Borrowers are unlikely to get any respite from lower borrowing costs for the forseeable future as the big banks continue to replace tens of billions of dollars of cheaper-priced debt at much higher rates.

That was underlined by ANZ yesterday when it disclosed that the new long-term debt it is taking on is costing 20 per cent more than the average price across its $90 billion portfolio of borrowings that extend to the 2014 financial year.

ANZ told investors in London that while funding costs had dropped since the peak of the global financial crisis, pricing remained high and would continue to rise as the bank looked to replace another quarter of its long-term loan book.

Like its big four counterparts, ANZ has been paying as much as one full percentage point more than such debt was costing in the economic boom years before late 2007.

At the height of the crisis and when the federal government’s AAA credit rating was required to guarantee new bank lending, the industry was paying as much as double that to keep wholesale financing sources open.

That situation has eased and the big banks have been able to cut their reliance on government-guaranteed debt – and the price they pay to use it – by using their own AA credit ratings to obtain replacement funding as their borrowings have matured.

Banks have typically borrowed from domestic and overseas investors for two to three years but have been extending these times to about five years to lock in secured funding at fixed rates.

ANZ said yesterday that five years was now the average compared with 3.9 years in 2009, though this would come at a higher cost. At the same time, it had raised 70 per cent of its target of $25 billion for the 2010 financial year, which it estimates it will need to meet customers’ loan requirements in the next year or so.

But the high price of the debt will continue to feed through to interest rates on individual loans such as mortgages, personal loans and business credit, market watchers say.

According to figures compiled by BusinessDay, between now and September next year the banks need to replace long-term funding of the equivalent of $125 billion in pre-financial crisis terms.

Such an amount leaves little scope for loan rates to be eased with the banks looking at any opportunity to pass on higher funding costs to customers.

But after some banks’ controversial decisions of the past two years to increase the price of standard variable mortgages above the cash rate, the big four have kept their increases in line with the rises in official interest rates.

Story by Danny John – domain.com.au

Rates are on hold but the housing fire could already be out.

The Reserve Bank decided to keep interest rates on hold during the week, much to the relief of many a home owner, citing concerns about European economies along with satisfaction with current inflation levels.

"Consistent with that outlook, and as a result of actions at previous meetings, interest rates to borrowers are around their average levels of the past decade, which is a significant adjustment from the very expansionary settings reached a year ago," Governor Glenn Stevens said.

But the damage to the housing market could already have been done, with some signs of moderation already emerging.

The RP Data Rismark Hedonic Home Value Index released last week showed signs of softening in April, rising by just 0.2 per cent over the month, after 16 months of strong gains.

A graph of the index’s rolling quarterly capital gains highlights a distinct pull-back in April after a peak in December.

Interest rates have jumped from 3 per cent to 4.5 per cent in as little as eight months. Unsurprisingly, that has had an impact on the number of loans approved, with housing finance falling for six consecutive months.

After dropping a cumulative 14 per cent from October to March, housing finance is now at its lowest level since February 2009.

The majority of this fall is due to owner-occupiers pulling out of the market – down by 24 per cent – as the first home owner’s grant was reduced, while investors rose 9 per cent.

The argument for why Australia didn’t experience the collapse in property prices seen in the US and other parts of the world has always been that the supply of accommodation here was limited while the demand continued to grow.

The stronger lending practices of our banks are another factor. We didn’t have as many loans going to property buyers who obviously couldn’t afford to pay them back.

The NINJA loan (no income, no job and no assets) was non-existent here.

But international commentators rightly point out that it is rare for bubbles in any kind of market not to burst.

The renowned value investor and founder of global investment management company GMO, Jeremy Grantham, says both the British and Australian housing markets should decline by about 40 per cent.

If they don’t, he says, it will be the first time in history that a bubble has not behaved in such a way.

We should be fortunate enough to avoid a property crash of the magnitude of that in the US but prices in any market rarely go only in one direction. They do fall, so don’t be surprised if property values start to soften.

