reports

The marketplace for home loans

– The lending marketplace for consumers is large and confusing – particularly in the home loan and more broadly, the residential lending space (home loans and investment property loans).

– 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 Solutions 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.

[1] Savings.com.au: Big banks lose market share in tough home loan environment by William Jolly

[2] The Adviser: Broker market share bounces back by Charbel Kadib

[3] Ibid To Sell is Human, Dan Pink p. 234

[4] Ibid, KPMG

[5] Subject to your consent – of course!

Hi,

Christmas is just around the corner, so if you haven’t done your shopping it might be wise to start now. In the meantime, here are four stories I think you’ll like:

– Borrowers pass their ‘rate buffer’

– Govt tackles housing affordability

– Australian property earns praise

– ABS releases good economic news

Read more below.

And for the business owners amongst you,

we have snuck in the results of our most recent survey (towards the end 😉)

This month’s survey question:

If you were borrowing money for your business, would you…..

use your transaction bank

a specialist lender

a broker

(Scroll to the end to see the results – and our commentary!)

Plus…..

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.

Request FREE Report

The mortgage market has entered interesting territory, thanks to the Reserve Bank’s decision to hike the cash rate by another 0.25 percentage points in November.

That increased the rate rises that have occurred since May from a cumulative 2.50 percentage points to 2.75 percentage points.

The reason that’s significant is because when lenders assess home loan applications, they have to make sure the borrower could repay the loan if interest rates were to rise.

Until October 2021, lenders had to add a buffer of at least 2.50 percentage points – so the November rate rise pushed many borrowers beyond their buffer.

Since October 2021, that buffer has increased to at least 3.00 percentage points

But despite the series of rate rises, CoreLogic isn’t seeing any signs of panicked selling or forced sales in its listings data.

“In fact, the flow of new listings remains substantially below what they would usually be for this time of the year,” executive research director Tim Lawless said.

Reach out if you’d like to discuss refinancing. I can explain the pros and cons, and potentially help you refinance to a comparable loan with a lower interest rate.

One of the highest-profile elements of the Albanese government’s first budget was a target to “build one million new well-located homes over five years from 2024”.

Only 2% of these one million new builds will be funded by the federal, state and territory governments; the other 98% will come from the market, with governments “playing a key role in enabling and kick-starting investment”.

CoreLogic’s head of residential research, Eliza Owen, noted that some have said the target lacks ambition, given that 974,732 homes were constructed in the five years to June 2022, and an average of 1,010,723 have been completed on a five-year basis since 2017.

One of the highest-profile elements of the Albanese government’s first budget was a target to “build one million new well-located homes over five years from 2024”.

“However, the past five years have been conducive to high levels of construction (notwithstanding immense bottlenecks for the construction industry in the past two years) and there’s no guarantee activity levels will remain at the same level for the next five years,” she said.

“As interest rates rise, home prices fall and supply-side constraints persist, the delivery of a million homes is not guaranteed and may be more ambitious than what was achieved in the past five years.”

Australia’s population is set to grow strongly over the next decade, which is likely to lead to higher demand for rental accommodation.

Global real estate giant CBRE said population growth is one of the main reasons why “Australian real estate represents a compelling investment”.

CBRE said Australia’s population was expected to grow by 14% between 2021-2030, which would be the highest rate among developed economies.

That strong population growth is partly due to migration, with the federal government recently increasing its annual permanent migration intake from 160,000 people to a record 195,000.

More competition for rental accommodation would put upward pressure on rents, in an environment that’s already strongly favouring landlords. As CBRE noted, there is “less than 1% vacancy in select markets”, which is leading to “robust rent growth”.

CBRE forecasts that from 2022-26, rents will increase by an average of at least 5% per annum in Sydney, Melbourne, Brisbane, Perth and Adelaide.

Australia’s economy has posted its best growth numbers in a decade, according to the most recent data from the Australian Bureau of Statistics.

The economy grew 3.6% in the 2021-22 financial year – the best result since it grew 3.9% in 2011-12.

