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RBA change is coming, like it or not

More people, more input, more cooks in the kitchen. That’s ultimately the price the Reserve Bank of Australia will pay for a couple of years of bad or miscalculated calls, made in response to the pandemic.

Ironically, the review was conceived in the pre-COVID days when the RBA was criticised because inflation was running below its 2 to 3 per cent target range. All the attention is on what has happened since.

When money was flooding into the financial system and the economy, it is now clear the RBA board was too slow to apply the handbrake. The result is the highest level of inflation since the 1990s and an unprecedented 10 straight rate rises that were never going to be popular with ordinary Australians or politicians. No one seems to care that the unemployment rate is around its lowest level in nearly 50 years.

Right or wrong RBA governor Philip Lowe wears the blame. He will be all over the newspapers and nightly television news bulletins, even though markets (equities, bonds, currency) barely blinked. Mr Market saw the review coming, and now says the changes are some way off.

From the market’s perspective, next month’s budget is more material. Treasurer Jim Chalmers needs to set up the books for the next few years, which means finding more money. The economy is finely poised: it would be tempting to throw money around to ease cost of living pressures, although money’s tight and the inflation doesn’t need stoking.

In the meantime, old-head RBA watchers said it was a significant day. The fact that the central bank, which has such a great impact on Australians’ daily life, was subject to such scrutiny made it a historic day.

Lowe and the RBA will be hauled over the coals for what happened a few years ago, even though it was just as much the government stoking the fire that continues to burn today. The critics argue he should be accountable for the combination of low rates, forward guidance, yield curve control, quantitative easing and the term funding facility, which combined to whipsaw the economy and may yet cause a recession.

Of course, Lowe’s monetary policy is just one tool.

Once the commotion passes, we should all still be worried about the rising cost of rent and energy and how both can be addressed. The review doesn’t change that.

The review prompted plenty of thinking about the RBA, its corporate governance, board composition and decision-making. It recognised that in more normal times, the RBA had done well to keep inflation around the midpoint of its 2 to 3 per cent range for the past 30 years.

However, it is the past few years, a wartime for central bankers when no one escaped with a goldilocks path out the other side, that will now shape the direction of Australia’s monetary policy system.

What’s the answer to it all? Get more people involved in the decision-making. A specialist monetary policy board, fewer board meetings and more outsiders sitting around the table.

Reading between the lines, there seemed to be concern about how insular the RBA either is, or has become. Lowe is a perfect example; he’s got a great temperament for the governor’s job, is clearly smart and well regarded by colleagues and peers globally, but he is an RBA lifer and ingrained in current-day practice.

The creation of a new nine-person Monetary Policy Board, widely tipped by pundits, is about getting more rigorous thinking into rates decisions.

The nine people would include the RBA governor, deputy governor, Treasury secretary and six outsiders. The review recommends that ‘‘external members should be able to make a significant contribution to monetary policy setting through expertise in areas such as open economy macroeconomics, the financial system, labour markets, or the supply side of the economy, and in the context of decision-making under uncertainty’’.

So, this specific rate-setting board should mean more challenge and debate to the house view, which appears to have become more entrenched. At the same time the review calls for RBA’s operatives to spend more time with board members, making it a bit of an each-way bet but a good use of what is a big and expensive research team. (The need to spare a day a week or so in the RBA’s offices surely tilts the external board positions towards academics.)

The undertones were that the board wasn’t functioning properly, either because it didn’t have the right people or the right information. Lowe defended his board at a press conference yesterday, saying discussion around the boardroom table was robust and not dominated by himself.

It’s all well and good to have more people in the room on rates decision day, but it does not mean the board will function more efficiently or come to better decisions.

But big boards do not necessarily mean better outcomes. Corporate Australia is littered with poor boards and ‘‘jobs for the directors club’’ type attitudes that ruin what can be otherwise good businesses.

Often the bigger the board, the more constipated the decision-making process. The other scourge is chairmen roping in old mates and colleagues from other boards.

Ultimately, whether a separate and bigger Monetary Policy Board works will depend on who is on it. It was a logical and welcomed decision to create the separate board, and clear rate-setters of the governance-type matters that tend to dominate board meetings.

The review recommended a transparent appointment process, starting with advertised expressions of interest. External members would be appointed for five years, and up to another year depending on the circumstances.

There would also be fewer board meetings; eight not 11. And the governor would have to front the press following each meeting to explain the board’s decision, with more emphasis on the expected path of inflation and the labour market. That shouldn’t prove too onerous. External board members would also be required to make one public address each year.

The idea of more communication is conceptually good, although post-meeting press conferences can be a double-edged sword. We’ve seen Federal Reserve chairman Jay Powell mix his messages in a live setting, which can leave the market with more questions than answers.

Fewer meetings mean more time between rates decisions and arguably more punting and reading the crystal ball for fixed income investors. There could be more focus on monthly/quarterly economic data, to fill the information void between meetings.

Market economists liked that there could be more briefings, as it should (in theory) help them with their forecasts. They also probably like that there would be an unattributed published vote after each policy decision.

Other parts of the review said RBA should work more closely with the government/ Treasury, although it remains to be seen how. The review said fiscal and monetary policy should be set separately, however the RBA and Treasury needed to ‘‘have a good understanding of the intentions of the other and informs better policy choices’’. The two institutions are already close, but the review said their co-operation should include increased information sharing on risks, scenarios and policy constraints, and some joint scenario analysis.

Lowe was gracious at his press conference, although it was clear he did not love all the recommendations. For example, he bristled at any notion rates decisions were his alone and thinks it’s important to be careful with the number of public messages out of the RBA to ensure consistency and stability.

Lowe said he would leave his reappointment to the RBA top job in the Treasurer’s hands. He said he would be happy to go around for another term if asked. If not, he said he would find another way to contribute to society.

The fact that the RBA was subject to a 294-page review and there were 51 recommendations suggests change is on the cards.

Next week’s CPI reading could be material to the situation. Economists are tipping a number just shy of 7 per cent.

For all the focus on Lowe, in the near term the real attention should be on Chalmers and the budget. That’s the real showstopper for the economy.

a.macdonald@afr.com 

RBA change is coming, like it or not2023-04-24T16:53:10+10:00

MORTGAGE CLIFF LOOMS LARGE, BUT HOW STEEP COULD IT BE?

Home loans Fixed-rate borrowers have been insulated from 10 straight RBA interest rate increases. But with credit worth $350 billion close to expiring, the impact could be profound, writes Michael Read.

Up to 880,000 Australian households will need to find hundreds, or even thousands, of dollars more each month when their fixed-rate periods expire this year and the rock-bottom interest rates they’ve enjoyed since the start of the pandemic become a thing of the past.

Until now, these borrowers had been insulated against 10 back-to-back rate rises from the Reserve Bank of Australia that sent variable mortgage rates rocketing.

