NAB is tipping the central bank will still raise interest rates by 25 basis points but not until November 2012 instead of previous forecast of May. NAB chief economist Alan Oyster anticipates a long period of inaction by the RBA, before increasing rates to 5% in November 2012.

But investors are betting the official cash rate will drop to 4% by December 2011 as the banks are forced ti act as the economic slowdown worsens. Out of the four big banks, Westpac is the only bank tipping that interest rates will drop by 25 basis points to 4.5% by this Christmas. Well who do you believe. We will have to wait and see.

Source: www.thetelegraph.com.au/16092011.

Mortgage exit fees were finally thrown out of the window on July 1, liberating borrowers from punitive home loans with excessive break costs. However, the banning of the exit fees is creating some noticeable side effects.

The big four banks were the ones receiving negative publicity over the interest rate manipulations, but it is these lenders who were most relaxed about the ban. In fact ANZ and NAB voluntarily eliminated their exit fees before enforcement date. So who were the worst hit from this ban?

It’s clear that the smaller lenders, particularly the non-banks are the ones who were hardest hit. In order to compete with the big boys, these non-bank lenders invented the ‘deferred establishment fees’, the fees that they would otherwise charge upfront in order to cover the set up costs for mortgages. The mortgage exit fees were charged to borrowers who terminated their loan contracts within up to the first five years. If the break cost was a percentage amount, it could be as high as 2 per cent of the original loan amount. That means that a $300,000 loan would incur a $6,000 exit fee. The fees were high, but it brought positive competition against the big four in the 1990’s.

What would the small lenders do, now that they cannot charge this fee whenever they lose a loan? The solution is to re-price their loan products and increase other fees and charges.

The online comparison service Mozo reported that all lenders big and small have started to increase upfront and discharge fees (standard admin fees that lenders are still allowed to charge). For example, Greater Building Society has introduced a new application fee of $500 to all loans. Heritage Building Society is charging $600 application fees on basic and fixed loans. Aussie has increased their fees for fixed rate loans by $185. New clients borrowing from ME Bank will now have to pay $150 legal fees and $150 valuation fees for all loans.

Unfortunately, fees are not the only things climbing up the wall. Interest rates are also on the way up for smaller lenders. The interest rate for UBank’s UHomeLoan went up from 6.59 per cent to 6.79 per cent. Also, loans.com.au’s dream loan express went up from 6.58 per cent to 6.69 per cent, and they have reduced their offer to tie to the Reserve Bank movements from 5 years to 3 years.

However, the benefits to this ban are limited. Statistics indicate that the number of borrowers who paid the mortgage exit fees was always quite low. By giving this tiny minority the right to switch lenders without any costs, all borrowers now have to pay more for upfront fees and ongoing costs for the life of the loan.

The bottom line is this: the banning of the mortgage exit fees is going to hurt the very lenders who introduced competition to the home loan market and succeeded in reducing mortgage interest rates. In the 1990’s, the big four earned a healthy interest rate margin of 4 per cent. This figure was reduced to 2 per cent thanks to the smaller lenders competing with the major banks. Now with less competition, the big four will inch up their interest margin and will result in Australians paying higher interest rates for their loans.

The liberation from the mortgage exit fees certainly comes with an unavoidable price. It was more of a political move than actually saving people money.

Despite Mortgage Downturn

Property investors are continuing to grow in numbers despite an overall decline in the number of mortgages across Australia on the back of successive interest rate rises.

We look at why this is the case…

Portfolios is part of Australia’s largest independent brokerage network Australian Finance Group (AFG). Throughout March, April, and likely to continue in May, AFG confirms the emergence of a two tier mortgage market, with the proportion of investors surging as sales to owner occupiers decline.

Property investors accounted for 36.9% of all mortgages arranged in April, the highest such figure AFG has ever recorded.  This compares with 10.2% for first home buyers and 16.3% for up-graders.

The remaining mortgages in April, 36.6%, were for refinancing purposes.

Why The Confidence in the Investment Property Market?

In our opinion there are a number of reasons to be confident in the Australian property market, we offer some below and welcome your comments:

• The volatility in the share markets always serves as a reminder of the stability and strength offered through a property portfolio
• When company profits fall dividends stop – amongst all of this property investors continue to take in rental income and experience changes on an anualised basis not day by day
• Property investors – buy and hold particularly – are long term investors – minor fluctuations in the market, and they tend to be minor in Australia, do not pose a threat to long term investors
• The Australian population continues to grow at rates outstripping the supply of housing
• Australian lenders continue to operate on the conservative side of the market meaning there is confidence in the capacity for Australians to repay their debt – unlike the scenarios witnessed in the American sub-prime market collapse. See the comment by Paul Braddick below.
• Rents are continuing to climb across most markets regional and metropolitan meaning investors can get in and hang on for longer.