That strong economic growth has helped drive down the unemployment rate to below 4%, which is very low. As a result, the vast majority of workers have jobs, which is the key to being financially secure.

The ABS also reported that households saved 13% of their income in the 2021-22 financial year, which is high by historical standards.

That means many people put money aside for a rainy day – a smart move given the subsequent increase in prices and interest rates.

The Reserve Bank said earlier this month that it “expects to increase interest rates further over the period ahead”, so if you have a home loan, it would be wise to budget accordingly.

Two possible ways to save money are to ask your bank for a rate cut (you’d be surprised how often they agree to this) or to refinance to a comparable loan with a lower interest rate.

This month’s survey results are in!

If you were borrowing money for your business, would you…..

The interesting thing here is that whilst 70% of borrowers consider using a broker for their residential property loan, business owners still prefer to use their bank.

This is interesting for a few reasons:

– Transaction banks are not always the best solution for business finance. That is why there has been a proliferation in the growth of non-bank lender finance for businesses.

– Using property security for business purposes may work when there is an asset being acquired and the asset is the property which is being used as security.

– However, for other business purposes e.g. working capital finance, cashflow finance, ‘urgent cash’ finance and debt consolidation finance, other types of security might work better – particularly in terms of turnaround time and flexibility of the amount able to be borrowed.

– There are now non-bank lenders offering not just invoice finance (commonly referred to as debtor finance or factoring) but also trade finance where the supplier’s invoices are financed so the supplier remains happy as they are being paid on time. This can be particularly relevant for purchases from overseas suppliers who don’t like to ship their stock if they haven’t guaranteed payment is going to be received.

– Sometimes (e.g. for a property acquisition), the business owner is using the business entity to hold the asset. However, the assets can be held in other entities which might be more appropriate eg a super fund, or a trust. Typically, we see good tax accountants assist business owners make this assessment.

We can help you work out the best way to fund the cash your business needs in order to grow. And, as a broker, we can introduce you to the lender which will best suit the needs of your business.

Before we start….

For further content, please visit https://www.bir.net.au/blog/

And, if you would like a Free Property Report, you can order yours here: https://www.bir.net.au/report-request. You can obtain a report for a particular property, suburb or region in Australia, so you can make informed property decisions. Plus, our suburb reports now provide a comparison report of up to 5 suburbs you want to research.

Any questions, please ring me, Michael Royal 0411 190 474 or email me: michael.royal@bir.net.au. And you can also book a meeting with me: https://calendly.com/michael-royal/chat-re-finance

Now, back to the Article! 😉

At its simplest level, there are 2 types of interest rate products available for the housing loan market in Australia – Variable Interest Rate products Vs Fixed Interest Rate products.

But this is just the start! Many lenders, for example, offer Fixed Rate products with different terms ranging from 1 year all the way through to 5 years.

And, there are 2 ways you can pay back the amount you borrow – gradually over time (referred to as Principal and Interest repayments) or in a lump sum (referred to as Interest Only repayments). Within the home loan lending environment, Interest Only products don’t tend to get repaid but rather, they revert to a Principal & Interest product after the Interest Only term expires. Interest Only terms are typically somewhere between 1 to 5 years while the remaining Principal & Interest term might be a further 25+ years on a 30-year term loan.

And if you take out a 30 year loan with a 5 year Interest Only option, your Principal repayments for the remaining 25 years and which kick in after the expiry of your 5 year interest only period will be proportionately higher than if you started off repaying your Principal at the commencement of your 30 year loan.

Plus, there are some lenders who offer a Variable Rate Line of Credit and there are some who allow you to prepay your interest a year in advance (which can be handy when you have a higher taxable income in a year which you can offset with the prepayment of interest when the interest is tax deductible).

All home loan products essentially take into account a mix of these 4 options. Each option combination has a different risk profile for the lender and is likely to have a different interest rate (or price) being charged to the borrower. There are no ‘set rules’ or even ‘rule of thumbs’ you can use to assess the perceived risk as risk profiles can change over time and lenders are continually updating their risk profiles. Below are some current risk profiles as identified in recent RBA data (as at October 2020).