Households servicing a $550,000 mortgage – the average size of a loan issued between 2020 and 2022 – will face an $891 increase in monthly repayments, and highly indebted households are on the hook for an even larger increase. Someone with a $1 million mortgage would have to fork out an extra $1620 each month.

The ‘‘fixed rate mortgage cliff’’, as it has come to be known, is one of the big challenges for the Australian economy this year, and how these households cope will be critical to whether the country can avoid a sharp downturn.

At the height of the pandemic, interest rates fell to record lows as the RBA tried to prop up the economy amid forecasts of a once-in-a-generation recession.

As part of its policy response, it provided banks access to cheap three-year fixed rate credit, which they then offered borrowers in the form of ultra-cheap, fixed-rate home loans.

The low rates led to an explosion of fixed rate borrowing and refinancing, and many households locked in their rates for two to three years.

Some borrowers entering the property market also took comfort from assurances by RBA governor Philip Lowe that interest rates were unlikely to increase until 2024. The governor has since apologised for the guidance.

At their cheapest point in May 2021, the average new fixed rate loan for a term of three years or less was 1.95 per cent, compared with a new variable rate loan of 2.8 per cent, RBA data shows.

As a result, borrowers took a gamble that interest rates were unlikely to fall further by locking in the lower rate, and by mid-2021 about 45 per cent of new loans being written were fixed, compared with just 5 per cent today.

Over the course of 2020 and 2021, Australian banks lent $394 billion to borrowers in fixed mortgage commitments. Fast-forward to this year, and 880,000 fixed loans written at rock-bottom interest rates are set to switch to much higher variable rates.

According to the RBA, about $350 billion – or half of all fixed rate credit – mortgages will expire this year. This is what is sometimes referred to as the ‘‘mortgage cliff’’.

The remaining 38 per cent of fixed rate credit, which includes about 450,000 loan facilities, will expire next year and beyond.

The pain will be felt most acutely between now and September, when one-third of fixed-term credit will expire, and affected households will be forced to absorb the 350-basis point increase in the cash rate over the past year.

Just how much extra they will need to fork out will depend on what their fixed rate was and whether they roll on to a competitive variable rate.

But regardless of the scenario, they are looking at a 3 percentage point to 4 percentage point increase in their home loan rate, and borrowers who took out mortgages larger than $615,000 will cop a monthly repayment increase of more than $1000.

A household with a $750,000 loan will have to find an extra $1215 per month – or $280 per week – when their loan switches to a variable rate.

This assumes they had locked in a 2.48 per cent interest rate for three years, which is the average, outstanding fixed rate, and refinance to a competitive 5.58 per cent variable rate upon maturity.

Borrowers who took on a $1 million mortgage – not uncommon for new borrowers in Sydney or Melbourne – will cop a $1620 increase in their monthly repayments, or $374 per week, based on these assumptions.

Homeowners servicing a $500,000 mortgage will see their repayments increase by $810 per month, or $187 per week.

Overall, the RBA estimates that 90 per cent of the fixed rate loans rolling off this year or next will have to wear mortgage repayment increases of at least 30 per cent.

After the switch happens, about 25 per cent of fixed rate borrowers will spend more than 30 per cent of their income on their mortgage, the central bank says.

Economists are divided whether the looming, fixed-rate mortgage cliff will mark the start of a sharp economic slowdown or represent a blip on the radar.

Because of the magnitude of the shock, the RBA said in its October Financial Stability Review that it expected an increase in home loan arrears in the period ahead as some borrowers struggled to meet higher repayments.

Westpac CEO Peter King warned in February that almost half of the bank’s $471 billion in outstanding home loans were likely to breach their original serviceability assessments, which tested customers’ capacity to deal with a 3 percentage point rate rise.

The roll-off comes as households are already under pressure. Consumer prices have been increasing at their fastest pace since the early 1990s (although there are signs that these pressures have now peaked) and real wages are at their lowest level in a decade.

The RBA estimates that two in five borrowers with small mortgage buffers (ie less than three months of payments) have fixed rates or are investors with loans in place before 2021.

But a range of factors suggests that households are well placed to manage the roll-off.

The RBA says it is possible fixed rate borrowers kept liquid savings elsewhere, meaning they are less vulnerable than they appear.

The household sector has also accumulated $300 billion in excess savings since the onset of the pandemic, which should at least partly cushion the blow, though these savings mainly sit with wealthy, older people.

Borrowers are also more likely to be in work than at any time in recent history, thanks to Australia’s stellar labour market and near-50 year low jobless rate of 3.5 per cent. Fixed rate borrowers have also had more time than variable rate borrowers to restructure their household budget in anticipation of higher repayments, and also time to build up a savings buffer. However, borrowers with split loans would have already experienced higher repayments on the variable portion of their mortgages.

For their part, the banks say they are ready to help customers struggling to meet repayments.

Westpac’s chief executive said there were tools that banks could use to nurse customers through hardship, including restructuring repayments, and putting borrowers on to interest-only loans.

Banks are also experimenting with extended loan terms that make it easier for customers to repay loans as interest rates climb further, as well as to borrow more upfront.

National Australia Bank’s subsidiary, Ubank, has said it would extend a 35-year mortgage previously offered only to new buyers to those looking to refinance. This would reduce monthly repayments, but end up costing customers much more over the life of the loan.

The federal government’s MoneySmart service says borrowers experiencing hardship should contact their bank as early as possible. Banks must respond to a hardship request within 21 days, and MoneySmart says borrowers should consider selling their home if their circumstances are unlikely to improve.AFR

MORTGAGE CLIFF LOOMS LARGE, BUT HOW STEEP COULD IT BE?2023-04-05T11:27:14+10:00

The worst of mortgage pain is yet to come

On the face of it, there’s nothing in higher-than-expected inflation data that should halt the rally that has helped the ASX 200 leap 7.5 per cent since the start of the year and put the benchmark index within touching distance of a record high.

Yes, the CPI numbers shocked economists; the headline reading of 7.8 per cent was the highest since 1990 and the trimmed mean measure, which leapt to 6.9 per cent, came in well above the Reserve Bank’s forecast. And yes, the data has all but cemented a 0.25 per cent rate rise when the RBA meets in a couple of weeks.

But bulls will see nothing in Wednesday’s figures to upset the consensus that we are now past the peak of inflation in Australia. Most investors (and the local bond market) already expected the RBA would need to lift rates again in early 2023 before pausing in March or April and then cutting rates in the back half of the year.

On this reading, the New Year rally, which has boosted both big names (BHP is up 8.6 per cent year to date and Commonwealth Bank is up 7.7 per cent) and unloved minnows (Myer is up 41 per cent this year, Nuix is up 35 per cent and Sezzle is up 59 per cent) can theoretically keep running.

But this week’s surprise CPI reading should also serve as a reminder that the inflation story – and the interest rates story that runs parallel – is not over, and the outlook for the consumer is less clear cut than this latest bout of bullishness suggests.

