Home Owners, The Home Loan Market And You

Since the GFC, we have witnessed some interesting dynamics in the loan market. Smaller finance companies struggled to get finance for customers, with many exiting the market. The big banks seized this opportunity to capture extra market share after securing the cheapest funding. It also resulted in attractive term deposit and savings rates as a source of funds for lenders.

The competition from non-bank lenders reduced while competition between banks intensified. NAB bucked the trend by reducing fees and competed on price to get your loans. This ongoing competition is increasing amongst the big 4 banks and other lenders. Funding costs for loans has eased significantly over the last few years. This is one of the reasons (as well as reduced interest rates) why term deposit rates are no longer as attractive as they were a few years ago.

Bank valuations on property also became much more conservative, therefore reducing the amount of money that they were willing to lend to customers. With lower official interest rates, property prices have recovered, allowing more equity to be used for investment or loan purposes.

What does this mean for you?It means that we are all in a strong position to negotiate with our banks. The gap between what is first offered and what you may get as an interest rate can be quite wide. Don’t accept that the interest rate that you are first offered or you are currently paying is the lowest you can get.

Do some market research and negotiate with your bank. This is something your Altus Adviser can help you with. You have to be prepared however, to change banks if your current provider won’t budge. Although this can be administratively painful in the short term, it can save you many thousands of dollars in the long run.

To fix or not to fix?

Interest rates are at historic low levels at present. The RBA has been quite vocal in its view that the AUD should be lower than where it was in early September. A lower AUD can have similar economic impact as an interest rate drop. One way to try to get the AUD to fall would be to drop the interest rate as our deposits would appear less attractive to overseas money and therefore potentially reduce the demand for the AUD. One of the benefits of a lower interest rate is that property becomes more affordable. This is the issue that the RBA are trying to juggle and the reason that rates have been stable of late. They want to get the economy moving but they do not want to inflate already expensive property prices and cause another property bubble pushed by speculative lending.

With the above in mind, the future of interest rates in uncertain. The question of whether to fix or not, should not just be on gambling about whether we are at the bottom of the interest rate cycle or not. It should be looking at the profile of your debt and maybe fixing the debt that you consider will be longer term debt and concentrate on paying down the short term non-deductible debt, with a variable interest rate. Contact your Altus Adviser for more detail on this strategy.

Tips and traps

1. Pay off your credit card if you have the capacity to draw back on your home loan (or if you have access to fund in an offset account)
2. You can save quite a lot by paying the debt off quicker (using your home loan rate rather than paying 18% interest on your credit card).
3. The trap is to not have the debt on your home loan AND you reduce your repayments. You want to use the lower rate to pay it off quicker (not slower).