There are a number of additional reasons the interest rate charged by a lender might vary in addition to the mix of products selected by the borrower – plus some of these factors might even result in particular lenders saying ‘no’ to providing finance:

– The borrower’s profile (including income, expenses, assets, liabilities, credit history, profession).

– The purpose for borrowing (typically either home (owner occupier (OO) Vs investment (IN); or established Vs off the plan Vs land & construction).

– The borrower’s identity (a natural person (like you and me!), company, trust, partnership or super fund).

– The amount being required to be borrowed (the total amount as well as the amount compared to the borrower’s income).

– The loan to value ratio (LVR) and whether the LVR is above the lender’s LVR limit resulting in the lender requiring the borrower to pay lenders mortgage insurance (LMI).

And finally, here are some other things to be aware of:

– Additional features provided by a lender may result in a higher interest rate as compensation for the lender for providing these features. For example, a loan without an interest offset account and redraw facility may have a cheaper interest rate. Additional features like an offset account can be very useful as they can reduce your total interest cost – and they may even be useful to have ‘in reserve’ in case you do need them – but as with all things, make sure you have thought this through otherwise you might be paying for something you never were likely to use.

– Interest rates vary between lenders as well as between a lender’s products. So, it is wise to do your homework and review the market. Nevertheless, not all lenders are going to be on ‘Page 1 of Google’. That is why it is prudent to consider using a great broker. Great brokers know far more lenders and lending options than could ever fit on Google’s page 1.

– No matter how attractive a lender’s interest rates appear in the marketing and advertising blurb, not all lenders’ products are available for all borrowers. As noted above, some lenders have quite tight restrictions on the criteria they use when considering whether to offer an applicant funding – and so you might not qualify for their ‘low rate’ product. Unwary borrowers can waste a lot of time preparing loan applications for loans they were never going to get or at a rate they were not going to be offered because they were not made aware of all the lender’s restrictions. Again, this is why applicants should consider using a great broker – because great brokers know more about each lender’s products than consumers and they know who and what to ask if there is a potential issue with a particular assessment criteria used by a particular lender.

– Beware ‘limited time’ offers with low interest rates – or honeymoon rates as they are often called. These rates expire and at the end of that time, your loan will revert to the lender’s then current interest rate.

– Fees and charges can vary for each loan. When considering fees and charges, Choice 1 suggests you need to take these into account under the heading ‘Watch the fees.’ Choice lists the following fees for consideration (I have regrouped them so it is easier to read:

– Upfront charges: LMI

– Ongoing fees: monthly or annual fees.

– Discharge fees & Break costs

I agree. However, be careful of not over-estimating the impact of fees and charges. For example, on a $500K loan, an interest rate differential of 0.1% pa equates to $500 pa. At present, most annual fees charged by lenders are less than $500 pa – so an interest differential saving of 0.1% pa when paying an annual fee of (say), $400 pa would mean you are ‘ahead’ by $100 pa. And even then, when we are looking at the overall cost of interest, this is not a great deal and in many cases, would not be considered material to your decision.

[1] Choice: https://www.choice.com.au/money/credit-cards-and-loans/home-loans/buying-guides/how-to-choose-the-right-home-loan

Hi,

Supply chains are still not back to normal, so it might be wise to start ordering your Christmas presents now. In the meantime, here are four big property and finance stories:

– Property buyer breakdown

– Regional scheme goes live

– Home loan landscape changing

– Buyers value energy efficiency

Read more below.

But first…. our monthly survey results 😉

How much can you save by

checking and renegotiating your variable interest rate with your lender?

This result is interesting for a number of reasons:

1. Over $1,000 a year saving is a lot of lattes!

2. If there is money to be saved, then it is important that borrowers who don’t want to pay more than they should to their lender, get cracking! Particularly if they don’t use a broker 😉

3. If they use a broker, it is important for borrowers to make sure their broker is doing this for them – at least once a year. (We have now started this process for our clients so watch your inbox for an email from us if you have a Variable Rate loan we have organised for you over 12 months ago 👍)

4. In the current changing interest rate climate, lenders are making hay – at their borrowers’ expense – as no one can keep up with the constant and rapid interest rate increases.