Source: Domain.com.au

Reserve Bank gives borrowers a breather, leaving interest rates unchanged amid renewed signs of global economic weakness.

The Reserve Bank has given borrowers a breather, leaving interest rates unchanged amid renewed signs of global economic weakness.

The central bank’s decision today to keep its key cash rate at 4.5 per cent snaps a series of three rises in as many months, and follows a month of turmoil on global financial markets.

Worries about a worsening debt crisis in Europe sliced 8 per cent – or more than $100 billion – from the value of Australian stocks in May, and virtually eliminated any expectation of a rate rise by the RBA today. The monthly shares slide was the worst since the depths of the global financial crisis.

”Since the Board last met, concerns about sovereign creditworthiness in several European countries have been a focus of financial markets,” RBA governor Glenn Stevens said in a statement accompanying today’s decision. ”Investors have generally displayed a good deal more caution.”

Even so, Mr Stevens said ”global growth is still expected to be at about trend pace in 2010. ” While conditions in Europe have been relatively weak,  growth in Asia – home to many of Australia’s top trading partners – ”continued to be quite strong and may need to moderate in the year,” he said.

Since October, when rates were at half-century lows, the RBA has lifted the official interest rate six times in a bid to discourage excessive spending as the economy rebounded from last year’s slowdown. Those rate hikes have piled about $300 on to the average monthly payment for a typical 25-year, $300,000 mortgage.

”They’re obviously waiting and seeing what the effects of past interest rates have been,” said NAB head of Australian economics and commodities Robert Brooker.

”We don’t think they’ll be moving up again until towards later in the year.”
Despite rising company profits, low unemployment and an increase in weekly wages, the recovery remains patchy.

Data out today showed building approvals sank 15 per cent in April, the most since November 2002. Retail sales, though, rebounded, rising 0.6 per cent in April, twice the pace of growth that had been expected by economists.

The Australian dollar was little changed after the RBA’s verdict, trading recently at 83.75 US cents, from 83.64 US cents just prior to the announcement.

Story by Chris Zappone Fairfax Digital

South Australians and Victorians tend to keep their options basic, whilst Queenslanders prefer to spice it up the most. What state you live in can determine just how you choose to do it. Borrow money that is.

South Australia

It’s often said that South Australians like to saviour the good things in life – food and wine.

Sex too, if you are to believe South Australian men, of whom 64 per cent told La Trobe University researchers that they had an extremely physically pleasurable relationship, much higher than the 45 per cent of Melbourne fellas and 44 per cent of Sydney blokes in the same survey.

(Interestingly, the percentage of women in all cities who agreed that they also had such a relationship was 31 per cent, 38 per cent and 36 per cent, respectively, but I digress…).

When it comes to housing loans, though, South Australians prefer plain vanilla. An astounding 69 per cent of all new loans through broker Mortgage Choice in South Australia are for a basic package.

Mortgage Choice spokeswoman Kristy Sheppard says basic variable loans can appear more affordable but have fewer features at the borrower’s disposal. They tend to be more popular with people on lower incomes and less experienced borrowers who are still finding their feet in mortgage land.

“This state’s demand for ‘no frills’ loans, which tend to have a lower interest rate and fees, says a lot about the conservative nature of South Australians,” says Sheppard. “SA residents tend to be good savers and are careful with their money.”

The broker recently surveyed South Australians who were planning to buy their first home before next February and found more than one-third (35 per cent) will have a deposit of 20 per cent or more to contribute towards their purchase.

This was the highest of any state and well above the national average of 29 per cent. Admittedly they have a lower bar to reach – Adelaide has the lowest median house price of the mainland capital cities.

Victoria

Victoria also shows a strong preference for basic variable loans though this has occurred only over the past 18 months. Before that, demand for basic and standard variable loans from new borrowers was pretty much neck-and-neck.

“Victorians are more cautious with their money, are strong savers and tend to be better informed about budgeting, managing their money and the mortgage process,” says Sheppard. “With Victoria predicted to experience exceptionally strong population growth in the coming years, it will be interesting to see where the demand for different loan types heads – will the state’s residents become less conservative?”