In addition to the latest inflation data, this week has brought a series of analyst notes examining price rises by ASX companies.

On Monday, Macquarie analysts looked at how Domino’s Pizza Enterprises was lifting menu prices by up to 40 per cent in some regions (taking the price of a pizza from its value range to $6.99) as it looked to offset cost increases and shore up the profitability of its franchisees.

On Tuesday, Goldman Sachs initiated coverage on Australia’s general insurance sectors, basing its constructive view on the fact premium increases should underpin an improvement in profit margins.

On Wednesday, Morgan Stanley was one of many banks to comment on Vodafone’s decision to raise prices on its mobile telephone plans by 13 per cent to 18 per cent, following on from similar moves by Telstra and Optus late last year. Macquarie sees the telecommunications sector as being 12 months into a pricing cycle that likely has some years to run.

There is a danger, of course, in extrapolating the experience of any one company, or even one sector to the broader economy. But if nothing else, the above examples suggest that the corporate sector continues to feel the sting of higher input costs and more expensive capital, and consumers will need to pay more if the profit margins are to be maintained. Perhaps this is the tail end of such inflationary pressures, but that’s certainly not clear in sectors such as insurance and telecommunications, which are nondiscretionary items in most households.

But the biggest issue for consumers is the impact of higher interest rates. Although investors in Australia (and in the US) are growing increasingly convinced that the central banks are close to the end of their tightening cycles, it’s remarkable how all the talk of the lag effects of rate rises that so dominated markets just months ago appears to have largely disappeared.

But Jo Masters, chief economist at investment bank Barrenjoey, makes a strong case that for households, the raising cycle remains closer to the start of it than the finish.

The well-documented ‘‘mortgage cliff’’ that confronts thousands of borrowers who will roll off cheap fixed rate loans (averaging about 2.5 per cent) and on to much more expensive variable rates loans (likely somewhere about 6 per cent) has been well documented and much debated.

On Masters’ numbers, this would result in repayments on a 30-year, $500,000 mortgage rising by just over 50 per cent, or $1022 a month.

But she argues it’s also important to recognise that variable borrowers have so far been spared much of the pain of rising rates, largely due to mortgage processing delays.

Barrenjoey estimates average variable mortgage interest rates have only increased about 1.1 per cent so far, compared with the 3 per cent increase in the official cash rates. In other words, just under two thirds of the pain of higher mortgage rates is still to come for variable rate borrowers.

There is clearly some serious catch-up to come. And this will be exacerbated by rate rises in response to still-strong inflation numbers; Masters is holding to her forecast that the RBA will lift by 0.25 percentage points in both March and February, taking the cash rate to 3.5 per cent.

But while official rates might only have 0.5 per cent to rise, Masters estimates the average mortgage rate will rise 1.5 per cent between now and June, and then a further 0.4 per cent in the second half of the year.

For a 30-year, $500,000 variable loan, repayments have risen $300 a month since the RBA started tightening last May. But those repayments are forecast to rise a further $565 over the course of calendar 2023, which Masters estimates is equivalent to a 6.4 per cent squeeze on disposable income.

This helps to explain the robust retail sales figures we’ve seen, both in official data and results from the likes of JB Hi-Fi.

That resilience has also been underpinned by the $260 billion of savings that was built up during the pandemic. But Masters says the savings rate has fallen from 11.2 per cent of disposable income in the March quarter of 2022 to 6.9 per cent in the September quarter.

Barrenjoey expects this rate will fall to 4.4 per cent in the June quarter of 2023 before stabilising.

‘‘This means households have $4 billion to lean on over the first half of this year – much less than the $7.8 billion in the second half of calendar 2022 and $14.3 billion in the first half – but then will need to rely on income growth to support any rise in consumption, particularly given our expectation that house prices will still be falling.’’

Income growth and population growth should offset this a bit, but Masters’ forecast is for consumption growth to slow to just 1 per cent through 2023, compared with a forecast 5.7 per cent in 2022.

To be clear, none of Masters’ analysis runs counter to the idea that inflation and interest rates have peaked or are close to it, so the New Year bulls may not necessarily be wrong.

But investors would do well to realise that the pressures on consumers will take a while to fade yet. Prices in some sectors will keep rising and the big jump in mortgage rates is yet to hit.

The worst of mortgage pain is yet to come2023-02-09T09:52:21+11:00

THE 30-MINUTE CHAT THAT COULD SAVE YOU $30,000

Refinancing Lucy Dean outlines exactly what you need to do to get a better mortgage rate.

Australian borrowers are refinancing at record rates as mortgage repayments race higher, pushing homeowners to the brink. However, experts are reminding borrowers of the power of a phone call with their current lender before they jump ship.

A big bank borrower with a $1 million owner-occupier loan, currently paying 5.86 per cent, would save $29,801 over three years if they managed to negotiate a 1 percentage point cut, RateCity analysis shows.

A smaller, 0.25 percentage point cut, would still be worth it – saving $2500 in the first year and $7466 over three years.

It’s really just a matter of picking up the phone and being prepared to wait for a little while to get through to a real person, says managing director at Pure Finance, Brendan Dixon.

‘‘In 2022 we did 489 [home loan] reviews for clients, and the average discount we negotiated was 0.26 per cent, which worked out to be $101.65 per month, per customer,’’ says Dixon.

‘‘In terms of the scope of savings, it depends on how big their loan is, and how bad their interest rate is. But I would say it would be pretty easy – if they took a loan out two years ago – to be saving thousands rather than hundreds.’’

This is what you need to do and say to have your best shot at saving.

Get your ducks in a row

Understand what product and interest rates you have | Before you go toe-to-toe with your lender, you want to know the product you have. If you’re on a variable offset product, then you need to be looking at what the variable offset product is at your current bank and what they are advertising to new customers,’’ Dixon says.

That new customer offer will generally be what you’re aiming for. Once you’ve found your current rate and the bank’s leading rate, you can work out the premium you’re paying as a result of being a loyal customer.

Your interest rates should be on every statement, but many borrowers only receive those every six months. That means you may need to log in to your online banking and grab your interest rate from there.

Find your lender’s best deal, and other lenders’ best deals | You’ll also want to look at what other lenders are offering for variable offset loans.

Ideally, you will have two or three rates from other lenders that would apply to your loan, says RateCity research director Sally Tindall. When it comes to the phone call, don’t be afraid to name-drop them, she says. It shows your lender you’re serious and prepared to move.

Understand your loan-to-value ratio | Your loan-to-value ratio (LVR) simply reflects how much of the property you’ve paid off, and is given as a percentage.

For example, someone who has paid off 20 per cent of their loan will have an LVR of 80 per cent.

‘‘The percentage that you borrowed is important. If someone only just took out a loan [with a 10 per cent deposit], they’re not going to get as good a discount as someone who bought a few years ago and has got more equity,’’ says Dixon.

