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To cure inflation using monetary policy we have 3 groups of HEAVY LIFTERS (and the rest of us Aussies should be fine). Read on to find out if you are likely to be one of the RBA’s heavy lifters.

Some in the media are now (finally) saying that interest rates are a blunt instrument to cure inflation. Blunt might be an understatement. Let’s see what happens and who is impacted when interest rates rise – and when you get to the bottom, you might get a surprise (ok, read down if you must).

So, the RBA’s mantra says you raise interest rates to bring down inflation. But who will be doing the heavy lifting?

First a few facts: Australia has roughly 20 million adults and 6 million kids. And, of those 20 million adults, 13-14 million work and 2-3 million own a business (mostly small business). And to round it out, there are around 500,00 unemployed (i.e. they work for less than one hour a week – so a 2 hour per week worker is a part-timer 😊)

Roughly, one third of adults own a home with a mortgage (with one third renting and one third owning their home outright) – ABS Data. So, the initial brunt of the increase in rates is felt by the one third mortgage holders whose costs go up immediately there is a rate rise. And, by businesses which have borrowed.

Sticking to the adults for the moment, the two thirds who don’t have a mortgage are not initially impacted by a rate rise (in fact, if savings rates go up (lol), some might even benefit).

So, what the RBA is saying (in effect) is: “Ok Australians, hey I’m talking to you with a mortgage! (and you small business owner!), you need to lead the charge on inflation and take a hit. And, as you start ‘doing without’ you will cut your expenditure which in turn will result in slowing demand for products across the board (those sourced and made locally as well as those imported); and for those local products, your drop in expenditure will shrink production and profits will fall.”

So, who will be our HEAVY LIFTERS to cure inflation using interest rates?

– The mortgage holder – about 6 to 7 million adults – probably whom a lot have to look after a majority of the 6 million kids – so up to 13 million impacted

– The newly unemployed – about another 500,000 if the rate doubles

– The small business owner whose profit is often their wage – about 2 to 3 million who may end taking a hit on their home mortgage AND on their business’ viability and profitability (often their wage)

If this logic is correct, the other 12 to 14 million adults should be able to ride the interest rate wave fairly comfortably. It was ever thus.

* Note, I’m excluding the argument on rents as this has little to do with interest rates and more to do with housing availability and demand.

#smallbusiness #interestrates #mortgage

Introduction

When you apply for a loan, you often have the opportunity to select a loan with a variable interest rate or one with a fixed interest rate, either in part or in full.

A variable interest rate can change over time as determined by the lender.

With a Fixed Rate, the rate of interest is set for a period of time, often from one to five years.

A lender will often offer a borrower the opportunity to have part of their loan balance at a Variable Rate and the remainder at a Fixed Rate.

This is known as a Hybrid Rate Loan.

What causes a lender to change their Variable Rate?

Most often, a change to the Variable Rate will follow a change by the Reserve Bank’s Official Cash Rate (OCR).

More recently, lenders are often seen to be taking into account other factors such as the cost of the funds a lender pays to borrow from overseas institutions.

Unfortunately, for this reason, lenders (led by some of the Big 4) sometimes do not pass on the full rate reduction suggested by the downward movement of the OCR.

Do Variable Rates and Fixed Rates ‘follow’ each other up and down?

Generally, variable and Fixed Rates tend to mimic each other in terms of overall movement but many factors can lead to variations between the two.

And to make it even more confusing, sometimes Fixed Rates are higher than Variable Rates and sometimes they are lower.

The factors which come into play include expectations of future interest rate movements (both locally and overseas) plus movements in the wholesale interest rates market, both locally but often overseas, from where a lot of a lender’s funds may be sourced.

So, the discrepancy between the two rates and whether Variable Rates are lower or higher than Fixed Rates is not a simple equation.

In fact, it is quite complicated and convoluted and certainly not transparent!

Variable Rates

Features

– The interest rate may go up and/or down during the term of your loan. Generally, it will not vary more than once a month, if at all.

Pros of Variable Rate loans

– More loan features which may give you greater flexibility.

