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Understand What You Can Borrow

When you’re applying for a loan, it may be tempting just to speak to the financial institution you already bank with. The mortgage market remains highly competitive and it pays to seek alternatives.

Better still, consider using the services of a mortgage broker. A good mortgage broker has access to a panel of lenders and knows their lending application processes.

This will save you time and money and give you the best chance of getting the best possible loan when you need it. They will also be able to advise you on which loan is right for you, given your own personal circumstances.

Carl Thompson – Commercial Lending Specialist, Strategic Investor Group

Big Banks Royal Commission Jitters

Australia’s big four banks continue to manage multiple challenges including falling house prices, a regulatory backlash sparked by the royal commission, and higher funding costs.

A further challenge is that international funding costs have been creeping up in recent months – a trend likely to cost banks hundreds of millions if they are not passed on to customers.

Issues raised by the royal commission will make it much harder for major banks to raise their interest rates independently of the Reserve Bank. At some stage, however, an economic decision will need to be made.

How are you placed should interest rates rise sooner rather than later?

Carl Thompson – Commercial Lending Specialist, Strategic Investor Group

How prepared are you for your property purchase?

Eighteen per cent of Australian bidders have failed to get pre-approved finance prior to attending an auction, a new study has revealed.

According to a recent YouGov Galaxy poll, nearly one in five adults in Australia failed to secure finance before buying at auction.

Given it takes time to seek and be granted pre-approval it is important to seek professional advice as early as possible.

Buyers need to determine how much they can borrow and gain certainty that they are being realistic with their expectations.

Pre-approval is an indication from a lender that they feel comfortable lending a set amount of money to a potential buyer. It puts the buyer ahead of the game and strengthens their position when negotiating a purchase.

Carl Thompson – Commercial Lending Specialist, Strategic Investor Group

Is your loan structured correctly?

The Reserve Bank has left the official cash interest rate on hold at 1.5 per cent for the 20th month in a row.

It is “universally anticipated” that the RBA won’t move on rates in the immediate future.

Most economists only expect one rate rise this year and 10 out of 24 analysts expect rates to remain on hold into 2019, and potentially beyond.

It is important to remain fully informed, and understand your options, by reviewing your individual circumstances today.

Carl Thompson – Commercial Lending Specialist, Strategic Investor Group

Location, Location, Location

Sydney has the nation’s most evenly distributed new apartment market – putting it at less risk of inner-city oversupply – according to the 2018 UDIA State of the Land Report.

Just over a fifth of new Sydney unit completions (apartments, townhouses and terraces) were within five kilometres of the city centre in 2017 compared with almost half of all Melbourne unit completions – the country’s fastest-growing apartment market – the report found.

A third of new Sydney units were within 5 to 10 kilometres of the CBD, 28 per cent of completions were 10 to 20 kilometres out and 18 per cent of completions were as far as 50 kilometres from the centre of town.

Obtaining industry best advice is essential prior to making any potential property investment decision.

Carl Thompson – Commercial Lending Specialist, Strategic Investor Group

Interest Only: PI Rate Movements

The average interest only investment loans with a variable rate have shot up by 73 basis points due to rate movements beginning last November.

These figures, from the latest Reserve Bank of Australia (RBA) Statement on Monetary Policy released on 3 August 2017, reveal this increase was caused by a double whammy of rate rises in November and again in June.

“Since May, most lenders have increased their standard variable reference rates for interest-only loans by around 30 basis points and reduced standard variable rates for principal-and-interest loans to owner-occupiers by around five basis points,” the RBA wrote.

The average fixed and variable rates, as well as the associated changes since November, are listed below:

Interest rate Change since Nov 2016
Variable P&I rate
Owner occupier 4.41% -4 basis points
Investor 4.98% +29 basis points
Variable IO rate
Owner occupier 4.98% +52 basis points
Investor 5.46% +73 basis points
Fixed P&I rate
Owner occupier 4.14% +3 basis points
Investor 4.45% +20 basis points
Average outstanding rate 4.63% +13 basis points

 

– Carl Thompson – Commercial Lending Specialist, Strategic Investor Group

Spruikers Paradise- A Tale of Two Cities

For a number of years now, Sydney property buyers have been coerced into buying in Brisbane. Lured by the promise of massive capital gains and thinking they are getting greater value because the prices were so much cheaper than Sydney.

 

What due diligence did these investors actually undertake? Often it was a schmick presentation by a professional marketing company that claimed to have carefully scoured the entire property market around Australia, and hand-picked a particular unit in a particular development.

 

Well, these investors are about to revisit what they learned in Economics 101, however unfortunately clearly forgot….the law of Supply & Demand.

CoreLogic recently released their expectations for the number of units due to settle over the next 24 months in each capital city. Whilst Sydney can expect an uplift of 12.2%, Brisbane blows that number out of the water with a massive uplift of new units of 21.4%.