You can figure out your LVR by finding the value of your property and comparing it with your loan balance.

So, if you were to hop online, you could punch in your address to an online valuation tool like Domain. Then it’s a matter of heading to your online banking portal and looking at the loan balance.

If you found your property was worth $1 million and you had a loan balance of $700,000, then you’d know that you have an LVR of 70 per cent.

The lower your LVR, the easier it will be to negotiate.

Check this is worth your time | Glen James, former financial adviser and host of the My Millennial Money podcast, had a rate review in late 2022, and under his new interest rates, he will be saving $380 a month across his two mortgages.

He generally uses a mortgage broker, but for the purposes of his podcast he wanted to see what it was like negotiating with his two lenders directly.

‘‘I think it was about no more than half an hour [on the phone] per lender,’’ he says.

While it was more than worth his time, he notes that it doesn’t make sense for all borrowers to call up their lenders.

For example, if you’re in the middle of a fixed-rate period, then you’re not going to be able simply to reduce your rate.

And if you took out the loan or refinanced in the last six months, there’s ‘‘probably limited scope’’ for your bank to budge on your rate, he says.

But if you haven’t moved, purchased or had a rate review for more than a year, there’s a fair chance you’re on a higher rate than a new customer, Tindall adds.

‘‘For example, an owner-occupier who took out a CBA basic variable loan just 12 months ago is likely to be paying 0.42 per cent points more than what the bank is offering new customers today,’’ Tindall says.

‘‘On a $1 million debt, this translates into more than $4000 in extra interest over the next year alone.’’

If you have a mortgage broker, adds James, it’s a good idea to speak to them before you make any moves as they may be able to save you a lot of hassle.

Your broker can put through the rate review on your behalf and save you the rigmarole, and should also be able to present a stronger case as they’ll have a better understanding of what a borrower like you could get elsewhere.

And if your lender doesn’t end up moving, a mortgage broker will also be able to help you refinance successfully.

Pick up the phone

It’s go time. Generally, you’ll just call the main number of your bank and navigate through the phone menu to the existing home loan customer line.

Some banks will allow you to email them or message them as well.

As Tindall notes, you have a good chance of landing a better rate. With a record $19.5 billion refinanced in November, banks are keenly aware that their customers aren’t afraid to move.

‘‘As a result, the banks are in the mood to negotiate, particularly if they think you might be a flight risk,’’ she says.

State your case, be specific and ask for the retentions team | Once you’re speaking to a human, it’s a matter of telling them you’re reviewing your home loan interest rates and are considering refinancing.

‘‘Some banks have got a retention department, but generally it’s existing loan accounts queries, or general queries [that you speak to first],’’ Dixon says.

‘‘So, you can say, ‘Hey, I noticed you’re advertising 4.79 per cent for new customers, I’m paying 5.25 per cent, why is that? I’ve also noticed Bank A and Bank B are offering 4.79 per cent, what can you do to keep me?’’’

If other banks are offering even lower rates than your lender’s best rate, it’s worth noting – but don’t get your hopes up about achieving that.

Then, you ask to speak to someone who can help. It may be the person you’re already speaking to, but you may be put through to the retention team, or the pricing team.

‘‘Their role [in the retention team] is to try to stop you from leaving, so you’re speaking to the perfect person,’’ Dixon says.

Staff in the retention team will generally be authorised to approve larger interest rate reductions than those on the immediate frontline, James says.

If your first point of contact, generally at the existing home loan customer line, isn’t being helpful (or they’re not offering a big enough discount), you can also ask to speak to the manager.

Ask for, and then weigh up, a cashback | Rather than, or in addition to, a reduction, your lender may offer you a cashback as a sweetener to stay.

You can also ask for one. This is particularly useful if your bank hasn’t lowered your rate as much as you were hoping.

‘‘Once your lender comes to you with an offer, you don’t normally have a counter, but it’s definitely worth trying,’’ Dixon says. Try something like this: ‘‘Look, it’s still pretty far from what your competitors are offering. Can you do any better? Otherwise, I think I’m still going to leave. Or, can you throw in a cashback for me?’’

Other lenders will offer cashbacks to lure you. The trick is ensuring that the cashback, which range from $2000-$6000, isn’t covering up a bad, long-term deal, Dixon says.

‘‘It’s a marketing tool by the banks. They might say, ‘Our interest rate is 5 per cent, our cashback is $5000,’ and then you have the second bank saying, ‘Hey, our interest rate is 4.7 per cent, but we’re not offering a cashback.’’’ It’s up to you (or your broker) to do the maths.

Call in the cavalry | James says if you’re still not getting quite what you want, you say: ‘‘Will something in writing from my mortgage broker help with the pricing request?’’

That’s when – if you have a broker – you go to them and ask if they can put something on their letterhead with your name and details, listing a couple of other lenders available.

‘‘I’ve done that before in the past, I’ve emailed them a letter,’’ James says.

Pull out the big guns | If that doesn’t work, you should be prepared to move, the experts agree. ‘‘If they still don’t budge, you can opt to play hard ball by asking for a mortgage discharge form,’’ Tindall says.

‘‘That could be enough to call their bluff. By this point, you should have the bank begging you to stay but if you’re still unhappy with the rate – well, you’re halfway to refinancing anyway, so you may as well go the whole hog and get yourself a decent rate cut.’’

You can do the refinancing process yourself, or engage a mortgage broker.

Get the best deal

Dixon says there’s at least a 90 per cent chance of success for borrowers tilting at a lower rate, particularly if their loan is one year old or more.

But not all existing lenders will go as low as their new customer interest rate.

‘‘There will be some lenders that will give the advertised interest rate when asked … but you need to have the conversation to find out. Different lenders have different retention policies, and they can change during the year,’’ he says.

The discount you can get will also depend on how much you’ve been overcharged.

Let’s say the advertised interest rate is 4.89 per cent, and you’re on 5.3 per cent. There’s a good chance you’ll get a reduction. But if your interest rate is 4.99 per cent, your lender will be less inclined to shave off that 0.10 per cent because you’re already close to the advertised rate.

Additionally, your chances of getting an interest rate that is lower than your current lender’s best rate – say a competing bank’s leading rate – are fairly slim. But it’s worth asking – the worst they’ll say is no, and they may say yes, saving you the switching fees.

Where to next?

Either you got what you wanted, or maybe it’s time to move and save more.

As noted earlier, a borrower with a $1 million loan with a big four bank and 5.86 per cent interest rate could save $29,589 over three years if they moved to the average 4.84 per cent interest rate offered to new customers, RateCity found.

However, if they were to refinance with a new lender to a 4.50 per cent interest rate, they’d save $39,336 over three years – including switching costs.

‘‘The sharpest rates are typically reserved for new customers, no matter how good your negotiating skills are, so it’s worth considering refinancing,’’ she says.

