Banks are threatening to raise interest rates by more than any official rise in the cash rate by the Reserve Bank of Australia. They further threaten that these additional rises might come about even if the RBA does not raise interest rates any time soon. They say this is necessary because funding costs are reducing their margins.
Question: If bank interest rate margins are really threatened by increased funding costs, why are banks offering generous discounts on home loans - in some cases up to 0.80 per cent?
Showing posts with label mortgages. Show all posts
Showing posts with label mortgages. Show all posts
Friday, October 1, 2010
Thursday, September 9, 2010
Home buyers returning to market
HOME buyers, lured by a steady interest rate outlook and cooling house-price growth, have been returning to the market, with demand for home loans picking up. At the same time, there are
emerging signs that some banks are again letting home owners borrow more, with some lenders starting to relax recent tight standards with the reintroduction of higher LVR loans.
Demand for home loans eased earlier this year, pressured by three consecutive monthly interest rate rises and ballooning prices along Australia's east coast. In May, housing credit was running at a three-month annualised growth rate of 6 per cent; however, this had since increased to 8.2 per cent.
Yesterday the Australian Bureau of Statistics released figures showing housing finance commitments rose 1.7 per cent in July, seasonally adjusted. The result easily beat the market forecast of a 1 per cent rise.
(Source: Sydney Morning Herald)
emerging signs that some banks are again letting home owners borrow more, with some lenders starting to relax recent tight standards with the reintroduction of higher LVR loans.
Demand for home loans eased earlier this year, pressured by three consecutive monthly interest rate rises and ballooning prices along Australia's east coast. In May, housing credit was running at a three-month annualised growth rate of 6 per cent; however, this had since increased to 8.2 per cent.
Yesterday the Australian Bureau of Statistics released figures showing housing finance commitments rose 1.7 per cent in July, seasonally adjusted. The result easily beat the market forecast of a 1 per cent rise.
(Source: Sydney Morning Herald)
Monday, September 14, 2009
US house price crash - could it happen here?
The Australian dream of home ownership is slipping away, leaving a threat of a US-style collapse in house prices, according to a team of university researchers.
Analysis by researchers from South Australia's Flinders University has revealed home ownership in the 10 years from 1996 rose only 0.8 per cent despite strong economic growth and low interest rates in that period. The Flinders Institute for Housing, Urban and Regional Research analysis found home ownership fell by 15 per cent over the two decades to 2006 for low income earners over 45 years of age and medium-high income earners under 45 years.
Other findings included large gains in national income from the resources boom were "wasted" by increasing house prices and accumulating debt to unreasonable levels. The analysis found the first home owners scheme boosted home purchases for people under 25 years of age but many lower income earners in the 25-44 age bracket were unlikely to ever own their own homes because their parents were spending their inheritances and prices remained high.
Dr Joe Flood, the institute's adjunct professor, said the "the writing is on the wall for the 'Australian dream'."
"The country that promised limitless land, cheap housing and near universal home ownership to all comers now has the most expensive housing in the world amid very tight housing and land markets and little prospect of restoring the balance," Dr Flood said in a statement on Monday.
Dr Flood and his team assessed Census data to conclude that Australia's housing market is in "a very dangerous and unstable situation which has received little adverse attention". The researchers found that after 1996, average house prices increased by three times on average - to around 6.8 times medium household income - and debt levels surged.
"On the one hand Australia is vulnerable to a collapse like the United States, where prices fell by a half during the sub-prime collapse ... or to a long slow decline as in Japan since 1988," Dr Flood said.
(Source: Business Spectator)
Analysis by researchers from South Australia's Flinders University has revealed home ownership in the 10 years from 1996 rose only 0.8 per cent despite strong economic growth and low interest rates in that period. The Flinders Institute for Housing, Urban and Regional Research analysis found home ownership fell by 15 per cent over the two decades to 2006 for low income earners over 45 years of age and medium-high income earners under 45 years.
Other findings included large gains in national income from the resources boom were "wasted" by increasing house prices and accumulating debt to unreasonable levels. The analysis found the first home owners scheme boosted home purchases for people under 25 years of age but many lower income earners in the 25-44 age bracket were unlikely to ever own their own homes because their parents were spending their inheritances and prices remained high.
Dr Joe Flood, the institute's adjunct professor, said the "the writing is on the wall for the 'Australian dream'."
"The country that promised limitless land, cheap housing and near universal home ownership to all comers now has the most expensive housing in the world amid very tight housing and land markets and little prospect of restoring the balance," Dr Flood said in a statement on Monday.
Dr Flood and his team assessed Census data to conclude that Australia's housing market is in "a very dangerous and unstable situation which has received little adverse attention". The researchers found that after 1996, average house prices increased by three times on average - to around 6.8 times medium household income - and debt levels surged.