– You can make early repayments or pay off your loan sooner (including refinancing with another lender) without paying break costs.

As noted earlier, break costs are those costs charged by a lender to a borrower when the borrower wishes to terminate a Fixed Rate loan before the expiry date of the loan term (often arising when the borrower wishes to sell their home).

– Some Variable Rate loans act as a continuous line of credit. This means you can access any available funds if you need money for something else later on (but there may be fees for this).

Cons of Variable Rate Loans

– Your repayments fluctuate with the current Variable Rate, so you don’t have as much certainty and may end up paying more interest than you planned (but also note: ‘the rate may go down as well so you save money’).

And, as noted above, the movement in the rate is based on conditions outside your control.

– The uncertainty over repayments can make budgeting harder. This can be particularly relevant in the first few years of your loan as your income is unlikely to change significantly during this time.

– The flexibility and extra loan features can come at the cost of a higher interest rate. For example, some ‘low rate’ loans have limited features and may even have restrictions as to what you can do and when you can do it.

Fixed Rates

Features

– Fixed rate loans are generally fixed for a period, typically years.

– Most Fixed Rate terms are from one to five years.

Not all lenders and not every lender’s products will offer every variability within this timeframe.

– At the end of the Fixed Rate term, your rate reverts to the current variable loan rate from your lender.

Pros of Fixed Rate Loans

– They make budgeting easier as you know how much you need to pay every month for the term of the Fixed Rate loan.

– The cost (interest rate) may be less as there are fewer features (e.g. redraw and offset may be non-existent or significantly reduced).

– You can set up automatic repayments for the term of the loan as the payments are fixed each month at the same amount.

– You can lock in a Fixed Rate when applying through a ‘rate lock’.

This means if interest rates move up after you apply, but before settlement, you get the benefit of the Fixed Rate at the time you submit your application.

Cons of Fixed Rate Loans

– If rates go down, you won’t benefit from the rate reduction during the term of your loan.

– If you wish to pay off your loan sooner or refinance, there may be break costs or early repayment fees.

Hybrid rate loans

Features

– Part of your total loan is a Variable Rate loan with the balance being a Fixed Rate loan.

– You may choose to have part of your Fixed Rate loans for different time periods.

For example: your total loan you apply for is $500,000. You choose to have $300,000 on a Variable Rate loan, $100,000 on a Fixed Rate loan, fixed for 1 year and $100,000 on a Fixed Rate loan, fixed for 3 years.

Our take

– No matter what the forecasters say about the future of interest rates, the reality is no one knows what is going to happen in the future.

Even with all the known information available, there are still a number of unknown factors which can influence the amount and timing of any change in interest rates.

– So, all forecasters (and you) can do is make educated guesses as to the direction and timing of any changes.

Other than any educated guess, the decision to either take a variable interest rate product or a fixed interest rate product is often a matter of 2 things to do with your feelings:

1. Your feelings around adversity Vs missing out on something good:

Are you the sort of person who stresses if something adverse happens or are you the sort of person who stresses if you miss out on something good?

2. Your feelings around cashflow stress:

Are you the sort of person who stresses if your cashflow gets tight due to higher payments?

– Everyone is different and everyone’s appetite for risk is different so there is no ‘one answer is correct’ advice.

And, when you are dealing with joint applicants, you need to take into account the risk profile of each applicant.

Just because one applicant might be comfortable with a higher level of perceived risk, the other applicant might be a little bit more conservative; so you need to balance the attitudes of both applicants.

As part of our due diligence when we assist you in identifying a suitable loan, we undertake a Needs Analysis for each person applying.

On a scale from 1 to 10, we inquire about your level of worry regarding the escalation of interest rates.

Additionally, we discuss with you the benefits and drawbacks of considering a Fixed Rate loan, either partially or entirely.

Lastly, we always ask about the members of your team.

What we want to know is, have you got a great team of advisors to assist you in making important decisions?

Because when you are dealing with loans of hundreds of thousands of dollars, you need knowledgeable, ethical professionals advising you of your risks.