With such a massive jump in the supply side, you would need to see a huge lift in the demand side for these units to avoid a complete blood bath in Brisbane. And unfortunately the demand is just not there. In the last 5 years, jobs growth in NSW has increased by 38%, compared to Queensland’s 12%…and it is jobs growth that drives population growth to those States.

In the last 5 years the NSW share of national population growth was 29%, whilst Queensland experienced 20%……. ‘Brisbane, we have a problem.’

The picture is becoming very clear right now and is showing up in what is known as ‘Settlement risk’. That is, the % of off the plan units that were sold in the last few years that are settling today with a valuation lower than the contract price. Sydney has the lowest number in the country sitting just above 10%. In Brissy that number has just hit a whopping 50% according to CoreLogic. That means that 1 in every 2 settlements, is coming in at less than what it was bought for. And whilst some investors will have the cash or equity to complete that purchase, many wont.

The lesson here is simple. Property doesn’t always go up. Property can carry substantial risk.  And most importantly you must always always do your own due diligence.

– Kiril Ruvinsky, Director Corporate Partnerships

Interest Rates – Will they rise, remain stable or fall?

If you have been listening to the so-called experts most were predicting interest rates to fall. Then most predicted they would rise. All the while they have remained steady and are now most likely to stay that way for the rest of this calendar year, and well into the new year.

Whilst the official cash rate has not changed since September 2016 the banks have independently responded by raising rates, particularly on interest only loans, which mostly are used by investors. Investors are now paying much more than a year ago.

In addition, the new bank levy imposed by the Federal Government on the big four in the recent budget is also likely to be passed on and, in fact, smaller and regional banks have already shifted rates higher in anticipation.

Given Bank interest rates already are on the up, and wages growth is the weakest on record, it would be a brave RBA governor who would contemplate a rise in the near future. Phil Lowe will let the banks do the work for him.

Regardless of when your existing loans are due for review, NOW is the time to consider your financing options.

With so many changes to lending criteria in the past few months, nobody quite knows where this will end. One thing is certain, however, that investors need advice right now to ensure they are correctly structured.

Many investors who are coming off their 5-year interest only agreement with their Bank, are going to get a rude shock when their Bank denies a further interest only extension of that loan. A possible solution is to apply for an extension today, whilst they are still eligible.

– Carl Thompson – Commercial Lending Specialist, Strategic Investor Group

Right now, is the time to review your debt – it’s costing you money

 

Although the official cash rate remains on hold, all four major banks in June raised interest rates by between 0.3 and 0.35 percentage points on interest-only home loans, mainly used by investors, while also cutting some other owner-occupied rates by a much smaller amount.

One reason is the prospect of tougher capital rules.

Any week now, the Australian Prudential Regulation Authority (APRA) will reveal how much extra capital banks must hold to be more shock-proof, a change that on its own would dampen profits.

Recent behaviour sees the banks having a track record in passing on the cost of tougher capital requirements to their customers.

A recent Reserve Bank paper pointed out that since 2008, official interest rates set by the RBA had dropped 5.75 percentage points, but the rates banks charge on home loans were only down by around 3.9 percentage points over the same period.

It is highly likely that the next round of capital rules may also see another out of cycle rate increase for investor loans.

A second and related reason why investors and people with interest-only loans may keep copping it is the regulators’ concern about the housing market.

In March, APRA imposed a 30 per cent cap on the proportion of new mortgage lending that can be interest-only, alongside a previous 10 per cent cap on growth in the stock of housing investor loans.

Banks have adjusted to these caps through a combination of tougher lending rules, and price signals.

However, the objective of these two caps is also to limit competition in housing investor lending.

The recent rate hikes by banks should quell some of the RBA’s fears about households’ excessive interest-only borrowing, without any need to move the cash rate.

A third reason why property investors may face higher interest rates is the political target on the banks’ backs. When they are so on the nose with pollies, bankers are naturally hesitant about slugging the majority of mortgage customers, who are owner occupiers, with higher rates.

But when housing affordability is so stretched in NSW and Victoria, it’s a brave politician who comes out and bashes the banks for jacking up rates on landlords.

Whether it is tougher capital rules, curbs on the housing market, or the bank tax, lenders have plenty of excuses to raise interest rates at their disposal. Property investors have become the easiest group for the lenders to target.

With so many changes to lending criteria in the past few months, nobody quite knows where this will end. One thing is certain, however, that investors need advice right now to ensure they are correctly structured.

Many investors who are coming off their 5-year interest only agreement with their Bank, are going to get a rude shock when their Bank denies a further interest only extension of that loan. A possible solution is to apply for an extension today, whilst they are still eligible.

– Carl Thompson – Commercial Lending Specialist, Strategic Investor Group