"On the one hand Australia is vulnerable to a collapse like the United States, where prices fell by a half during the sub-prime collapse ... or to a long slow decline as in Japan since 1988," Dr Flood said.
(Source: Business Spectator)
Friday, September 11, 2009
Banks may raise rates regardless of RBA
Variable mortgage rates offered by the banks might increase by around 10 to 15 basis points regardless of what the Reserve Bank (RBA) does between now and Christmas.
At a historical low of 3 per cent, the cash rate is at emergecy levels and will have to rise in time anyway. With some good economic data lately leading to improved business and consumer optimisim, sentiment on a rate rise has shifted to sooner rather thna later. However, the last few days has seen a fall in retails spending and home loan approvals that will be giving the Bank reason to reconsider any upward movement in rates before Christmas. Regardless of any pause by the RBA, variable home loan rates might increase anyway.
An important contributer to the cost of bank funding is the 'Bank Bill Swap Rate' - the cost of short term funds lent between banks. Over the last few weeks this rate has crept steadily higher. In the event the RBA does increase rates before Christmas the banks would almost certainly tack on an extra few points when the pass the increase to customers. If the RBA decides to hold, the major banks may just go it alone.
This is ironic because the knowledge of the potential for an adjustment by the banks will most likely add to the RBA's decision to keep rates on hold a little longer.
At a historical low of 3 per cent, the cash rate is at emergecy levels and will have to rise in time anyway. With some good economic data lately leading to improved business and consumer optimisim, sentiment on a rate rise has shifted to sooner rather thna later. However, the last few days has seen a fall in retails spending and home loan approvals that will be giving the Bank reason to reconsider any upward movement in rates before Christmas. Regardless of any pause by the RBA, variable home loan rates might increase anyway.
An important contributer to the cost of bank funding is the 'Bank Bill Swap Rate' - the cost of short term funds lent between banks. Over the last few weeks this rate has crept steadily higher. In the event the RBA does increase rates before Christmas the banks would almost certainly tack on an extra few points when the pass the increase to customers. If the RBA decides to hold, the major banks may just go it alone.
This is ironic because the knowledge of the potential for an adjustment by the banks will most likely add to the RBA's decision to keep rates on hold a little longer.
Monday, August 17, 2009
Housing affordability takes a tumble
Housing affordability dropped more than 5 per cent in the June quarter on the back of rising house prices, the Housing Industry Association-Commonwealth Bank First Housing Affordability Index has found.
The Index, released yesterday, slid to 152.5 index points in the June quarter from 161 index points during the March quarter.
The median house price rose to $419,900 for the quarter, from $386,400 in the March quarter, taking the median monthly mortgage repayment payment to $1,983 – up from $1,843.
Housing Industry Association chief economist, Dr Harley Dale said that while affordability had taken a tumble, it was still well ahead of the corresponding period last year thanks to a sharp recovery in house prices from mid 2008.
(source: Mortgage Business)
The Index, released yesterday, slid to 152.5 index points in the June quarter from 161 index points during the March quarter.
The median house price rose to $419,900 for the quarter, from $386,400 in the March quarter, taking the median monthly mortgage repayment payment to $1,983 – up from $1,843.
Housing Industry Association chief economist, Dr Harley Dale said that while affordability had taken a tumble, it was still well ahead of the corresponding period last year thanks to a sharp recovery in house prices from mid 2008.
(source: Mortgage Business)
Friday, August 14, 2009
Low interest rates fuel refinancing boom
New data has showed a record number of Australian consumers are refinancing their home loans to take advantage of the current low interest rates. Housing finance figures from the Australian Bureau of Statistics revealed borrowers refinanced a total of $1.5 billion in June - a whopping 94.7% jump from a year ago.
Mortgages taken to buy a block of land climbed by 48.4% while loans to build new homes fell by 6.9% dragged down by lower investment loans. (see previous post)
"Home loan customers are refinancing at a record rate and in the process, unleashing fresh spending power," said Craig James, chief economist with Commonwealth Bank's CommSec. "The reduction in work hours in the community is clearly not a restraint on consumer spending. Consumers have been actively unlocking spending power by refinancing loans at super-low rates. The benefits of the cheaper debt are long-lasting, erasing fears of a slowdown in consumer spending later in the year."
Could you save by refinancing to a better rate? Get a free assesment
(source: Your Mortgage, 14 August 2009)
Mortgages taken to buy a block of land climbed by 48.4% while loans to build new homes fell by 6.9% dragged down by lower investment loans. (see previous post)
"Home loan customers are refinancing at a record rate and in the process, unleashing fresh spending power," said Craig James, chief economist with Commonwealth Bank's CommSec. "The reduction in work hours in the community is clearly not a restraint on consumer spending. Consumers have been actively unlocking spending power by refinancing loans at super-low rates. The benefits of the cheaper debt are long-lasting, erasing fears of a slowdown in consumer spending later in the year."
