Even though the GFC is now a fading acronym in most economists’ minds, the effects of 2008’s worldwide glitch in the fiscal matrix are still having a few ripple effects in Australia’s banking sector.
The latest influence however, comes with an opportunity for borrowers to save money on their property related loans. According to the latest JP Morgan mortgage industry report, discounts offered by lenders on standard variable mortgage rates have climbed by as much as 140 basis points this year.
JP Morgan banking analyst Scott Manning, claims this is due to the banks’ cost of funds – which soared on the back of the GFC – starting to come back down over the past couple of years, meaning more breathing room for retail rate reductions.
However the much-anticipated out-of-cycle variable rate cuts, to make up for a succession of out-of-cycle increases that occurred post-GFC, have not been forthcoming.
Instead, lenders are offering higher discounts on their variable loan products. JP Morgan estimate the average reduction has increased from 75 basis points in 2012 to 100 basis points today, with some borrowers enjoying as much as 140bps concessions on their mortgages.
As with most things banking though, when it comes to securing a good variable rate discount from your financial institution you need to tick a few essential boxes. It’s all based on your appeal as a client and risk.
So what exactly do lenders look for when determining the variable rate discount your business is worth to them?
1. Size of loan
Obviously the bigger the loan, the bigger the potential discount on your interest rate. To put it simply, the higher the mortgage balance, the lower the bank’s origination costs and of course, this keeps shareholders happy.
Not to mention, if you’re gunning for a sizeable loan of say, $500,000 plus, you must have the income, assets and credit history to support the repayments that come with it.
For high net worth investors, this is a great time to parley with your lender for a better rate deal on new and existing property related loans, particularly if you have an established history of business with them and want to refinance.
Remember to weigh up what type of leverage you have in the deal and if you’re not sure, consult a professional broker who understands property finance portfolios [Read Trilogy broker here].
2. Type of loan
Investment loans, where the borrower has existing equity in their own home and/or a small cache of residential real estate, will generally attract variable rate discounts because, lets face it, you represent a lot of potential business for lenders.
First homebuyers on the other hand can expect a smaller bone from the banks, because they are more often than not, an untested risk.
Just be careful not to allow yourself to be tied up in messy cross-securitised structures in order to get a higher rate reduction. Although the associated savings might seem too good to pass up, trying to untie the knots of cross-collateralisation will cost you a lot more in the long run.
Again, a good broker who understands how to structure your loan portfolio in order to maximise flexibility and wealth creation, can help to identify the best type of product for your circumstances and investment goals.
3. Loan to Value Ratio
It’s all well and good to want to borrow a million from the banks and anticipate an enticing rate reduction offering. But if you only happen to be contributing a 10% deposit (plus associated costs) to the purchase price of the property you’re eying, chances are you’ll lose a lot of bargaining power.
Banks are in the business of minimising risk in order to reap the maximum reward, it’s that cut and dried really. So if you shoulder more of the loan to value ratio burden – say 20% (plus purchase costs) – they will show more flexibility in their variable rate products.
4. Type of borrower
If you have accrued a sizeable deposit by diligently following a strict household budget and saving at least 10% of each wage, or chipping away at your existing property related debt to build up a bank of equity in your home/investment property(s), then lenders will really like you.
They will also show more generosity when it comes to talking rate reductions if you are a ‘high net worth’ household, with one or two stable incomes and employment history.
The take home message for all borrowers, and property investors in particular, is to really consider where you stand and what leverage you have at your disposal when it comes to dealing with lenders.
It’s also good to remember that sometimes you should focus on securing the best overall product and importantly, loan portfolio, for your needs, not just a decent variable or honeymoon rate reduction.
Critically, never over-extend yourself in order to get a better deal. If in doubt when it comes to identifying an affordable loan product that befits your personal needs, consult a professional with the necessary knowledge of property investment finance who can walk you through the process.