Check our Financial Calculators!

Book a time here with me to know more about each rate: Calendly

Hi,

I hope you and your family had a great Christmas break. Even though it’s early in the year, there’s already some big news around:

– Refinancing hits new record

– Property listings rise 4.6%

– 3 key fixed-rate loan tips

Read more below.

But first….. 3 things!

#1 Our survey results are in!

Conveyancer Vs Property Lawyer?

Our question was: As a property purchaser, would you use:

– A conveyancer

– A property lawyer

– Someone who does both

Some observations:

Personally, I like to use a conveyancer who works closely with a property lawyer or alternatively, a property lawyer. The reason being that if something goes awry, I want my conveyancer to be onto it like a dog with a bone. I don’t want to have to suggest and then engage a property lawyer at the last minute (I had a client who was once in that position and it was painful for all concerned 😥)

Property lawyers can cost a little bit more than a conveyancer (but not always a lot more) and for run-of-the-mill property transactions, you might think “Is this overkill?‘ But for me, I come from the perspective ‘I am not the expert and I don’t know what I don’t know‘ so I rely on the legal and property experts to assist me. I would call those extra few hundred dollars I might need to spend as my insurance policy!

And if there is complexity but I don’t understand the complexity, I don’t want my conveyancer to assume I have already obtained appropriate legal advice (noting that conveyancers cannot give legal advice).

#2 Updates to our Property Market Reports.

These Reports are a great resource for those looking to buy in a new region or just to get a feel for what is happening in that region. Each Report also includes a suggested recommendation to Buy / Hold / Sell.

Updated Regional Property Reports

Here are the last 3 months’ updates of these detailed regional reports (including the property clock: Buy / Hold / Sell).

There are 30+ regions analysed and they are updated regularly.

Get your Free Property & Regional Reports

#3 Phil Anderson – Guru or ….?

If you don’t know or have not heard of Phil Anderson, you are not alone. He runs a business called Property Share Market Economics and pre-COVID, he presented at a CBRE property seminar.

Phil has a contrary view on all things economic to what you might read in the media. As he says, the economy runs off the back of the price of land and the economic rent of land. And most economists don’t factor this relationship (and the cyclical nature of this relationship) into their economic forecasts.

Phil’s food for thought: Phil believes the property market runs in a predictable cycle (18.6 years is pretty precise!) and that the next peak is in 2026/27.

Further, he is predicting banks, with their higher margins from the interest rate increases will be increasing access to credit which will fuel the next series of price rises. On this I am in agreement – and, watch out for bank profits to go up even higher as a result.

Now, whether you think Phil is blowing steam from you know where or whether you agree with him, the interesting thing is that he is bullish on the property market for the next few years. And, he says he has data on his side. Of the last 10 cycles of interest rate increases, the price of property has increased 9 times (and in the 10th it went sideways).

So there you have it!

Mortgagees refinanced a record $19.5 billion of home loans in November, the Australian Bureau of Statistics (ABS) has reported.

That included $13.4 billion of owner-occupied loans (also a record) and $6.1 billion of investment loans (the second-highest on record).

The ABS had a simple explanation for the astonishing amount of refinancing that occurred in November: “More borrowers switched lenders for lower interest rates as the RBA’s cash rate target continued to rise.”

There are two reasons why so many people are able to find lower-rate home loans at other lenders.

First, rising interest rates are causing people to shop around, because not all lenders are increasing rates at the same pace.

Second, with so many lenders in the market, competition for business is fierce, so institutions often charge new customers lower rates than their existing customers.

If you like the sound of switching to a home loan with a lower interest rate, get in touch. I’ll compare the market on your behalf and give you multiple options to choose from.

Want to compare interest rates? Let’s talk!

In a strange twist, the number of properties listed for sale has increased, even as the number of homes coming onto the market has decreased, according to SQM Research.

At first glance, it appears as though there must be fewer for-sale properties. That’s because, across Australia, the number of new listings (those that had been on the market for less than 30 days) in December was 22.4% less than the year before.