Could you save by refinancing to a better rate? Get a free assesment
(source: Your Mortgage, 14 August 2009)
Thursday, August 13, 2009
Housing Finance Approvals
Alan Kohler is a well know and respected finance analyst. Take a moment to view his "August Economic Report". Pay attention to the Housing Finance Approval -in particular to the graphic showing owner occupiers verses investors.
Monday, August 10, 2009
Faux fixed rate: The fixed rate you're in when you're not in a fixed rate
The time to get a fixed rate was about eight months ago. Unfortunately, this was when there still seemed considerable pressure on the Reserve Bank to lower its cash rate. With people talking about cash and variable rates at 2 and 4 per cent respectively, there was naturally some reluctance to fix at say, 5 per cent.
Now however, if you could get a 3 year fixed rate at 5 per cent, chances are, you would jump at it. As we write this, rates are bouncing around a bit but an average 3 year rate is in the vicinity of 6.50 per cent. A five year rate is about one per cent dearer at seven and a half. With discount variable rates at an average of 5.10 it would be difficult to contemplate locking in for five years and to start paying 7.50 even if you were extremely pessimistic about interest rates. Locking into a 5 year rate at seven and a half on a mortgage of $300,000 would increase your principle and interest repayments by around $468.00 per month. You then have to wait until the reserve bank increases rates by over 2 per cent before variable rate customers are paying the same rate as you. However, while those in variable loans have been enjoying lower rates, you need to wait until rates increase a further 2 per cent before you might consider you have broken even on the deal.
All this is a matter of timing of course and it may not pan out exactly this way but its representative of the dilemma customers are now facing when it comes to finding a fixed rate that offers some certainty.
However, if paying your mortgage now at a much higher fixed rate is something you are considering, why not do it within the terms of your current variable rate?
What this requires is for you to start paying your mortgage as if you were being charged 7.50 per cent (Remember, you would be doing this any way if you took out a fixed rate loan). The big difference is that under the terms of your current variable mortgage, your loan is only being charged at around 5.10 to 5.50 per cent. (If you are paying more than this you should talk to us right away). This way you can pocket the savings yourself, instead of giving it to the bank, and get ahead on your mortgage. This way when rates start to go back up your loan principle will have been reduced and the amount of interest charged will be lower.
The beauty of a fixed rate loan is its ‘set and forget’ so you will require a certain discipline to operate your loan in suggested way. However, It will offer the flexibility to leave when you want to refinance or sell with out paying the enormous exit fees involved with most fixed rates.
This isn’t a dead set certain interest rate solution because it is possible rates may go up a lot more than we currently expect, but it is an alternative to locking into a fixed rate. If you’re interested, talk to us about the method that will best suit you and your faux fixed rate loan.
Now however, if you could get a 3 year fixed rate at 5 per cent, chances are, you would jump at it. As we write this, rates are bouncing around a bit but an average 3 year rate is in the vicinity of 6.50 per cent. A five year rate is about one per cent dearer at seven and a half. With discount variable rates at an average of 5.10 it would be difficult to contemplate locking in for five years and to start paying 7.50 even if you were extremely pessimistic about interest rates. Locking into a 5 year rate at seven and a half on a mortgage of $300,000 would increase your principle and interest repayments by around $468.00 per month. You then have to wait until the reserve bank increases rates by over 2 per cent before variable rate customers are paying the same rate as you. However, while those in variable loans have been enjoying lower rates, you need to wait until rates increase a further 2 per cent before you might consider you have broken even on the deal.
All this is a matter of timing of course and it may not pan out exactly this way but its representative of the dilemma customers are now facing when it comes to finding a fixed rate that offers some certainty.
However, if paying your mortgage now at a much higher fixed rate is something you are considering, why not do it within the terms of your current variable rate?
What this requires is for you to start paying your mortgage as if you were being charged 7.50 per cent (Remember, you would be doing this any way if you took out a fixed rate loan). The big difference is that under the terms of your current variable mortgage, your loan is only being charged at around 5.10 to 5.50 per cent. (If you are paying more than this you should talk to us right away). This way you can pocket the savings yourself, instead of giving it to the bank, and get ahead on your mortgage. This way when rates start to go back up your loan principle will have been reduced and the amount of interest charged will be lower.
The beauty of a fixed rate loan is its ‘set and forget’ so you will require a certain discipline to operate your loan in suggested way. However, It will offer the flexibility to leave when you want to refinance or sell with out paying the enormous exit fees involved with most fixed rates.
