Provided by Mercer: 22/9/08
A lowering of interest rates has been announced but the difficulties for borrowers aren’t necessarily over.
For new borrowers, the reality is that the competition for your mortgage business just isn’t as fierce anymore - lending guidelines are tougher than they have been for many years and the cost of loans is generally higher.
For existing borrowers, it’s time to look at your housing loan and closely check what’s been happening with your interest rate and, perhaps less obviously, fees.
What's been happening?
First, a recap on what’s been happening in the housing market and why Fannie Mae, Freddie Mac and their friends in the United States are having an impact on your housing loan.
Prior to the mid 1980s, the Australian banking system was dominated by the four big banks. Deregulation of the Australian market led to the entry of non-bank lenders who added a huge element of choice to the home lending market. In the past 20 years, the number of non-bank lenders has grown to around 100. Typically, however, they’ve drawn much of their funds through a process known as securitisation (where mortgages are pooled and sold to investors). Most of the securitisation market is offshore and by late 2007, the subprime crisis in the United States had made the funds from these markets either expensive or inaccessible.
In response, non-bank lenders have had three unattractive options - battening down the hatches (for instance, Macquarie Bank’s home lending business has stopped accepting new business), raising the prices of the products they offer (ie higher interest rates or fees), or by subsidising new loans from old earnings.
Some think the securitisation market will rebound in time, others are doubtful. In the meantime, banks – who can call on cheaper deposits for funds - are taking market share from non-banks as borrowers don’t have as many options as were previously available.
So how can you make the best out of this situation?
For new borrowers, here are some things to consider:
- Be prepared. A few years ago some lenders were relaxed about guidelines – now they’re not! You’ll need to show stable employment and proven income.
- Have a reasonable deposit. If you want to borrow more than 80% of the purchase price, most lenders will require you to take out mortgage insurance. This one-off cost can be significant, particularly if you’re borrowing more than 90% and the loan amount is over $300,000 - for example a client borrowing 90% of the value of a property with a loan amount of $550,000 is up for Loan Mortgage Insurance (LMI) of over $9,500. At 95% the cost of LMI increases to over $14,700. It should be noted that LMI costs vary between banks.
- It’s still about location, location, location. Lenders prefer to lend against properties in areas with broad appeal. Many lenders, for instance, have an aversion to inner city apartments, particularly in larger developments where there are more than 50 apartments in a group. When they do lend in these areas, the loan to valuation ratios are generally reduced.
- Work out what you want – and only pay for that. No frills loans – without redraw facilities or offset accounts – are generally cheaper. Check the fine print. Look beyond the headline rate at the fees. Be sure that the product you choose is appropriate to your needs - if not, you may get an unpleasant surprise if you pay it out within the period.
- The average loan term is only four years – so the exit fee (sometimes called a deferred establishment fee or early repayment fee) is important. This fee is something people commonly overlook in the belief that they’ve taken out a 25 year loan and that’s that. For most, however, it isn’t. Changing from a fixed loan to a flexible one can count as a new loan, as does changing the terms of the loan - for example, if you apply for a small increase in year three of your loan, the clock may start ticking again for a further four years. Most lenders charge some sort of fee if a loan is fully repaid within four years. Some institutions will charge a flat dollar fee while others will charge a percentage of the loan amount (such as 1% - which can become very expensive).
For existing borrowers, review your loan and keep doing so. Mortgage contracts typically allow the lender to introduce new fees or change existing fees at any time. Check what’s happening with your loan. Have a look at what else is on the market and make sure the loan you’ve got is competitive.
Before you make a decision to switch though, find out how much it’s going to cost you to do so. Apart from the exit fee mentioned above, lenders will charge a mortgage discharge fee of approximately $300 when a loan is repaid. It may not be worth refinancing unless there is a substantial interest rate benefit to be had - for example a 1% saving on a $300,000 loan will save you $3,000 per annum. However, in the real world the interest differential between lenders is not often that large.
It’s a tougher market but there are still a huge range of home loan offerings out there. If you need help comparing products and deciding what’s best for you, speak to an independent mortgage broker.
More information
If your looking for a home loan or you'd like to review your existing mortgage, call a Mercer Lending Adviser on 1800 633 403.
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This information has been prepared by Mercer (Australia) Pty Ltd ABN 32 005 315 917 for general information only. The information does not take into account your personal objectives, financial situation or needs. Therefore, you should not act on this information if you have not considered the appropriateness of this information to your personal objectives, financial situation and needs. You should consult a licensed or appropriately authorised financial adviser before making any investment decision.