5. The ACCC’s 2020 report on home loan interest rates suggested that borrowers were paying FAR too much interest compared to the best rates in the market. And, to make matters worse, the longer the borrower had been with a lender, the greater the difference between this ‘best rate’ and the rate they were being charged by their lender. Check out the table below.

So, if you would like us to do our FREE rate review for you (whether we organised your loan or not), just reach out and I will get our team cracking to see what we can save you! Just click the link below to get this moving!

Contact Us

New analysis has found that different buyer groups respond quite differently during downturns – with the current slowdown fitting the historical pattern.

“The main difference between the buyer types over historic downswings is that first home buyer demand for finance has traditionally been more resilient through downswings, with subtler declines in demand, and during some periods, increases,” according to CoreLogic’s head of residential research, Eliza Owen.

“Subsequent home buyers and investors have seen a more distinct decline in demand for housing finance initially through downswing.”

Ms. Owen’s research findings came after studying downturns in 2004, 2008-09, 2010-12, 2015-16 and 2017-19.

Since April (when national home values peaked) and August (the most recent month for which the Australian Bureau of Statistics has data) the value of new home loans fell:

– 9.9% for first home buyers (owner-occupiers)

– 10.8% for subsequent home buyers (owner-occupiers)

– 20.1% for investors

I can help you enter the market, whether you’re a first home buyer, an upgrader or an investor.

The federal government’s first home buyer support package for regional Australians has been launched, as of October 1.

Here are the key details of the Regional First Home Buyer Guarantee:

– The scheme is limited to owner-occupiers

– Eligible buyers can enter the market with just a 5% deposit

– You don’t need to pay lender’s mortgage insurance

– You must buy in a regional area

– You must have been living there, or in an adjacent area, for at least 12 months

– Income limits apply ($125k for singles, $200k for couples)

– Price caps apply (which vary from area to area)

The government has allocated 10,000 places per financial year to this scheme.

“Australians living in regional areas have faced some of the largest drops in housing affordability, making it increasingly hard for locals to save a sufficient deposit,” according to Housing Minister Julie Collins.

“The Regional First Home Buyer Guarantee will help aspiring first home buyers living in regional Australia realise home ownership sooner by overcoming the deposit hurdle.”

Over the past six months, the average person’s borrowing capacity has fallen by about 25%.

That’s because the maximum amount a typical person can borrow falls by about 5% every time the Reserve Bank increases the cash rate by 0.50 percentage points, according to the Reserve Bank’s head of domestic markets, Jonathan Kearns.

Since May, the cash rate has jumped by 2.50 percentage points, which is why borrowing capacities have fallen by about 25%.

As a result, it’s become harder to qualify for larger loans; and harder for some borrowers to qualify for any loans at all.

If you want to buy your dream home, it’s a good idea to consult an expert mortgage broker. Here’s why:

– Your borrowing capacity varies from lender to lender

– Brokers work with a large, diverse panel of lenders

– So they can recommend lenders that want to do business with borrowers like you

– They can present your application in a way that appeals to the lender’s individual criteria

Unfortunately, if you try to manage the application process yourself, you might choose an unsuitable lender or present your application incorrectly – and potentially get rejected.

Property buyers are placing increasing importance on energy efficiency, according to research from realestate.com.au.

A survey found 56% of consumers believe energy efficiency is extremely important, compared to 48% for the same survey last year.

The top five reasons people thought energy efficiency was important was so they could:

– Reduce their energy bills 76%

– Do good for the environment 57%

– Reduce their carbon footprint 53%

– Reduce their chance of bill shock 50%

– Live in a better-designed property 44%

And the top five sustainable property features that interested them were:

– Solar power 71%

– Efficient lighting 63%

– Insulation 60%

– Air flow 59%

– The position of the home relative to the sun 58%

Meanwhile, the top five keywords that buyers entered when searching for energy-efficient features on realestate.com.au were:

– Solar power 93.3%

– Energy efficiency 3.6%

– Double-glazed windows 1.2%

– Hydronic heating 0.6%

– Star rating 0.5%

Before we start….