This isn’t a dead set certain interest rate solution because it is possible rates may go up a lot more than we currently expect, but it is an alternative to locking into a fixed rate. If you’re interested, talk to us about the method that will best suit you and your faux fixed rate loan.
Wednesday, August 5, 2009
Paying the price of keeping our wealth
Interest rates are near zero per cent in countries like the US and Japan. Our rates at the current 3 per cent are higher than that in New Zealand but not as high as China, Brazil and Iceland. So why are Australians paying some of the highest interest rates in the world?
Well, Australia has always had high interest rates relative to other OECD countries but in this instance there’s a very specific reason - house prices.
The global financial crisis started an unprecedented collapse in property prices around the world (some might say it was the other way around – an unprecedented collapse in property prices started the global financial crisis). In most places they’re still falling, but not here, they’ve recovered the small amount they lost last year. The Australian Bureau of Statistics has just reported that house prices grew 4.2 per cent in the June Quarter. This is a monthly, seasonally adjusted figure so it’s a little unreliable but still impressive none the less.
If our house prices were under the same downward pressure that other economies are experiencing, the reserve bank would almost certainly be cutting rates to somewhere closer to 2 per cent.
So we’re lucky, we get to hang onto our wealth. “Our houses have kept their value, but the price of hanging on to that wealth is higher mortgages rates and kids who never leave home because they can’t afford to buy a house.”
(source: Business Spectator, 5 August 2009)
Well, Australia has always had high interest rates relative to other OECD countries but in this instance there’s a very specific reason - house prices.
The global financial crisis started an unprecedented collapse in property prices around the world (some might say it was the other way around – an unprecedented collapse in property prices started the global financial crisis). In most places they’re still falling, but not here, they’ve recovered the small amount they lost last year. The Australian Bureau of Statistics has just reported that house prices grew 4.2 per cent in the June Quarter. This is a monthly, seasonally adjusted figure so it’s a little unreliable but still impressive none the less.
If our house prices were under the same downward pressure that other economies are experiencing, the reserve bank would almost certainly be cutting rates to somewhere closer to 2 per cent.
So we’re lucky, we get to hang onto our wealth. “Our houses have kept their value, but the price of hanging on to that wealth is higher mortgages rates and kids who never leave home because they can’t afford to buy a house.”
(source: Business Spectator, 5 August 2009)
Wednesday, July 15, 2009
Do your sums on FHOG
The Boost to the First Home Owners Grant has been extended until 30 September, 2009. After that it reduces by half until 31 December 2009. In the New Year, the grant returns to an ongoing amount of $7000 for both new and established homes for those buyers who are eligible.
However, being eligible for the grant doesn’t necessarily make buying a house achievable. Prior to the announcement of its extension, we were inundated with calls from customers who wanted to take advantage of the government’s generous offer, particularly for the $21,000.00 for the purchase of a new dwelling. While the $21,000 is still up from grabs for those whose construction commences on or before September 30, it might not be enough to get you into a home on its own.
This is largely because lending has changed significantly over the past several months. In the current environment, the great majority of banks will only lend you 90 per cent of the value of the property you are considering for purchase. This means you have to come up with the other 10 per cent yourself. In some circumstances you can still borrow 95 per cent but even 5 per of an average property is still a lot of money.
The other stumbling block is the fees. While state governments have come to the rescue on stamp duties (for example: first home buyers are virtually exempt from transfer and mortgage duties on homes under $500,000 in Queensland) there is still the matter of mortgage insurance. To get a loan where the borrowing amount is greater than 80 per cent of the purchase price, you have to get your loan mortgage insured and this comes at a cost - the lower the LVR the cheaper the premium. However, as we’re talking 95 per cent, these premiums are at the upper end and even with the discounts some insurances offer first home buyers, the amount can be several thousand dollars.
The last hurdle you need to overcome is the requirement to provide evidence of genuine savings. This means you have to demonstrate to a bank that the money you are contributing as 5 per cent has been saved over a period of time – usually 6 months.
Table 1. Estimate of Savings Required – Established Home
Costs
Purchase Price $350,000.00
Lenders Mortgage Insurance (approx)* $ 6,949.00
Government Fees (estimate) $ 676.00
Legal/Conveyancing (allow say,) $ 1,000.00
A Total Costs to Purchase $358,625.00
Funds
Borrowings from Bank @ 95% $332,500.00
First Home Owners Grant $ 14,000.00
B Total Funds Available $346,500.00
A - B = Your contribution (savings) $ 12,125.00
After December this year when the FHOG reduces, this same scenario will be $7,000.00 dearer. Trying to do the same thing with only a 90 per cent loan will be even more difficult. You should note that there are conditions surrounding your circumstances in qualifying for a 95 per cent LVR loan apart from the obvious issues of affordability.