Property Investors Still Making Money

Property investors are continuing to see potential in the Australian property market, particularly in key market areas such as rural mining communities, growth cities such as SE Qld and Brisbane. Major growth centres, or smaller towns receiving substantial financial and infrastructure investment are good bets.

This is not so obvious as in the resource rich state of Queensland where property prices in the mining communities are still reasonable and rentals are beginning to climb even on the back of the existing investment.

Confidence Amongst Bankers

Paul Braddick, Head of Property and Financial System Research, is upbeat about the state of the housing market and is cautious when discussing the need for deleveraging of debt in the market place.

Braddick says “Economy wide debt to income ratios, gearing ratios and even debt service ratios tell us little about the underlying sustainability of household debt. The distribution of debt across the household sector, lending criteria applied and the strength of the labour markets are far more telling for debt sustainability.”

“Relative to offshore  experience, lending into the Australian household sector has remained very conservative.  This is reflected in the virtual absence of a sub-prime mortgage market and extremely low delinquency and default rates.”

Braddick’s sentiments are echoed across the banking sector.

What Next?

Braddick sums it up well:

“In the near term, Australia’s growth prospects are bright and much will depend on the RBA and government’s ability to effectively manage the expansion. Higher household debt means the RBA has considerable leverage over the household sector and their actions during the GFC should instill confidence that the present upswing in growth will be handled well”

Source AFG Mortgage Index April 2010.

Source ANZ Australian Housing Update April 21 2010

As some people may say we appear to be coming out of the global financial crisis, we are not so sure and thought you might find it interesting to view the new financial landscape. Just like a storm passing through a town, the GFC has forever changed the Australian home loan environment.

Last week the RBA has decided to increase the cash rate by 0.25% in an effort to dampen down an economy that appears to be moving back into a growth cycle. A growing economy is a good thing for our general prosperity but growth can be quickly neutralised by the affects of inflation. Unfortunately for us mortgage holders and property people, the primary anti inflation weapon the RBA has at it’s disposal is to increase interest rates.

As property people we are closely looking at property segment bubbles, stock levels, tight credit, new lending policies for low doc lending and the performance overseas.

As some people may say we appear to be coming out of the global financial crisis, we dont agree and thought you might find it interesting to view the new landscape. Just like a storm passing through a town, the GFC has forever changed the Australian home loan environment.

• RAMS is now owned by Westpac.
• Wizard is now owned by Aussie.
• Aussie is now 33% owned by CBA.
• St.George is now owned by Westpac.
• CBA now owns Bankwest.
• The big 4 banks now write over 92% of our home loans compared to 60% before the GFC.
• The margin between the RBA cash rate and the variable rate available to bank customers is now approximately 2.1% compared to approximately 1.1% before the GFC.
• NAB has purchased approximately 35% of all mortgage broking groups.
• Most lenders now require borrowers to contribute 10% of the property value compared to 5% (or even 0%) before the GFC.
• It takes twice as long to get a loan looked at and the overall process has blown out from 21 days to over 41.
• Each and every loan is reviewed with a fine tooth comb and they are asking for documentation and letters to support the application never seen before. Most well over the top. Id they dont like you or the deal they just say typically without any real justification
• Options for development and project funding are rare and tough on requirements especially presales and servicing

The one thing that has remained after the GFC is the profits being generated by our big four banks. The extraordinary revenue margins and increased market share created by the GFC has allowed the banks to maintain profits despite a large increase in bad debts of approx 1.4% across their loan books/ portfolios

Profits: CBA – $4.4 Billion, NAB – $3.7 Billion, WBC – $4.5 Billion, ANZ – $3.3 Billion, Total = $15.9 Billion

It is interesting to note that the ANZ Bank is forecasting a 1% increase in the cash rate over the next 12 months. Further Westpac are forecasting a 0.50 to 0.75% increase by July 2010. Many borrowers might be tempted to jump into a fixed rate in an effort to avoid the increases but as you can see from the graph below,as we have been saying to people whi enquire about fixing their rates, the big banks are well ahead of that idea. The five year fixed rates and the three year fixed rates have been shooting up since March, so dont be fooled as their margin are well locked in at up to 2.5% + above the variable rate

This is a bitter sweet decision by the RBA.

Contact the team at Portfolios to discuss and any property and finance related opinions and options for you.

Now more than ever a sound level of understanding of property and finance as a whole is required for you to … Make it Happen