However, while fewer new homes are being listed for sale, those already on the market are taking longer to sell. In December, the number of listings that had been on the market for more than 180 days was 14.3% higher than the year before.

As a result, the total number of homes listed for sale in December was 4.6% higher than the year before.

SQM Research managing director Louis Christopher said the rise in older listings appears to be uniform across cities and towns, and is typical of what happens in a housing downturn.

“As there remains more sellers than buyers, dwellings on the market that are not priced to market, don’t sell,” he said.

Get in touch if you need a home loan!

If you fixed your home loan in early 2022 or before, and your fixed period is going to expire this year, it’s important to prepare yourself for higher interest rates.

That’s because, once your fixed period ends, you’ll revert to a variable loan, whose interest rate will almost certainly be higher.

Since May 2022, the Reserve Bank has raised the cash rate by 3 percentage points, and most banks have increased their variable rates by a similar amount.

Here are three tips to prepare yourself for a rate rise:

– Pretend your interest rate has already increased by 3 percentage points and pay the extra amount into a special savings account each month

– Look for ways to reduce your discretionary costs, such as by holidaying domestically rather than internationally or buying a used car rather than a new vehicle

– Speak to a broker ahead of time about refinancing to a lower-rate home loan once your fixed period ends

Many lenders offer special inducements to refinancers, including lower interest rates and cashback deals, which is why refinancing can be such an effective tactic.

Get in touch if you want to refinance!

The Australian Banking Association, which represents the country’s biggest banks, will make changes to the Banking Code of Practice to better protect customers.

In response to the 2021 Independent Banking Code of Practice Review, the ABA has said it would:

– Accept clear statements about customers’ rights and how to enforce them.

– Ensure banking services are inclusive of people of diverse sexual orientations and gender identities.

– Update the definition of a ‘small business’, to protect an additional 10,000 small business customers.

– Update the definition of a ‘vulnerable customer’, to better recognise that anyone can be vulnerable at any time.

The changes around vulnerable customers will also clarify the type of support available to all customers, including financial difficulty options for small businesses or those needing access to external support services such as interpreters and financial counseling.

The ABA has started work on drafting its amendments.

The ABA’s membership includes 20 of Australia’s largest banks, including the big four banks, Macquarie Bank, Bendigo & Adelaide Bank, Bank of Queensland and ING.

Below are some observations as reflected from the data obtained from the RBA for the 12-month period ending 31 August 2020. Whilst both the absolute numbers and the relationship between rates will change, these observations provide you with useful information when you are shopping for a home loan by explaining some of the macro risk profiles considered by lenders.

1. Principal and Interest (P&I) interest rates are generally lower than Interest Only (IO) interest rates. Based upon a quick look at two major lenders (Macquarie and Westpac), P&I rates are lower than IO rates by 0.7% pa and a whopping 2.25% pa respectively!!!

This spread in rates can change if lenders form a different view of future economic conditions including inflation. Right now, lenders are rewarding borrowers who can demonstrate a capacity to gradually repay their loan. (PS the sting in the tail for IO loans is that whilst the repayments might be lower (in dollar terms) than a P&I loan, the debt servicing rate for IO loans is higher than for P&I loans; the logic being that after the IO period ends, the loan principal needs to be repaid over a shorter period of time so the monthly repayments of the principal are higher).

2. Rates for Owner Occupiers (OO) are sometimes lower than the rates for Investors (IN). Currently, the Variable Rates for an Owner Occupier are about 0.3% pa lower than for a similar Variable Rate product for an Investor.

3. The relationship between variable rates and fixed rates is more complex. Depending upon lenders’ views of future interest rates (and a whole bunch of other economic factors), the Variable Rates can be higher or lower than the Fixed Rates. Currently, Variable Rates are lower than most similar Fixed Rate products. And, the difference in interest rates between the two increases as the Fixed Rate term increases (the lowest Fixed Rate term is 1 year and the highest Fixed Rate term is 5 years).