In summary, if you are nearly in a position to buy your first home it might make sense to explore your options sooner rather than later. However, don’t put yourself in a situation where you can't afford your new loan just for the sake of the extended first home owners grant.
* Lenders Mortgage Insurance will vary depending on bank and Mortgage Insurer
However, being eligible for the grant doesn’t necessarily make buying a house achievable. Prior to the announcement of its extension, we were inundated with calls from customers who wanted to take advantage of the government’s generous offer, particularly for the $21,000.00 for the purchase of a new dwelling. While the $21,000 is still up from grabs for those whose construction commences on or before September 30, it might not be enough to get you into a home on its own.
This is largely because lending has changed significantly over the past several months. In the current environment, the great majority of banks will only lend you 90 per cent of the value of the property you are considering for purchase. This means you have to come up with the other 10 per cent yourself. In some circumstances you can still borrow 95 per cent but even 5 per of an average property is still a lot of money.
The other stumbling block is the fees. While state governments have come to the rescue on stamp duties (for example: first home buyers are virtually exempt from transfer and mortgage duties on homes under $500,000 in Queensland) there is still the matter of mortgage insurance. To get a loan where the borrowing amount is greater than 80 per cent of the purchase price, you have to get your loan mortgage insured and this comes at a cost - the lower the LVR the cheaper the premium. However, as we’re talking 95 per cent, these premiums are at the upper end and even with the discounts some insurances offer first home buyers, the amount can be several thousand dollars.
The last hurdle you need to overcome is the requirement to provide evidence of genuine savings. This means you have to demonstrate to a bank that the money you are contributing as 5 per cent has been saved over a period of time – usually 6 months.
Table 1. Estimate of Savings Required – Established Home
Costs
Purchase Price $350,000.00
Lenders Mortgage Insurance (approx)* $ 6,949.00
Government Fees (estimate) $ 676.00
Legal/Conveyancing (allow say,) $ 1,000.00
A Total Costs to Purchase $358,625.00
Funds
Borrowings from Bank @ 95% $332,500.00
First Home Owners Grant $ 14,000.00
B Total Funds Available $346,500.00
A - B = Your contribution (savings) $ 12,125.00
After December this year when the FHOG reduces, this same scenario will be $7,000.00 dearer. Trying to do the same thing with only a 90 per cent loan will be even more difficult. You should note that there are conditions surrounding your circumstances in qualifying for a 95 per cent LVR loan apart from the obvious issues of affordability.
In summary, if you are nearly in a position to buy your first home it might make sense to explore your options sooner rather than later. However, don’t put yourself in a situation where you can't afford your new loan just for the sake of the extended first home owners grant.
* Lenders Mortgage Insurance will vary depending on bank and Mortgage Insurer
Tuesday, May 26, 2009
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)
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)
Thursday, May 14, 2009
FHOG extension a chance to boost savings
The Federal Government’s extension of the boost to the FIRST-HOME Buyers Grant will give would-be first home-owners a chance to get their finances in order before applying for a loan.
Under the scheme as it was, the boost to the grant was due to cease on June 30, 2009. The Federal Government will extend the boost to the first home-owners grant by six months to December 31. This additional six months extension, announced in last night’s federal budget, will allow borrowers to build their savings to meet the current, more stringent requirements of lenders.
Since October 2008, first home-buyers have received an extra $7,000 when purchasing an established home and an extra $14,000 for new homes, on top of the $7,000 provided under the first home owners scheme. The boosted grants were due to end on June 30 but will now apply for homes purchased on or before September 30 this year. The extra grants will then be phased down to an additional $3,500 for established homes and $7,000 for new homes up to December 31, 2009. After that date the scheme will continues in its original form providing $7000 to eligible persons to purchase either a new or existing home.
Under the scheme as it was, the boost to the grant was due to cease on June 30, 2009. The Federal Government will extend the boost to the first home-owners grant by six months to December 31. This additional six months extension, announced in last night’s federal budget, will allow borrowers to build their savings to meet the current, more stringent requirements of lenders.
The boosted grants were due to end on June 30 but will now apply for homes purchased on or before September 30 this year.
Since October 2008, first home-buyers have received an extra $7,000 when purchasing an established home and an extra $14,000 for new homes, on top of the $7,000 provided under the first home owners scheme. The boosted grants were due to end on June 30 but will now apply for homes purchased on or before September 30 this year. The extra grants will then be phased down to an additional $3,500 for established homes and $7,000 for new homes up to December 31, 2009. After that date the scheme will continues in its original form providing $7000 to eligible persons to purchase either a new or existing home.
Tuesday, May 5, 2009
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.
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.