The good news is, if you’ve made it to this stage, you understand your positioning in the market and will have a better idea of who would be willing to take you on and what your chances of success actually are.

‘‘If you own less than 20 per cent of your home, at today’s values, you might find you’re in ‘mortgage prison’, unable to refinance,’’ says Tindall. ‘‘That’s because most new lenders will charge you lenders mortgage insurance even when refinancing, which could potentially negate any savings you might make from switching banks.

‘‘Conversely, if you’re an owner-occupier and own over 30 or even 40 per cent of your home, then you’re in the box seat when it comes to rates. Use it to your advantage.

THE 30-MINUTE CHAT THAT COULD SAVE YOU $30,0002023-02-09T09:48:06+11:00

APRA ready if home loans choked

Australian Prudential Regulation Authority chairman John Lonsdale says he is open to changing bank rules on home loans if the economy deteriorates to ensure banks do not ‘‘choke off’’ credit and make the fall in house prices worse.

But the new head of the banking regulator was confident banks had sufficient capital buffers to withstand falls in house prices that economists predict could hit 20 per cent from their peak amid the fastest pace of interest rate rises in a generation.

‘‘We watch housing very, very closely, as it affects the banks we regulate and it is very important in the Australian economy,’’ Mr Lonsdale told The Australian Financial Review in his first media interview since succeeding Wayne Byres at APRA in November.

‘‘Two-thousand-and-twenty-three will be challenging. But we have done a lot of work over a long period of time to make sure the banks and the system is safe and stable – and we have a safe and stable financial system.’’

Money markets are expecting a quarter percentage point rate rise on February 7, and another increase on March 7, before the Reserve Bank pauses ahead of a possible final rate increase by mid-year. This could push the 3.1 per cent cash rate to 3.85 per cent, a level not reached since 2012.

Meanwhile, capital city house prices are expected to fall over the first half of this year, after dropping 7.1 per cent last year. Leading economists expect a further fall of about 8 per cent, resulting in a top-to-bottom fall of 15 to 20 per cent. Mr Lonsdale said capital levels built up by the banks since the financial system inquiry and the ongoing focus on lending standards would allow banks to cope with a fall of this magnitude.

‘‘We have built a very strong capital framework that provides a lot of buffer in the system. At the heart of it is the ‘unquestionably strong’ reforms, which we are embedding,’’ he said.

‘‘Second, is pursuing very sound lending standards, and we have been doing that for a few years.

‘‘That has set the system up – if you look at prudential metrics right now, they look very good. We have strong capital, strong liquidity and credit standards are very good. We sail into 2023 in a good position from a system point of view, and entity point of view.’’

Mr Lonsdale reiterated a warning to the banks that they should not seek to appease the bond market by refinancing long-term ‘‘tier II’’ bonds at more expensive market interest rates, given it is designed to protect depositors and make the banking system more stable.

As APRA scrutinises high levels of household debt, Mr Lonsdale declined to say whether indebtedness should form part of the RBA’s thinking as it considers an appropriate peak cash rate.

‘‘Interest rates and monetary policy is an issue for the [central] bank,’’ he said. ‘‘In terms of indebtedness, it is certainly a factor we look at very, very closely because it is important to the stability of the system. But I don’t want to go any further on that.’’

Mr Lonsdale said he was comfortable with current controls on bank lending for housing, but if the economy were to deteriorate he would be open to changing the macroprudential policies to ensure banks do not ‘‘choke off credit’’, which could exacerbate house price falls.

Declaring APRA’s macroprudential settings – including the ‘‘serviceability buffer’’, which requires banks to assess new loans at a rate 3 per cent higher than prevailing market rates – the right policy at this time, he said the regulator would consider readjusting its rules to respond to lower credit growth or house prices.

This would ensure credit continued to flow in the face of more aggressive official rate rises to reduce inflation, and as hundreds of billions of dollars of fixed-rate mortgage reverted to much higher variable rates.

‘‘As I sit here before you now, we think the macroprudential settings – including the serviceability buffer, which is just one of them – are appropriate,’’ he said. ‘‘But if the facts change, our views might change too.’’

APRA lifted its serviceability buffer, which banks apply to ensure customers can cope with future rate rises, to 2.5 per cent from 2 per cent in mid-2019, and then to 3 per cent in October 2021. The RBA has raised rates by exactly this amount since May.

But markets now expect that after a few more cash rate rises, the RBA could start easing rates early in 2024. Any reconsideration of the serviceability buffer would show APRA was also preparing for rates to peak.

‘‘It is very much a trade-off,’’ Mr Lonsdale said about setting buffers. Their main focus was protecting bank depositors by ensuring lending standards were strong.

But buffers would be counterproductive if they were so restrictive that they made it tougher to buy houses even as prices fell, adding to systemic risk given big bank lending was so concentrated in mortgages.

‘‘We knew things were going to become more difficult [when we increased the buffer in 2021],’’ he said.

‘‘But at the same time, we have got to balance not choking off credit – there is a difficult balance there that needs to be struck.’’

In a wide-ranging interview, Mr Lonsdale detailed other key focus areas for APRA this year, including lifting governance standards in the superannuation sector, bolstering ‘‘operational resilience’’ including cybersecurity defences after the Medibank attack, and strengthening disclosure rules for banker pay.

Its supervisory and policy priorities, including around climate change, will be released later this week.

Other priorities for APRA this year include more intense supervision of the superannuation sector, an area where APRA has come under criticism since the royal commission.

‘‘We are going to improve investment governance of super, on stress testing, valuation and liquidity management,’’ Mr Lonsdale said.

After APRA’s ‘‘climate vulnerability assessments’’ last year found banks strong enough to withstand growing stresses from climate-related issues, he said climate ‘‘will be a key plank of supervision priority this year’’.

Another obvious focus is operational resilience, after APRA-regulated Medibank Private suffered a loss of trust from a devastating cyberattack. He flagged potential regulatory action against the health insurer when the findings of reports into the incident become clearer.

‘‘On Medibank, their reviews are under way, and we will have a look at those reviews – the important thing is they get to the root cause of issues and remediation takes place, and we will look at enforcement if we need to,’’ he said.

He also warned banks not to forget the lessons of the Hayne royal commission. It was their lack of attention on risk culture that was the ‘‘root cause of what went wrong’’ and he said APRA would continue to conduct risk culture surveys of banks and boardrooms to ensure higher standards are maintained.

‘‘I don’t see it fading at all. There is a legacy of the royal commission we have certainly built into our supervision. We have a much clearer sense of accountabilities of executives operating in banks, of who is accountable for what, and the FAR [Financial Accountability Regime] will embellish that if it gets passed by the parliament.’’

APRA will also this year complete remuneration rules, to standardise bank disclosure of pay.

APRA ready if home loans choked2023-02-09T09:45:42+11:00

Financial Planning Message – December 2022

As 2022 draws to a close we are reminded of the recent period of intense volatility in capital markets and the reality that a global recession is likely next year.