Standard variable loans are often priced slightly higher than basic variable loans, they tend to offer greater flexibility and features such as access to “professional packages” that, for a fee, provide a discounted rate and other benefits.

Western Australia and Queensland

Residents within the resource states tend to be the biggest consumers of loans with all the options.

“WA and Qld residents are happy to make slightly higher repayments in return for ‘bells and whistles’, which indicates they are less risk-averse and perhaps more capable of dealing with interest rate rises,” says Sheppard.

WA and Qld also have younger aspiring first home buyers, and more young people buying solo than in other parts of Australia. Many plan to buy their first home before they turn 30. In the other mainland states, the highest proportion of buyers-to-be are 30 years and over.

NSW

NSW tracks closer to the commodity boomers than it’s western and southern neighbours. A flood of first home buyers after the Federal Government’s first home owners boost was introduced in October 2008 has driven demand for basic variable home loans.

Before that, the preference was for more flexibility. Now it’s pretty much even-stevens with basic variable more in demand, but only by five percentage points.

Perhaps it’s got something to do with mortgage size. Almost one in three potential first home buyers in NSW intending to take out a mortgage of $400,001 or more, according to Mortgage Choice’s 2010 First Homebuyers Survey. This was the highest percentage for any state and noticeably higher than the national average of 24 per cent.

Story by Carolyn Boyd Fairfax Digital

The Reserve Bank of Australia (RBA) has warned lenders and borrowers to be prudent while giving an assurance that Australia does not have a speculative housing bubble on its hands.

Fears of a property bubble emerged after the Australian Bureau of Statistics house price index rose 20 per cent in the year to March.

But RBA head of financial stability Luci Ellis said in a speech that Australian house prices have recovered their small decline from 2008 to post increases of between about 12 to 15 per cent over the past year in capital cities, depending on the measure.

Ms Ellis said recent data suggested Australia does "not have a credit-fuelled speculative boom on our hands".

"It would not be desirable for the current situation to turn into one," she said in a speech.

"It will therefore be important for lenders to remain prudent in their standards.

"It will be equally important for prospective borrowers to have realistic expectations, and not to rely on a hoped-for capital gain in order to service their debts."

She told a residential property conference housing prices have been under upward pressure in Australia, with most short-term drivers coming from the demand side following the increased first home-buyers grant, low interest rates and lower than expected unemployment.

"The nature of the demand shock Australia faces means that it would be helpful if more of that demand could be accommodated with extra homes for occupation, instead of by higher prices," she said.

"Some of that pick-up in construction does seem to be happening."

She said the supply of housing was always going to be quite "sluggish".

"But whatever the causes, the ability to add to supply is falling short of this higher rate of population growth, despite some pick-up recently," she said.

"Naturally that is putting upward pressure on housing prices."

Ms Ellis said it would be "desirable" for the supply of new dwellings to become more flexible than it had been to date because extra people need somewhere to live, and both house prices and rents could rise.

The more that housing prices rise, the more some people might feel they must stretch their finances to buy a home, she said.

Another concern was that if too much of the response to faster population growth comes as faster growth in housing prices, this could be "built into people’s expectations".

"If price expectations become over-optimistic and encourage too much investor demand, the result could be disappointment, or worse," she said.

She also said fewer households had bought their homes without debt.

Across the mortgage market, lending standards were now a little tighter than they were a few years ago and the fraction of low documentation loans was now lower than it was two years ago for both owner occupiers and investors, she said.

As well, only a minority of recent home loan borrowers started with a loan to value ratio above 90 per cent, she said.

Ms Ellis also revealed the RBA has been carefully watching lending standards in the important first-home buyer market segment.

"First-home buyers have long faced greater risk than more established home owners who have more equity in their home," she said.

"But as far as the data allow us to tell, recent new loans to first-home buyers look quite like those made to previous cohorts of first-home buyers."