Friday, April 24, 2009
Window of opportunity closing
The window of opportunity to secure a low fixed rate home loan could be closing with the major banks now moving to bump up fixed term rates. Effective this week, the four major Australian banks are offering three year rates ranging from a low of 5.49 percent to a high of 6.19 percent. Accross the four banks this represents a rise of between 20 to 40 basis points.
One of the four also took the opportunity to increase its 5 year rate by 45 basis points to 6.84 per cent.
Despite expectations that the cash rate will fall further this year the rising cost of funds has once again been blamed for the banks' decisions to claw back shrinking home loan margins.
While not as attractive as the recent 4.99 percent we offered to customers, a three year rate of 5.49 percent is still reasonably attractive in the context of historical rate levels.
One of the four also took the opportunity to increase its 5 year rate by 45 basis points to 6.84 per cent.
Despite expectations that the cash rate will fall further this year the rising cost of funds has once again been blamed for the banks' decisions to claw back shrinking home loan margins.
While not as attractive as the recent 4.99 percent we offered to customers, a three year rate of 5.49 percent is still reasonably attractive in the context of historical rate levels.
Tuesday, April 21, 2009
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.
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.
Tuesday, November 25, 2008
Good news and bad news
If the Debt Futures Market (DFM) know their stuff, the Reserve Bank of Australia (RBA) is going to lower its cash target rate to 2.75 per cent by April next year. That represents a fall of another two and a half per cent from the current cash rate 5.25 per cent. To kick off this reduction, markets are pricing a massive cut of 125 basis points when the RBA meets at its next board meeting on December 2. That would be the biggest one-month cut in official rate since the onset of the 1990 recession.
If these forecasts prove correct, the cash rate will be at its lowest level for several decades. According to the monthly average of official daily data published by the RBA , the cash rate was at a low of 2.98 per cent in January 1960.
Economists argue that a shrinking Australian economy, falling asset prices and recession-like levels of business confidence will make the RBA more inclined to cut rates aggressively. A 125-basis-point rate cut next month would take the cash rate to 4 per cent. It would be the biggest cut since April 1990, when the RBA slashed the then 16.5 per cent cash rate by 150 basis points, as the Australian economy entered into a recession.
This is both good news and bad news.
However, its really bad news though because rate cuts of this magnitude highlight the seriousness of the economic conditions we are about to head into.
(source: Faifax Ltd)
If these forecasts prove correct, the cash rate will be at its lowest level for several decades. According to the monthly average of official daily data published by the RBA , the cash rate was at a low of 2.98 per cent in January 1960.
Economists argue that a shrinking Australian economy, falling asset prices and recession-like levels of business confidence will make the RBA more inclined to cut rates aggressively. A 125-basis-point rate cut next month would take the cash rate to 4 per cent. It would be the biggest cut since April 1990, when the RBA slashed the then 16.5 per cent cash rate by 150 basis points, as the Australian economy entered into a recession.
This is both good news and bad news.
- Good news because exsitng and new mortgages will be so much more affordable. In the long run, this will help the broader economy in areas like retail, property and personal and business services.
- Bad news for people who rely primarily on bank deposits for income (retirees) as deposit rates fall.
- Good news for equities markets as return on investment in shares become more attractive relative to income earned in bank deposits
However, its really bad news though because rate cuts of this magnitude highlight the seriousness of the economic conditions we are about to head into.
(source: Faifax Ltd)
Thursday, November 20, 2008
Tight, easy and neutral
Monetary policy is a tool by which government (usually through an independent central bank) can influence the economy by affecting interest rates.
To stimulate the economy when things are slow a central bank, like the Reserve Bank of Australia or the Federal Reserve in the US, will typically reduce interest rates to encourage people and businesses to borrow. To constrain the economy, they do the opposite and rates are increased. This makes the cost of loans more expensive and discourages people from borrowing. When things are going OK they neither raise nor lower rates.
When banks are raising rates they are said to be employing tighter monetary policy. When they are lowering rates they are easing monetary policy. When they leave rates alone monetary policy is said to be neutral. This is very general and other factors in an economic cycle can influence whether monetary policy is tight, easy, or neutral.
At present Australia, like almost all other world economies, is experiencing significant economic downturn. Despite the optimism that we may avoid a recession, the Reserve Bank (RBA) is still very concerned about the effect interest rates are having on economic activity and therefore are in the process of easing monetary policy.
The RBA states in its minutes that the reason for lowering rates by three-quarters of one per cent last month was that "given the changing balance of risks, there was an advantage in moving the setting of monetary policy quickly to a neutral position".
This means that despite the large interest rate cuts we have experienced recently, the RBA considers official interest rates may only be back to a "neutral" setting. Given that we are on the brink of a recession, this statement highlights how much further the RBA will cut so that rate are "easy" and therefore begin to stimulate the economy.
