6th November 2016
It appears the sun has set on the period of super aggressive price discounts which has seen major banks, complete with all the extra services we normally pay a premium for, reduce their rates to match those of the ‘online’ and mutual bank lenders. We thought it may be an opportune time to cover some reasons for how we may have got here.
The Australian property and home loan markets have been navigating unfamiliar waters for some time now. The focus of this article is the effects of the current environment on home loan pricing, however as the two are deeply interconnected it is also worth briefly commenting on the property market.
Bureau of Statistics data shows that there has been above average property value growth in some eastern states capital cities, while a slowdown and exit from the ‘once in a lifetime’ mining boom has created negative pressure on property values in mining states of Queensland and Western Australia. There has also been a de-coupling from “rental yield to value” ratios of investment properties. A likely cause being the cost of funding – in other words low interest rate residential property investment loans. Even with a lower yield, the lower cost of borrowing is supporting higher prices for investment properties.
In early 2016 the Australian Prudential Regulation Authority recognised this, and moved to introduce safeguards against the potential of overheating property prices. These restrictions on the banks resulted in a targeted increase to residential property investment loans – this difference, around 0.20% to 0.40% from a residential property home (owner occupied) loan, remains today.
Another key driver of loan market prices is the success of the Finance Broker network. The number of Australians seeking their home/investment loan advice from a broker, rather than directly from a branch, has been increasingly steadily and now sits near 50% of the total overall number of loans written in Australia. The ability of a Broker to remove the point of contact with a branch has reduced the costs for smaller lenders to reach a customer – as they don’t have the costs of a branch network. This has seen the rise of competition in the market, for example ING Direct, which has no branch network in Australia, can successfully offer low rate loans to customers introduced to them by Finance Brokers. It has also played a role in the October 2016 announcement by Suncorp to close 8 branches in Western Australia. The home loan market has never been more competitive.
This takes us to the leading factor in variable interest rate home loan pricing - the Reserve Bank of Australia cash rate, as this has a strong part to play in the price banks pay to fund consumer loans. This reached a historic low of 3% in April 2009, and after short term increase began steadily decreasing to reach the historic low of 3% again in December 2012. Since then, it has consistently set a new historic low and reduced to the current 1.5%. That is almost 4 years at record low rates – which has been matched by record low home and investment loan interest rates.
So with all this unprecedented change it is hard to not have a feeling of uncertainty, but it also makes for some interesting and unique opportunities. This leads us to home loan pricing.
As lenders continue to muscle for position they offer lower and lower rates. They seem to disappear as soon as they appear, with a possible objective of drawing attention to their products by creating conversation amongst brokers and borrowers. But if you have engaged the services of an astute and active broker you may be able to capitalise on the right opportunity for you, at the right time.
Some unique offers that you may have missed are the low rate Suncorp package deal with no package fee (for life of the loan), the 90% LVR loan with no lenders mortgage insurance at Bank of Queensland (for aviation professionals), and the recent extremely aggressive pricing by Commonwealth Bank – which saw it match rates with almost any lender.
So although we appear to have reached the end of the last six months super-discounting by some of the leading institutions in Australia, at Prefix Finance we’ve taken pride in the opportunities we have managed to grab for our clients. With the continuing uncertainty and competition we expect to see future aggressive offers from the banks, though possibly not as strong, and as always we will be considering our clients when they appear.
If you want to be positioned to take advantage of a perfect offer for you when it arrives, get prepared now.
Brent Jolley is a Director and Mortgage Consultant (Finance Broker) at Prefix Finance. This article includes his opinions and ideas only and does not constitute any form of advice either direct or indirect nature. To accurately advise on any individuals lending requirements and objectives would involve accurate investigation into a person’s/entity’s specific circumstances and financial position, as well as verification of the information collected. All offers and products discussed in this article may be and are not available to all person’s/entity’s and may no longer be available as at the date of publication. To confirm your eligibility for these offers would require the engagement of the services of a qualified mortgage consultant.