 

Markets are pricing in a lower probability of a recession in Australia.

 

This in turn will depress corporate earnings and valuations across all asset classes and significantly increase default rates among high-risk borrowers.

 

The correction to valuations is likely to be more severe during this economic cycle due to valuations starting from elevated levels compared to previous corrections.

 

We are also yet to experience a high number of fixed loans move from fixed interest rates of sub 2% to levels of 5%+ prevailing rates, something in the order of $500bn are due to mature in mid to late 2023.

 

This will no doubt impact the already depressed property market in Australia.

 

All the major banks and APRA are keeping a close eye on this development as we progress into 2023.

 

As inflationary pressures persist ( highest in 40 years ), geopolitical tensions and tight labour supply, the  central banks are forced to aggressively press on with higher interest rates and keep for much longer.

 

The RBA has so far moved the cash rate from .1% in March 2022 to now 3.1%, markets are now pricing in another two .25% increases in early 2023 before a potential pause to evaluate the impact on inflation.

 

The Federal Reserve was pricing in a rate increase of just 1% in December 2021, it is remarkable that their view now is that it is likely to peak at approximately 5.25%.

 

Consequently, 2023 is poised to exert added stress to highly leveraged borrowers, specifically those that have acquired property / equities in 2021 / 2022, are now in nil or negative equity positions.

 

It is worth noting that during this business cycle, we have had an explosion of companies that have become addicted to cheap debt, on the other hand, these same companies are not generating sufficient cashflow to support increased interest payments.

 

Clearly, there will be consolidation particularly in property related businesses in 2023.

 

There are no doubt significant headwinds for Australian households and the economy in general as we enter 2023.

 

Accordingly, extreme caution and sound strategies need to be implemented for the year ahead, including but not limited to :-

  • Be clear on what and who matters given the many conflicting sources of information and ‘investment opportunities’ across the media.
  • Understand your portfolio and position appropriately taking into account your forward plans and risk / return / management costs.
  • Review cashflows and eliminate unnecessary lifestyle costs in light of higher interest rates in 2023.
  • Let’s not forget managing your tax position, this is always relevant be it during your working life, in retirement ( with respect to investments) or as part of your estate plan.
  • Focus on what can be controlled / influenced as opposed to factors over which we have no control or influence.
  • Make incremental ‘dollar cost savings’ as opposed to taking a significant position when investing.
  • Diversification and history are our best friends, reflect and actively rebalance asset allocations.
  • Consider Dividend Reinvestment Plan ( DRP) in light of the attractive valuations.
  • Confirm borrowing / refinancing options well before due dates and explore potential savings across relevant lenders – competition appears to be intensifying across the major lenders.
  • Insurance is always important, however potentially critical during extreme business cycles as are likely to unfold in 2023. It is not desirable to execute forced sales at depressed values.

 

In closing, we would like to take this opportunity and thank you for placing trust in AMCO since inception 26 years ago and making our Integrated Wealth Management practice what it is today.

 

We are aware of the challenges you are facing during these uncertain times and are there to advise and navigate all matters with professional care and promptness.

 

It is vital that fundamental mistakes are prevented during these critical periods, hence the need for sound advice.

 

From the team at AMCO, we wish you and your loved ones good health, peace of mind and prosperity in the year ahead.

 

Merry Christmas.

 

 

Danny D. Mazevski 

Chartered Tax & Financial Adviser

FIPA   CTA  FTMA  MBA (Un.NSW/SYD)  Dip.FS   JP

Financial Planning Message – December 20222022-12-22T08:01:23+11:00

Top central banker’s ‘sobering’ rates warning

Members of embattled super fund EISS could be forced to pay penalties levied against its board of directors, after the industry fund’s union and employer shareholders decided not to use their own money to pay any future fines.

The Australian Prudential Regulation Authority launched an investigation into spending at the Energy Industry Super Scheme (EISS) last year, amid media scrutiny of sponsorship arrangements entered into by its former chief executive, Alexander Hutchison.

APRA declined to confirm this week whether it was still investigating the $6.2 billion fund, which the regulator last year found administered the nation’s second-worst default superannuation product.

Last November, APRA took the unprecedented step of telling EISS to merge, demanding the fund review its expenditure and stop engaging in sponsorship arrangements that were not in its 20,000 members’ best interests.

EISS is the latest superannuation fund to seek court approval to use members’ money to pay fines levied against its directors, appearing at the NSW Supreme Court on Tuesday to seek judicial advice on amending its trust deed.

The move was in response to changes made by the Morrison government, known as the ‘‘Section 56 amendment’’, designed to prevent super funds from using members’ money to pay fines for any wrongdoing. The measure came into effect on January 1, and EISS filed documents in February.

Super funds including Australian-Super and Cbus fronted up to court late last year warning their trustee boards could become insolvent as a result of the change, since fund trustees generally have less than $100 in capital and would not be able to pay multimillion-dollar fines.

In its statement of facts, EISS said it had only $8 in capital and its insurance policy could not prevent it from going insolvent if it copped a non-indemnified liability.

Instead, the fund wants the power to use members’ money to cover fines by charging a ‘‘reasonable’’ fee on EISS’ $6.2 billion pool of retirement savings.

EISS said its seven shareholders had refused to dip into their own pockets to pay any fines the fund may incur.

EISS’ shareholders include energy companies Ausgrid, Transgrid, Endeavour Energy and Essential Energy, alongside the NSW branch of the Electrical Trades Union, the United Services Union and nominees of Unions NSW.

The document notes the cost of an ‘‘unplanned insolvency’’ of EISS ‘‘materially outweighs the cost of the new trustee fee’’, which is the pot of members’ money the fund wants to earmark for paying fines.

‘‘The amount of that fee must be an amount which the trustee determines is reasonable,’’ the document says.

EISS was named and shamed last August by APRA as managing one of the 13 worst-performing MySuper default funds, which triggered a focus on several of the fund’s sponsorship arrangements.

The sponsorship arrangements that have come under scrutiny include a community housing provider with links to a former chairman, Terry Downing, a multimillion-dollar deal with the National Rugby League (NRL), and sponsorship of Ronald McDonald House, where former chief Mr Hutchison’s wife had been employed.

The fund also supported two surf-lifesaving clubs in Maroubra.

APRA has not made any public findings about specific arrangements, but the regulator has told EISS to stop engaging in sponsorships that were not in members’ best interests.

Mr Hutchison resigned in September, along with multiple board directors and chairman Warren Mundy.

EISS has been in merger talks with Cbus since APRA said in November it needed to join forces with a better fund.

A spokesman for EISS said the fund ‘‘continues to work towards a merger with Cbus Super and are finalising a merger implementation plan’’.

Top central banker’s ‘sobering’ rates warning2022-08-30T14:06:58+10:00

China is stumbling into its own destabilising mortgage disaster

The Chinese authorities’ drift on managing bad debts feels eerily like the impending subprime crisis in 2008.