This means that Australian home-owners with a variable rate mortgage can look forward to an RBA cash rate around 3.50 per cent by March or April next year. For your mortgage this means a rate of about 5.10 to 5.60 per cent
To stimulate the economy when things are slow a central bank, like the Reserve Bank of Australia or the Federal Reserve in the US, will typically reduce interest rates to encourage people and businesses to borrow. To constrain the economy, they do the opposite and rates are increased. This makes the cost of loans more expensive and discourages people from borrowing. When things are going OK they neither raise nor lower rates.
When banks are raising rates they are said to be employing tighter monetary policy. When they are lowering rates they are easing monetary policy. When they leave rates alone monetary policy is said to be neutral. This is very general and other factors in an economic cycle can influence whether monetary policy is tight, easy, or neutral.
At present Australia, like almost all other world economies, is experiencing significant economic downturn. Despite the optimism that we may avoid a recession, the Reserve Bank (RBA) is still very concerned about the effect interest rates are having on economic activity and therefore are in the process of easing monetary policy.
Australian home-owners with a variable rate mortgage can look forward to an RBA cash rate around 3.50 per cent by March or April next year. For your mortgage this means a rate of about 5.10 to 5.60 per cent
The RBA states in its minutes that the reason for lowering rates by three-quarters of one per cent last month was that "given the changing balance of risks, there was an advantage in moving the setting of monetary policy quickly to a neutral position".
This means that despite the large interest rate cuts we have experienced recently, the RBA considers official interest rates may only be back to a "neutral" setting. Given that we are on the brink of a recession, this statement highlights how much further the RBA will cut so that rate are "easy" and therefore begin to stimulate the economy.
This means that Australian home-owners with a variable rate mortgage can look forward to an RBA cash rate around 3.50 per cent by March or April next year. For your mortgage this means a rate of about 5.10 to 5.60 per cent
Friday, October 3, 2008
Why can't banks just lower their rates?
Even with the recent write downs announced by banks like ANZ and NAB, in general terms, our banks have always been far more prudent with their lending than their US counterparts. With the odd lapse now and again this prudence has become a feature of the Australian Financial system for a number of social, political and economic reasons. Despite the way we disparage our politicians, Australians display a broad cultural acceptance of government that allows regulation, prudential supervision and legal safeguards against the sort of reckless behaviour that has permitted what has now become known as "the US sub-prime crisis".
As Saul Eslake from ANZ bank points out, despite the current turbulence,
However, this is not going to happen. The reason the RBA cut rates last month is because they see a slow down in the economy as potentially more damaging than any lingering threat of inflation that last caused it to raise rates back in March. Inflation will still be on the RBA's radar but the onset of recessionary conditions in the US and elsewhere globaly (New Zealand is already in a technical recession) will help to kill off any immediate inflation worries. We are already seeing markets forecast lower global demand in the falling price of oil. The reason the Australian Dollar has gone from US$0.96 to $US0.78 in just a few weeks is because of the expectation that commodities like coal and iron ore are going to be affected by lower global demand.
The Reserve will want to see retail interest rates continue to fall in an effort to stimulate a faltering economy and it will cut the official cash rate when its board meets next Tuesday. If they want to see retail banks pass the rate cut onto customers, then the cut will need to be a generous half of one per cent because the cut given to customers by the retail banks will definately be more modest.
(References: Saul Eslake, ANZ Bank. Cited in The Sydney Morning Herald, 30 September 2008)
As Saul Eslake from ANZ bank points out, despite the current turbulence,
"Australian banks are still profitable and still adding to their capital and therefore to their capacity to lend. However, the Australian banking system has at least one point of vulnerability – we don't save enough in the form of bank deposits to finance all our loans. This means the banks rely on "wholesale funding" for the difference. This difference is reflected in Australia's large current account deficit that requires overseas borrowings by Australian banks to finance it."That overseas borrowing has become more expensive since the financial crisis began to unfold in August last year and dramatically so over the past two weeks as the crisis has deepened. This upward pressure on funding costs is the reason banks have raised their rates on top of the increases that were handed down by the Reserve Bank in recent months. If things continue as they are and the Reserve leaves its cash rate at the current 7 per cent, its quite concievable the retail banks would have to begin putting their rates up if they want to contine lending at their current levels. To leave their lending rates where they are would mean, in the short term, they would have to restrict their already reduced levels of lending. Either outcome would have catastrophic consequences for our economy as credit for business investment, housing and consumer goods either dried up or was priced beyond reach of most borrowers and crippled those already in debt.
