Ward Finance's Blog

Recently there has been a spate of activity on Fixed Home Loan Rates. A number of lenders have reduced their short and medium term rates and some can interpret this as a change in the interest rate sentiment. Earlier in the year many thought that rates may move to previous high levels at around 8%. With the fixed rates now reducing it shows that the market feels that those levels are less likely and maybe we are seeing the peak of the rate increases.

Much has been made of the European debt crisis and some of the inconsistent data coming from the US has put a dampener on the V recovery. Many people have seen their share portfolios drop by 20-30% over the last 3 months and this is flowing through to consumer spending which is much weaker.

What does this mean for home loanrates? Rates look to be softer than expected and the banks are looking to offer lower fixed rates to capitalise on consumers interest rate fear. As many borrowers remember the last time rates were high, many banks were offering fixed rates and thus locking them in for 2-3 years resulting in many people missing out on the drop in interest ratres when the GFC hit. You need to be aware that if you do take up a fixed rate, these can be very expensive to get out of if your circumstances change.

How expensive? Depending on the term of the fixed rate remaining, the loan amount and the variance to the curent variable rate, I have seen fixed rate break costs range from $3000.00 to $60,000.00. Ouch!!

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Buying a strata title unit, whether an owner occupier or investor, will give you the opportunity to be part of the body corporate. This is a organisation that looks over the management of the complex and can plan and pay for group type activities, like repainting the exterior of the complex. There is generally a body corporate manager appointed who manages the administration of the body corporate and keeps it compliant with the relevant State laws governing body corporate behavior.

I myself have been secretary of a body corporate and now chairperson. This is a great way to influence what goes on in the complex and protect the interest of all owners. It also allows you to look closer at the accounts and drill down on exactly whats being paid to who and their relationship to the body corporate and the Body Corporate Manager.

What you as an owner need to be aware of is the legal kick backs that the body corporate managers may be getting from service providers. My case in point is the commissions paid to body corporate managers from Insurance Brokers. In many cases your Body corporate manager will provide the committee an insurance quote, generally from a broker. If the committee OK’s the quote then the Body corporate Manager may get up to a 20% commission on the policy. Some might say this is a conflict of interest and I certainly agree.

Recently I put this conflict to the acid test. On receiving the insurance quote I immediately called the body corporate manager and asked if they received commission from the premium. They advised NO. I then called around and got some comparable quotes from insurance companies direct and surprise surprise, the premiums were substantially cheaper. How much?. It was 33% cheaper to go direct and a saving of $1500.

I contacted the body corporate manager and it immediately became apparent that these commissions were a major part of their revenue. I was given all sorts of lame reasons why I should take the brokers quote and it prompted me to read the fine print in the body corporate management agreement which disclosed that THEY DO get commissions from the insurance premiums.

Needless to say the body corporate manager and their billing is under close scrutiny. It does however show a widespread conflict of interest in the industry and you as a unit owner need to be aware of these issues. I’m advised that these commissions are not illegal if disclosed in the management agreement but I feel they are definitely something you should be aware of.

Next time there’s a annual general meeting, take some time to look at the building insurance quotes and get some direct comparisons before voting yes. It could save you and other unit owners thousands.

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In a unexpected move, Rams have announced they will no longer offer their loan product via the mortgage broker network. This comes in concert with a stunning move by Rams to reduce their LVR’s on all new lending to 85%.

Rams have been struggling over the last 6 months with dwindling demand from the broker network. This has been mainly driven from their ever deteriorating product offering making their Lo Doc loan products heavy on documentation and interest rates on full doc products becoming uncompetitive.

Its worth noting that this lowering of the LVR was directed solely at the broker network. Rams franchisees are still able to offer higher LVR lending on their full doc products however the issue over the less competitive interest rates still prevails. Franchisees cant be happy that their basic Rams home loan at 6.01% is out priced by ANZ’s offering at 5.96%. ANZ’s cheaper rate coupled with the ease of managing accounts using the branch network is proving to be a powerful inventive for borrowers.

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Do You know that you are able to arrange for contestable or faulty credit listings to be permanently deleted from your credit file?

Here’s an example of what can be done:

This person has a telecommunication default noted on her credit file. Although it had been paid the very presence of the listing was hindering her ability to qualify for finance.  The mortgage broker suggested she call We Fix Credit.  Upon investigation we learned that the issue related to a number of phone services that were moved to another phone carrier. Although she thought the transfer to the other carrier was finalized, one of the phone services was not transferred by the original carrier correctly. Even though the client had tried a number of times to resolve this issue herself the carrier was not willing to listen and listed a default.

