well below the 13 per cent that represent US sub-prime loans in that market.

(reference: smartcompany.com 30 July 2008; ASIC.gov.au)

The cost of a little discipline

A personal loan may be more costly than home loan rates but they have the advantage of instilling discipline in certain borrowers when purchasing consumer items.

Consumer finance is by definition, finance for items that get consumed - things that get used up or wear out. It would be perfect if we could always access the cash when we needed it to buy these kind of items.

When you're looking at a new car, holiday, boat or other worthwhile purpose, the cheapest way to get it is to save. But when these items cost upwards of $20,000 saving might not be an option.
Borrowing for consumer items using credit that operates on a revolving basis, like credit cards or some home mortgages has its advantages. But when it's used by borrowers with limited or fixed income, often the principal remains unpaid for years or never gets paid off at all.

When you do need to borrow for consumer items a personal loan might be the best option. A personal loan allows you to access goods and services now, that you might not otherwise be able to take advantage of if you were forced to save. The repayment of the loan, both principal and interest is required to be made over a specific period of time, usually one to seven years.

Borrowing for consumer items can make good sense. If your car is older and is in need of constant maintenance and is costly to run, there may be good financial reasons to borrow funds for a newer and less costly vehicle. The running costs alone might be preventing you from saving any money towards a new vehicle. However, before you consider borrowing on this basis ask yourself a few questions first. Do I really need the item? Would it be possible to get something a little less expensive and save for it? Also consider the consequence additional debt will have on other financial goals you may have. If you are a first homebuyer looking to enter the mortgage market, it might be better to defer the decision to borrow for an overseas holiday until you are in your new home.

The simple fact is that some people do need the discipline of a certain payment every month for a set period of time to pay things off - and there's a lot to be said for that. But if you're on a higher income and you have the discipline and can afford to service new debt, then you've probably earned the right to make the choice to "consume now and pay later"