However, this is not going to happen. The reason the RBA cut rates last month is because they see a slow down in the economy as potentially more damaging than any lingering threat of inflation that last caused it to raise rates back in March. Inflation will still be on the RBA's radar but the onset of recessionary conditions in the US and elsewhere globaly (New Zealand is already in a technical recession) will help to kill off any immediate inflation worries. We are already seeing markets forecast lower global demand in the falling price of oil. The reason the Australian Dollar has gone from US$0.96 to $US0.78 in just a few weeks is because of the expectation that commodities like coal and iron ore are going to be affected by lower global demand.
The Reserve will want to see retail interest rates continue to fall in an effort to stimulate a faltering economy and it will cut the official cash rate when its board meets next Tuesday. If they want to see retail banks pass the rate cut onto customers, then the cut will need to be a generous half of one per cent because the cut given to customers by the retail banks will definately be more modest.
(References: Saul Eslake, ANZ Bank. Cited in The Sydney Morning Herald, 30 September 2008)
Wednesday, October 1, 2008
Extra money towards your first home
The burden of saving for your first home has never been greater but, for those saving to purchase in a few years time, the job might be just a little bit easier. From today the federal government’s First Home Saver accounts become available.
If you're saving to buy or build your first home then a first home saver account may suit you. The accounts are complicated by a few rules and regulations but in essence they allow you to attract a contribution from government of up to $850 a year and the tax on the interest you earn is capped at 15 per cent (the same as your superannuation).The overall account balance will be limited to $75,000 and a minimum of fours years needs to pass before the money can be withdrawn to buy a home. The real bonus is that operating one of these accounts doesn’t disqualify your eligibility for the First Home Owners Grant Scheme (FHOG).
To earn the maximum government contribution you need to have saved $5000.00 per year yourself. The contribution is calculated as 17 per cent of the amount saved in each year (17% of $5000.00 = $850.00). If you can achieve this for 4 years you will have $23,400.00 saved which includes the government contribution plus any interest you have earned (less some tax at the lower rate). Add to this the FHOG of $7,000.00 and you’ve got yourself a tidy deposit of just over $30,000.00.
This represents a 6 per cent deposit on a home with a price of $500,000. With the recent exemptions from government stamp duty on homes up to this amount, $30,000.00 will go a long way towards getting you into your first home.
If you're saving to buy or build your first home then a first home saver account may suit you. The accounts are complicated by a few rules and regulations but in essence they allow you to attract a contribution from government of up to $850 a year and the tax on the interest you earn is capped at 15 per cent (the same as your superannuation).The overall account balance will be limited to $75,000 and a minimum of fours years needs to pass before the money can be withdrawn to buy a home. The real bonus is that operating one of these accounts doesn’t disqualify your eligibility for the First Home Owners Grant Scheme (FHOG).
To earn the maximum government contribution you need to have saved $5000.00 per year yourself. The contribution is calculated as 17 per cent of the amount saved in each year (17% of $5000.00 = $850.00). If you can achieve this for 4 years you will have $23,400.00 saved which includes the government contribution plus any interest you have earned (less some tax at the lower rate). Add to this the FHOG of $7,000.00 and you’ve got yourself a tidy deposit of just over $30,000.00.
This represents a 6 per cent deposit on a home with a price of $500,000. With the recent exemptions from government stamp duty on homes up to this amount, $30,000.00 will go a long way towards getting you into your first home.
Monday, September 1, 2008
First home-owner hope
A recent Housing Industry Association survey showed that a record 50 per cent of Generation Y Australian’s (people born between 1975 and 1990) are living at home with their parents. The figure for Queensland is slightly lower, at 44 per cent and from this week, it might just get a little bit better.
Three reasons:
- From today, the Queensland state government has abolished stamp duty on homes with a purchase price up to $500,000. First-home buyers will be exempt from stamp and mortgage duty on homes up to $500,000, a saving of around $10,000. Prior to today, the purchase price threshold for exemption from these taxes was $350,000.
- Tomorrow, a mortgage will cost just that little bit less with the Reserve Bank (RBA) widely tipped to cut interest rates. A cut tomorrow by at least a quarter of one per cent will be the first easing since December 2001 and will help make life a little easier for potential first home owners. The prospect of banks not passing on the RBA cut to retail customers now seems unlikely with recent announcements by NAB, ANZ and Suncorp. On top of this Wizard Home loans has stolen a march on its much bigger rivals. As of today Wizard, cut its standard variable lending rate by 25 basis points in advance of tomorrow’s RBA announcment.
- The housing market is stagnant (despite what some real estate agents might optimistically say) and house prices are falling. So although prices are still very high (Australia currently ranks as having some of the least affordable property in the english speaking world), it’s a buyers market.
While home affordability is still very tough, these three developments should put some welcome purchasing power in the hands of the first home buyer (and maybe free up a spare bedroom for some Boomer Generation mum and dads)
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