We Fix Credit was able to arrange for this default to be permanently removed from the client’s credit file which in turn allowed her to get finance.

Telco’s can be very quick to give people a bad credit history. They often use their ability to give people a bad credit rating as leverage to force payments, even when there may be a genuine dispute where the customer feel the telco is in the wrong.

If you are in a similar position give WE FIX CREDIT some consideration. Their website is www.wefixcredit.com.au

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Many people, including myself, have some real concerns for this unexpected interest rate increase of 0.25% by the RBA. Many feel that the economy is just getting up off its knees and the RBA has stepped in to curb the economies momentum. There are a number of issues that we, the lucky country, are dealing with.

All reports point to the resilience of the domestic economy however we are still very exposed to the international economies. Higher interest rates in Australia will have upward pressure on the dollar while making other currencies more value for money for our international buyers of commodities. In the short term you can only foresee some trading in the Aussie dollar as customers, like China, who will try to buy currency to offset any expected increases in the 2010 year. Domestically the situation is more complex. Unemployment is still rising and will continue to do so until late next year. The afterglow of the stimulus package and the first home buyers grant have left us with a housing bubble that will affect those outer lying centres in Sydney’s South West as demand starts to drop. The Banks have severely reduced their lending policy thus making it a lot harder to borrow money. Most applicants now require a 10% deposit and some banks are assessing servicing at an interest rate of 8%. Place on top of that the housing affordability is as bad as it ever was thus the RBA’s move to raise rates can go a long way to dampening demand.

One issue that is concerning me is the RBA’s use of the term “emergency levels” in interest rates. The flip side to this argument is that they have an idea what average interest rate levels are and wish to return us there. I feel that having such benchmarks is placing undue faith in the historical data that gave us the GFC. I feel that the RBA needs to be looking at the economy in fresh eyes and not chained to the old ideas of getting rates up above 5%. Simply put, the world economy is nothing like what is was over the last decade. The Australian economy is heavily reliant on the performance of its trading partners and some of them are not doing that great. In the last year alone, almost 100 banks have gone bust in the US. Their unemployment rate is now at 9.8% and there is the expectation that the US economy won’t be able to show promise until 2011. Taking this into account, how can the RBA hold onto the idea of normal interest rate levels when “normal” went out the window with the GFC.

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By far the largest expense to many first home buyers, Mortgage Insurance (MI) is a necessary cost associated with borrowing money. It’s not any type of insurance policy to protect you if things go bad, its simply insurance for your Bank to cover them for the risk associated with lending money to you.

What risk you may ask? In the bad old days before MI Banks required borrowers to come up with deposits of 20-30% of the properties value. The reason being was that when the Loan to Value Ratio (LVR) went above 80% the Banks Risk went up thus they would not lend above that amount or they did so at higher interest rates.

With the advent of Mortgage Insurance borrowers were able to insure the bank against the risk of lending above 80% and the trade off was that borrowers could get the same interest rates for loans right up to 97%. This in turn allowed borrowers to get properties with fairly small deposits and these days, with the more conservative lending, banks will lend up to 90% conditional upon you providing 5% genuine savings. The balance can come from other sources including the First Home Owners Grant.

The cost of the MI is reliant upon the LVR. As you can imagine, the lower the LVR the lower the risk. At its peak of 90% LVR, premiums can be up to 1.8% of the loan amount. This is payable once, at the beginning of the loan, and often can be added to the borrowed funds.  

Mortgage insurance is also payable for Lo Doc Borrowers. Most institutions now insure for LVR’s between 60-80%. Lo Doc borrowers can’t borrow beyond a 80% LVR and the banks use MI to manage their risk, however slight, for LVR above 60%.

The one message to take away from this is that by putting in your largest deposit you can reduce the mortgage insurance premium or better still, avoid paying it altogether.

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Much has been said over the latest 0.1% rate hike from the CBA however I don’t feel this is an indication of any immediate increased in interest rates.  

Since the last RBA rate cut, the CBA has found itself at the front of the big four banks as far as the standard variable rate was concerned. With 90% of the new loan business in Australia going to the 4 majors, it doesn’t seem too farfetched to think that the CBA could up its rates and still be competitive with the other 3.  

I’ve said this before. The Australian banks are not doing it tough. During the GFC they have been running around town buying up their competitors and consolidating their dominance in the market. All this time the margins on funds has been increasing and let’s not forget the $11 billion collected in fees each year.  