4. The Loan to Value Ratio (LVR) also impacts the interest rate you will pay. If you have an LVR of over 80%, you can expect to pay a premium of anywhere up to 0.5% pa (and perhaps higher). It is also worth noting that loans with a high LVR (mostly over 80% but sometimes a bit higher if, for example, you are an eligible borrower (e.g. medical practitioner)), also require borrowers to pay Lenders Mortgage Insurance (LMI). LMI is an insurance policy the borrower pays to protect the lender in the event of a default and is often capitalised on top of the loan amount. (Note: LMI also has some hidden costs to the borrower in the event of default but more on that elsewhere).

5. The size of the commitment suggests that lenders slightly favour loans under $1.0M over loans. However, the differential is not significant. – between nil and 0.1% pa.

[1] RBA Data: https://www.rba.gov.au/statistics/tables/#interest-rates

The marketplace

– The consumer lending marketplace, especially in home loans and residential lending, is vast and perplexing.

– Apart from the big 4 retail banks (CBA, Westpac, NAB and ANZ), there are regional banks which operate in each State, credit unions and mutual lenders (which are ‘owned’ by consumers) plus the growing range of online ‘fintech’ lenders who only offer consumers loans via their website.

Brokers have access to many of these lenders plus even more as they can obtain loans from lenders who only lend money to consumers via a broker distribution channel.

– Research by KPMG[1] in 2019 indicates that the big 4 banks have a share of over 81% of the residential property mortgage market. And, as over 55% of borrowers use a broker[2], brokers also place a lot of their clients’ loans with the major lenders.

So, whether you use a broker or whether you walk down to your local high street bank, the big 4 dominate the lending landscape.

Most borrowers probably feel that if they have a choice of 4 (or 5 or 6 if you include regional banks which are available in most States) of largest lenders, they would be getting an ‘ok’ deal – and that the options they are being offered by the big 4 represent what is available across the lending industry.

And for many borrowers, this might well be true – but it is not necessarily true.

The reason this approach of walking down your local high street is appealing to many borrowers who have not used a broker is because research has shown we don’t like too much choice.

We do like choice, but not too much. And more than 4 or 5 to choose from quickly becomes ‘too much choice’.

So, with over 40 lenders which most brokers deal with, the choice is far too large to consider for most borrowers.

That is one of the main reasons why borrowers use a broker – to sort through the ‘too much choice’ factor quickly and efficiently so the borrower can approach a lender whose product is suitable for the borrower.

How do we shop for home loans?

The KPMG research shows a number of interesting facets in obtaining a loan:

– We prefer to research online (87% use and prefer the internet) but when it comes to the application, we are more likely to opt for face to face (56%) – but then, we prefer to revert to online service (80%). And, we really don’t like call centres and we try to avoid them whenever possible!!!

– 44% of those who have previously taken out a loan preferred to apply via a broker Vs 41% using their existing financier and 15% preferring to use a new financial institution.

– And of those who use a broker, 67% renegotiate their interest rates at least once every 5 years compared to 53% for those who applied directly to a lender.

At BIR Finance we do this every year with your existing lender and every 2 years with other lenders.

– The older we are, the more likely we are to use our existing lender.

– Roughly two thirds of respondents have 2 or more financiers.

– Reasons we choose brokers or new financial institutions – or decide to stay with our existing financier:

> Interest rate or price related data: 51% of those borrowers who used a broker channel and 59% of those who went to a new financial institution, did so for interest rate related reasons.

– and this was regarded as a significantly important reason.

Only 19% of those who used their existing financier prioritized interest rate related reasons and they did not rank this reason as being an important reason for choosing their existing financier.

> Convenience: 35% of those borrowers who used a broker related channel and 65% of those who used their existing financier did so for convenience related reasons.

> Trust: was the third main area identified as reasons borrowers chose brokers (14%) or new financial institutions (27%) or they decided to stay with their existing financier (16%).

Based upon my exposure to borrowers, lenders and the broker channel, this research makes intuitive sense.

Major Bank Market Share Falls 2019

Broker Market Share Bounces Back

Ibid To Sell is Human, Dan Pink p. 234

Ibid, KPMG

Subject to your consent – of course!

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