It is spreading like wildfire. Home buyers in China are refusing to pay the mortgage on properties they have bought but that their financially strapped developers can’t finish. Some say that they will resume payments only when construction restarts.

The protest involved more than 100 delayed projects as of July 13, up from 58 projects the previous day.

The frustrated buyers accuse the developers of misusing sales proceeds and the banks of failing to safeguard their loans.

China has never seen anything like this. As in the United States – until the 2007 subprime crisis – the possibility of troubles in the mortgage market was vanishingly small.

But this mortgage strike isn’t entirely unpredictable. Home buyers have every reason to be angry. Most of the projects were begun by developers who have defaulted.

China Evergrande Group led the pack, accounting for an estimated 35 per cent of the total projects that faced mortgage revolts, data compiled by capital management company CLSA of Hong Kong shows.

One such project in eastern Jiangsu province was launched before the COVID-19 pandemic. Construction has been suspended since August, while property values in its neighbourhood have come down by about 10 per cent. In other words, not only did the affected households see their wealth dip, they can’t move in and enjoy their new apartments either.

Over the years, with consent of local governments, the likes of Evergrande and Country Garden Holdings fed the residential housing boom through a pre-sales model: apartments are bought long before they are completed. Now the builders don’t have money to finish these projects.

Granted, developers’ debt woes were met with protests in the past – from suppliers, employees, all the way to hapless retail investors who had bought their wealth management offerings. But this new development is something entirely different.

It opens a Pandora’s box and poses a direct threat to the stability of Chinese banks. The Ministry of Housing and Urban-Rural Development held talks with financial regulators and major banks last week to discuss the mortgage boycotts.

Unless President Xi Jinping’s government stops this stampede, a collapse of the banking system on the scale of Lehman Brothers in the US in 2008 is very much on the cards. China is unprepared for such a big chunk of its bank loans to go sour.

According to Autonomous Research, banks have about 62 trillion yuan ($9.1 trillion) of exposure to the property sector. More than half is in the form of mortgage loans. At China Construction Bank, one of the world’s largest banks, mortgages account for more than 20 per cent of total assets.

Until last week, China’s middle class were excellent customers, dutifully paying their monthly bills. The government’s social credit system – a national credit rating and borrowing blacklist – has worked well; bad credit can even hamper one’s ability to travel on high-speed rail. But what if some are just fed up and willing to walk away from their obligations?

We’re not talking about one or two delinquent developers. In the past year, 28 of the top 100 developers have defaulted or asked their debt holders for extensions, data compiled by CLSA shows.

Collectively, they account for about 20 per cent of China’s total property sales. Money is even tighter now. In the first half of the year, property sales plummeted 72 per cent from a year ago, further eroding their cash flow.

A CLSA monthly survey on the status of Evergrande projects gives us a glimpse of how many unfinished sites there are across China. As of June, more than half of Evergrande’s projects were under construction halts.

CLSA estimates that about 840 billion yuan in mortgages is tied to abandoned sites across China.

It is worth asking how we even managed to get to this point, especially for a government that is obsessed with stability.

All we have seen is policy inertia. Developers have been in distress for more than a year now, but there has been no progress in restructuring their finances. Local officials have been unwilling to make difficult decisions, write off bad debt and reach resolutions.

Unable to shed financial burdens, builders cannot focus on operations. They become zombies, and their construction sites turn into ghost towns.

In 2008, I worked at Lehman Brothers in New York and witnessed first hand how the subprime mortgage crisis dragged down the venerable bank – and threatened the entire industry. This environment is starting to feel eerily similar.

BLOOMBERG OPINION

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets.

China is stumbling into its own destabilising mortgage disaster2022-07-22T16:08:11+10:00

Five key drivers behind the great Aussie house price correction

The great house price correction has begun: the all-regions (metro plus non-metro) national dwelling value index published by CoreLogic declined by 0.1 per cent last month, which is the first time it has fallen since the short-lived, pandemic-induced correction that ended in September 2020.

The real devil is in the detail, however, with much larger losses being recorded by Australia’s two biggest cities, Sydney and Melbourne, where home values declined by 1 per cent and 0.7 per cent, respectively, in May alone. Unsurprisingly, dwelling values also fell in contiguous Canberra, albeit by 0.1 per cent only.

Sydney dwelling values have now dropped 1.6 per cent since their technical peak in February (the market started flatlining in November 2021). Home values in Melbourne have also corrected almost 1 per cent since their own January apogee.

In past cycles, we have seen the vanguard cities of Sydney and Melbourne lead the way. This is, once again, the prevailing dynamic: dwelling values in Brisbane, Adelaide, Perth, Darwin and Hobart continue to climb, although the Brisbane boom does appear to be grinding to a halt.

There have been a number of key drivers of the great Aussie house price correction. First, there has been a massive increase in fixed-rate borrowing costs, with the typical, three-year fixed-rate jumping from circa 2 per cent one year ago to 4.5 per cent.

This process commenced in November as a result of the Reserve Bank suddenly dropping its commitment to not raise interest rates until 2024, and its so-called yield-curve target whereby it kept the interest rate on the 2024 government bond at 0.1 per cent in line with its target overnight cash rate.

A second driver has been market perceptions that the RBA would start raising rates this year, which penetrated the popular consciousness in late 2021 after the RBA dumped its forward guidance about not lifting off until 2024. A series of increases this year were fully priced by markets in November 2021, which was widely communicated by the media.

A third headwind has been the RBA commencing its monetary policy normalisation process with an inaugural 0.25 percentage point cash rate increase in May 2022 (one month ahead of the explicit plan it outlined in April, which targeted a first rise in June), resulting in variable-rate home loan costs increasing by the same margin.

A fourth factor has been RBA governor Philip Lowe advising the public in May that he expects to lift his target cash rate to at least 2.5 per cent, which would mean that discounted variable-rate home loan costs will rise from circa 2 per cent before the RBA’s May increase to 4.5 per cent once the cash rate hits 2.5 per cent.

Financial markets have a much more aggressive view: they are pricing in a terminal RBA cash rate of 3.7 per cent, which would imply that discounted variable-rate home loans will increase to 5.6 per cent.

Finally, there has been a generic increase in lenders’ funding costs. This includes both banks and non-banks. Funding costs were unusually low as a result of the RBA lending the banks $188 billion at a super-cheap cost of between 0.1 per cent and 0.25 per cent annually. This facility is no longer available and will have to be repaid over the next few years.

Funding costs have, as a consequence, started to mean-revert, and it is reasonable to assume that some of these expenses will be passed on to borrowers in the form of out-of-cycle hikes imposed by lenders. These should, however, be neutralised by the RBA: any extras that lenders pass on to borrowers are increases the RBA will not need to impose itself (given the RBA is practically targeting a given level of borrowing rates).