AAP

Sixty per cent of people looking to buy an investment property before mid 2011 planned to access equity in their home to fund all or part of that purchase, according to the latest Mortgage Choice property survey.

This response reveals that there’s still a high proportion of ‘mum and dad’ investors who don’t comprehend how to use equity to buy additional properties, and feel they must first repay their mortgages, said Mortgage Choice spokeswoman Kristy Sheppard.

In addition to using the equity balance, which acts as the loan security and the cash deposit substitute, meeting the lender’s serviceability criteria is also important, said Sheppard. And on loans that equate to more than 80 per cent of the property price, adds Sheppard, lenders mortgage insurance must also be factored into borrowing costs.

Risk is also a consideration when accessing equity, said Sheppard.

"Before accessing your equity it is necessary to establish whether you can comfortably afford higher loan repayments and which, if any, lender is willing to lend to you," she said.

Mortgage Choice identifies three common types of equity finance:

1. Loan top-up – is essentially a mortgage extension to fund another property purchase. Extra funds are usually made available via a lump sum payment with interest payable on the entire top-up amount.

2. Line of credit – allows a borrower to withdraw funds in addition to a home loan amount, up to a limit set by the lender. Interest is also payable on these funds. Line of credit loans generally attract a higher interest rate, are often interest-only and must be carefully managed.

3. Refinancing – allows a borrower to move to a different lender and loan product to increase the home loan amount. It’s important to shop around as lenders offer different features, fees, interest rates and measure borrowing capacity differently.

Source: API Magazine

The string of interest rate rises since October is not deterring borrowers from taking out variable rate housing loans, leaving mortgage holders potentially more exposed to higher repayment costs.

The Reserve Bank, in its quarterly Statement of Monetary Policy released today, said fixed-rate housing loans now account for only about 2 per cent of total – the lowest ratio in a decade.

”This share has been well below its decade average of 11 per cent for almost two years, with the result that the share of outstanding loans at fixed rates has declined substantially,” the RBA said.

Fixed loans mortgage borrowers in the market fell to 4.8 per cent of the total in 2009 from as high as 19.4 per cent in 2007, separate data from the Australian Bureaus of Statistics data and RateCity research show.

Fixed-rate loans, which currently charge an interest rate about 1.5 percentage points higher than standard variable rate loans, demand larger fees for providing borrowers with certainty about monthly costs.

Variable rate mortgages, while offering more repayment flexibility, expose borrowers more directly to Reserve Bank interest rate changes. The RBA has lifted rates six times out of its past seven monthly board meetings – including earlier this week – adding about $300 per month to total repayments for those borrowers holding a typical $300,000, 25-year variable rate mortgage.

Borrowers flocked to the certainty of fixed-interest mortgages during the last cycle of rising interest rates, with the ratio rising to 22 per cent a month over the six months to March 2008.

The average three-year fixed rate mortgage rate was 9.42 per cent in August 2008, according to RateCity. That compares with 7.38 per cent for a standard variable rate today.

”There are still a lot of people out there, still paying these high interests rate for fixed loans,” said RateCity consumer advocate and spokeswoman Michelle Hutchison.

Being locked in also meant those borrowers missed out on tumbling rates over the past two years when the RBA drove its key cash rate to 50-year lows in a bid to avert a sharp economic slowdown.

Outlook changes
Interest rate futures pointed to a rate cut this morning for the first time since August of 2009 as fears unleashed by the sovereign debt crisis in Europe forced central banks reconsider the case for a global slowdown.

As of Friday afternoon, the market was rating the possibility of a rate cut in June by the central bank at a 6 per cent chance – a reversal of previous months when the outlook has been consistently pointed to the prospect of rates to rise in coming months.

The turmoil in financial markets – including steep plunges on Wall Street overnight – has also trimmed the prospect of further rate rises in coming months.

Credit markets are pricing in a cash rate for the RBA of 5 per cent within a year from a current 4.5 per cent.

czappone@fairfax.com.au