For further content, please visit https://www.bir.net.au/blog/

Now, back to the Article! 😉

Introduction

Commonwealth legislation requires that for every home, car or personal loan advertised, a comparison rate has to be quoted. But lenders also have to include a warning about the accuracy of the comparison rate.

Comparison rates were originally introduced as part of the Uniform Consumer Credit Code in 1994. The UCCC has since been replaced by the National Credit Protection Act (NCCP) which includes the National Credit Code (NCC) as Schedule 1 to the NCCP. Comparison rates are set out in Part 10 of the NCC. Compliance with the provisions of the NCCP are governed by ASIC (Australian Securities and Investment Commission).

As ASIC says on its own website, ‘The comparison rate includes: the interest rate and most fees and charges’. It goes on to say, ‘A comparison rate does not include all fees and charges. For example, the comparison rate does not include: government fees and charges (such as stamp duty and mortgage registration fees) and charges that are only charged in certain circumstances (such as early repayment fees and redraw fees), for example if you pay off the loan early.’ And in wrapping this explanation up, ASIC says, ‘The comparison rate only allows comparison based on cost, and will not include other factors that may make a loan more attractive, such as access to fee free accounts or flexible repayments arrangements.’

CBA also goes on to say a comparison rate does not include ‘cost savings such as fee waivers or the availability of interest offset arrangements which can influence the cost of a loan.’ And Finder.com.au adds in late payment fees, deferred establishment fees and conveyancing fees.

After reading this, it’s fair to ask:, ‘Is a comparison rate useful?’ That depends on what you want to achieve and how relevant the data is on which the comparison rate is based.

Features of the Required Comparison Rate

– The Government’s comparison rate is based upon a loan amount of $150,000 and a loan term of 25 years.

– The comparison rate takes into account:

> The interest rate includes any ‘revert to’ rate which applies to the loan after a set period.

> Fees and charges including upfront costs like establishment fees and valuation fees, and ongoing costs such as monthly or annual fees.

> Repayment frequency.

– You can calculate your own comparison rate but to do so, you will need the following information and preferably, a comparison rate calculator:

> Loan amount

> Loan term

> Repayment frequency

> Interest rate

> Monthly account fee (if any)

> Annual fee (if any)

> Establishment fee (if any)

> Valuation fee (if any)

> Mortgage documentation fee (if any)

> Settlement fee

Pros of the comparison rate

– It ensures lenders cannot completely hide all ‘hidden fees and charges’. In this sense, it is a good guide for borrowers.

– Because comparison rates take into account fees and charges as set out above, the rate of interest tends to be higher than the quoted interest rate which excludes fees and charges.

Cons of the comparison rate

– It does not reflect the actual comparison rate for your loan – unless of course your loan is for $150K over 25 years.

– It does not reflect the impact on the quoted interest rate provided by most lenders for most home loans as most home loans are well above $150K (the average Australia-wide was approximately $450K in December 2019.)

– As most fees and charges are fixed in nature, at the loan value of $150K, the impact on the interest rate would be significantly higher compared to, say, a $750K loan. On a straight comparative basis, the impact on the interest rate for the $750K loan would be one fifth of that calculated on the $150K comparative rate loan.

– If your home loan is not for 25 years, the comparison may become less relevant.

Our take

– Comparison rates are useful indicators but should not be used in isolation for all the reasons identified above.

– Do your own research before you proceed to ensure you understand all the costs a lender will charge you.

– Use a broker to do the hard work for you! Brokers have software which can show you the total cost of a loan over the life of the loan and also over shorter periods (eg the first five years of a loan). This can be very useful as you might be contemplating refinancing or moving well before your loan term expires.

[1] ASIC

[2] Commonwealth Bank of Australia (CBA)

[3] CBA – ibid

[4] CBA – ibid

[5] Finder.com.au

[6] Canstar quoting from data prepared by the Australian Bureau of Statistics (ABS) which was analysed by Commsec