Last October, we expected at least another 5 per cent worth of capital gains at the national level before the Aussie housing market started to roll over (CoreLogic’s index delivered 5.4 per cent between 1 November and 30 April).

We argued that after the RBA begins lifting rates in mid-2022 at the earliest (having planned to kick off in June, they got the yips and started in May), the first 100 basis points of rate increases would trigger a subsequent 15-25 per cent correction in national home values. This would be the largest draw-down on record. Care of CoreLogic, we now know that the great Aussie housing correction has indeed begun.

Although capital losses might suck for homeowners, they have banked capital gains of 37 per cent since the RBA first cut its cash rate below 1.5 per cent in June 2019 (it is currently 0.35 per cent after the 0.25 percentage point hike in May).

If we are right and national values correct 15-25 per cent over the coming years, it will be modest payback in the scheme of things.

We further believe this correction will be orderly given the overall strength of the economy, which is likely to be supported by a number of factors.

These include: a low and competitive Aussie dollar, helping exporters and import-competing industries; very strong population growth, powered by skilled and unskilled migration, which will drive aggregate demand; a revolution in business borrowing as companies seek to invest in their productive capacity, given ongoing supply-side constraints coupled with a huge increase in re-shoring of supply chains as economies decouple from China; elevated prices for all of Australia’s key exports, including agriculture, iron ore, natural gas, and coal; and ongoing fiscal stimulus as a result of structural deficits at the federal level, which are being reinforced by the need to spend vast sums on national security, and robust infrastructure investment programs from both the Feds and the states.

One dynamic that is not especially well understood is how the public purse profits from inflation. In the case of the states, they capture GST revenue, which is a direct inflation tax. They also earn payroll tax revenue, which is a wage tax. Obviously, the Feds get the benefit of income taxes that climb as wages rise.

Upside surprises to tax revenues are a key reason why federal and state budget deficits have been massively revised down for the current financial year, as we long expected.

There is also no shortage of demand for government debt securities, as Victoria underlined with a record new bond deal on Thursday. Treasury Corporation of Victoria launched dual-tranche 2028 and 2030 floating-rate notes that attracted an unprecedented $8.1 billion of demand, allowing TCV to ultimately print a record $4.4 billion across the two FRNs (we bought both).

This was a smart trade: Victorian taxpayers are paying only circa 1.3 per cent annual interest on the FRNs compared with the 4.2 per cent they would pay on a normal 10-year fixed-rate bond. Judging by what taxpayers are doing with their own money, it is also what they want: almost all new home loan approvals today are for discounted floating-rate mortgages that cost 2.25 per cent, half the price of the typical three-year fixed-rate loan that charges 4.5 per cent annually.

The key investors in the FRNs were banks, which will need to buy between $315 billion and $570 billion of government bonds over the next 2.5 years to meet the regulator’s liquidity requirements. Although there had been some debate as to the magnitude of bank demand for government bonds, TCV’s transaction put that subject to bed.SI

Five key drivers behind the great Aussie house price correction2022-06-08T18:32:42+10:00

What to do when your fixed rate ends?

Mortgages These five options show how you can save $35,000 over two years by making the right choice. Duncan Hughes reports.

Carla Allen is one of hundreds of thousands of borrowers facing the challenge of what mortgage to choose as her cheap two-year fixed rate on a Sydney northern beaches apartment comes to an end.

Allen, a senior human resources adviser with an engineering company, knows the wrong choice could add an extra 40 per cent to the cost of remortgaging her home.

‘‘I’m a little surprised how quickly rates have turned around,’’ says Allen, who has switched to a variable rate loan of 2.44 per cent with Athena Home Loans, a small lender backed by AustralianSuper and Macquarie Bank. Her previous fixed rate with ING of 2.09 per cent has more than doubled to 4.69 per cent.

Record numbers of borrowers are approaching the end of their fixed terms and are set to switch or roll into their lender’s default rate as rising cash rates and bond yields rapidly push up the costs of borrowing.

Investment bank UBS estimates borrowers with $350 billion of fixed-rate loans could receive a 20-40 per cent mortgage shock when they roll into higher rates over the next few years.

Leading mortgage broker Australian Finance Group estimates a record $37 billion of fixed-rate loans on its books will mature over the next three years (that’s three times higher than average), according to chief executive David Bailey.

But a Mortgage Choice survey finds more than half of borrowers are not aware of the rate they are paying or whether they intend to re-fix their rate or choose a variable rate loan.

The following five scenarios provided by RateCity, which monitors rates and fees, covers some options faced by a fixed-rate borrower ending their loan this week.

The scenarios are based on an owner-occupier paying principal and interest on a 25-year, $1 million loan fixed for two years in 2020 at the average big four bank rate of 2.27 per cent. The assumption is that the cash rate rises from 0.35 basis points to 2.25 per cent by May 2023, which is based on projections by Westpac.

In scenario one, the borrower takes no action and lets the loan roll on to the revert rate, which is 3.66 per cent and forecast to rise to 5.56 per cent over the next two years. This would result in repayments of $95,000 in interest and fees over the two years.

Under scenario two, the borrower would negotiate to refix for two years with one of the big four banks. The rate of 4.17 per cent is based on the average of the big four’s lowest two-year fixed rates of between 2.42 per cent and 4.32 per cent. Total repayments after two years would be around $76,000.

Scenario three involves the borrower renegotiating to the big four banks’ lowest variable rate, which is on average 2.42 per cent but forecast to rise to 4.32 per cent in two years. It would result in repayments of around $71,000 over the two years.

In scenario four, the borrower refinances to one of the cheapest variable rates from any lender, currently under 2 per cent but rising to almost 4 per cent over two years. Repayments would be about $64,000 over that time.

Under scenario five, the borrower would refix for two years on one of the cheapest rates on offer, currently 3.24 per cent. Repayments over the two years would total around $60,000.

‘‘Variable rates look more attractive than fixed rates right now. However, borrowers should remember these rates are not going to stay low for long,’’ warns RateCity research director Sally Tindall. ‘‘The cash rate could rise to over 2 per cent by May next year. People need to factor this in.’’ Chris Foster-Ramsay, principal of mortgage broker Foster Ramsay Finance, says borrowers should be ready to renegotiate a cheaper rate.

He says low-risk borrowers with steady income, a good record of repayments and more than 20 per cent equity in their property should be about to knock off one or two percentage points.

Record numbers of borrowers have flooded into fixed-rate loans over the last two years as rates for top one-, three- and five-year fixed loans fell below 2 per cent for a $1 million borrower with a 20 per cent deposit seeking a 30-year loan.

In the past year, the average two-year fixed rate for a principal and interest owner-occupier loan has more than doubled to 4.14 per cent, according to Canstar, which monitors rates. The most expensive two-year rate is more than 6 per cent. SI

What to do when your fixed rate ends?2022-06-08T18:31:36+10:00