No doubt someone in the CBA is mindful of the fall out come the next RBA rate cut. If they used that opportunity to bring themselves back into line with their competitors they might get disproportionate negative publicity as their competition would look to have passed on more of the RBA cut.

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The Federal Govenments budget has bought some welcome relief for First Home Buyers (FHB). Many FHB’s were being frustrated by the lack of stock in the Sydney market causing frantic bidding and a increase in the < $500k Market.

In the NSW Minister for Housing’s press release today she stated ” extending the FHOB will mean more opportunities for Australians to enter the housing market for the first time, and will support many thousands of jobs in the vital housing sector along with the companies in the housing supply chain”. I have mentioned in previous entries, the FHOG has been at the centre of the demand sustaining the housing market to date. 

The FHOG will be extended “for eligible first home buyers entering into contracts between 1 July 2009 and 30 September 2009 (inclusive) the FHOB will continue to provide $7,000 for the purchase of established homes and $14,000 for the purchase of new homes” say the Minister.

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From 5pm last Friday, Rams and Westpac made an announcement that they will no longer lend above a Loan to Value Ratio (LVR) of 90%. They become the 2nd of the big four Banks to do this with ANZ being the first late last year. NAB and the CBA are the only 2 majors remaining with both now requiring 5% genuine savings for their 95% LVR loans.

Taking into account the frantic activity in the first home buyers market this can only force the first home buyers toward CBA and NAB. Processing times for home loan applications have recently blown out from an industry standard of 3 days to 28 days. Yes, 3-4 weeks to get your home loan assessed. Further to that, with the expected over exposure the 2 remaining banks will have to the First Home buyer market, it will in my opinion, force these banks to follow suit and reduce their LVR’s to 90%.

To put this in perspective your average Sydney First Home Buyer (FHB) purchases a property of around $400,000. With the changes in place those institutions requiring a 90% LVR will force the borrower to come up with a $40,000 deposit plus cover Legal fees. Further to that, the banks will require $20,000 of that deposit to be genuine savings which means the borrower will need to show 6 months bank statements with the $20k in it.

I feel that if the 90% LVR is adopted by the remaining major banks then it will all but wipe out the FHB market. There are those in the community who feel that we would all be better to go back to the lending standards of old however they may want to consider this. In the last 10 years Australia has been doing home loans up to 100% LVR yet it still has one of the lowest default rates in the developed world. We may also want to take into consideration that FHB’s are the fuel that fires the housing industry. They allow existing home owners to release their equity and upgrade their properties, and, they buy new homes that are built by the tens of thousands of contractors in the community. 

So why have the banks gone cold on high LVR lending? It’s one word, UNEMPLOYMENT!!! You will note in the recent economic data that the unemployment rate is being constantly revised upward. From a banking point of view, unemployment is an issue that causes immediate and often catastrophic changes to disposable income. Within a month, borrowers can be in financial duress and the banks need to be able to recover their asset, the mortgage.

One point to consider is where does this leave the government’s stimulus package. My expectation is that there  wont be much >90% LVR lending available in 3 months time so the $14,000 FHOG will be only useful to those FHB’s who have 5% genuine savings with extra in the bank to cover the balance of the 10% deposit. My own thoughts on this are that will cause a substantial decrease in FHB activity.

There is an answer to this problem. The Federal Government needs to consider offering a Government backed mortgage insurance product for all home loans up to 95% LVR. With the Government receiving premiums from this insurance and the obvious benefits to the housing market I feel this would be a responsible answer to an insurance failure currently being inflicted on the FHB market. Other benefits would be the increased competition in the home lending market and the maintenance of comfortable and sustainable numbers in FHB market

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For those people who are buying a home there is something you should be discussing with your solicitor. About 18 months ago the High Court came out with an unexpected interpretation of the law which means that some lawyers and conveyancers should now recommend you lodge a caveat in addition to all the other steps which used to be taken in a conveyance. I know that not all law firms and conveyancers offer this service but it should be considered under advice from your solicitor.

The reason you may want to consider a caveat is to protect yourself against any unwanted 3rd parties lodging an interest in the property you are about to buy. If this is allowed to happen it can have catastrophic repercussions to your purchase and its safest to rule the posibility out buy use of a caveat.  When you’re getting quotes, it might help to ask whether the price includes the cost of a protective caveat, sometimes called a Black v Garnock caveat, so you can be sure about the level of care your getting from your solicitor and additional costs, if any.

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