Reality can be a tough pill to swallow when you’ve been living in the land of low interest rates for more than two years, with financial commentators warning that borrowers lulled into a false sense of security over ‘cheap’ housing credit are facing a potentially alarming wake up call.
In response to increased funding pressures, more than twenty lenders have taken matters into their own hands, discreetly raising retail rates on their respective mortgage products.
Meanwhile, other financial institutions are selectively easing strict borrowing conditions across certain markets in a bid to capture a greater proportion of consumers.
Experts say those who failed to take advantage of the unprecedented low rate ride and make extra repayments on any non-tax deductible housing debt (such as your own PPOR mortgage), have missed a golden opportunity.
Fix it Freddy
Another opportunity borrowers might be missing out on because they didn’t act sooner is the potential to secure a great fixed term loan.
Whether it’s refinancing your existing debt portfolio or venturing into real estate for the first time, there’s no doubt that recent conditions have made fixed rate offerings a lot more enticing.
Mortgage aggregator AFG recently reported a significant increase in the number of fixed rate loans being written by its brokers, with 17.7 per cent of all total lending arranged by the company during the three months to March comprising fixed rate products. This is up from 14.3 per cent in the December quarter and 11.4 per cent in the September quarter last year.
According to AFG’s general manager of sales and operations Mark Hewitt, borrowers who sense a shifting tide want to take advantage of low fixed rates while they still can.
“With rates at historical lows the downside risk of fixing is relatively small, so many borrowers are choosing to lock in now,” he says.
“And there are no guarantees lenders won’t make their own moves outside the Reserve Bank cycle. Some are talking about increased funding and regulatory costs.”
Interestingly, investors still seem to be a dominant force in the market, even though we’ve heard a lot of talk about slowing activity from those looking to secure residential housing assets.
AFG reported that 33 per cent of business during the March quarter was attributable to investors; up from 31 per cent in the December quarter and not too far shy of the 40 per cent peak in the middle of last year.
Are you sensitive?
To an interest rate rise that is. Head of investment strategy and economics at AMP Capital Shane Olive says the Reserve Bank is completely aware that the nation’s households are highly susceptible to future rate increases.
With climbing levels of household debt he notes, “Its not stupid (the RBA). It knows households are now more sensitive to higher rates.”
Of course this has led to claims of an impending housing crash from various financial boffins.
Principal of Digital Finance Analytics Martin North however, says the bust is more likely to be “a slow train wreck, rather than a sharp correction.”
He adds, “The truth is, at some point, prices and credit have to come back to long-term trend, and they are both way over at the moment.”
One of the concerns is that the many investors who’ve jumped on the bandwagon during this recent, low rate driven real estate revival may be forced to sell up when the mortgage on their asset(s) becomes unmanageable.
If rates increased from the current average of 5.95 per cent to 7 per cent (the serviceability benchmark generally used for mortgage applications) for instance, the net servicing cost for an average residential property investment in Sydney and Melbourne would increase by about $5000 a year, or about 5 per cent of net household income.
Whereas the same increase in interest rates just three years ago would only have resulted in a $3500 net increase in servicing costs due to lower property prices at the time, according to Moody’s Investor Services.
North says while many are exploring the option of refinancing to take advantage of low fixed rate products that may not be around much longer, about 7 per cent of borrowers are finding it a tough ask to get comparable terms.
“In other words, there is a cadre of loans out there written in the past two years that are outside current bounds,” he observes.
But Justine Davies from Canstar says the pressure banks are currently responding to in their own independent rate rises, creates an opportunity for sassy property buyers willing to shop around for a better deal.
“Reducing your home loan interest rate from the current average to, say, 4.35 per cent, could save $263 a month for a 30 year, $1 million loan.”
Moreover, if you can barter a great fixed rate deal, this means you’ll still have some time up your sleeve to shore up cashflow and prepare for the impending upward movement of interest rates once more.
If you’ve been considering refinancing to fix all or part of your debt portfolio as a part of your investment strategy, why not speak with the team at Trilogy Funding?
After getting to know where you’re at and where you hope to be in the future with regard to your property investment portfolio, we can come up with the ultimate plan to not only save you money, but protect your equity position and facilitate your future financial success. Click here to connect with us today.