Home loans expected to take a slight bump in 2017
A bit of bad news looming for property buyers: Lenders will be hiking rates by more than 80 basis points for existing property loans and giving lower discounts to new borrowers.
Data from the Australian Bureau of Statistics (ABS) revealed that overall demand for home loans fell slightly this October, just after a surge from the previous month. Estimated home loans dropped by 0.8% drop from the previous month’s record.
Experts said that market still remains high despite the minor decline in home loans. The fact that over 53,000 loans were approved in October is just one proof that results are still robust. Loan approvals prior to May 2015 never even reached 50,000. But just this October alone, over 53,000 loans were approved – a very unusual occurrence. The total value of all dwelling commitments amounted to more than $32 billion which is more than enough to consider that the market is still in an uptrend.
However, mortgage rates are expected to rise as a ripple effect of the recent US Fed rate hike. The cost of using international money to fund mortgages will increase but the probability of having the Reserve Bank of Australia raise cash rates is close to nil.
After the recent upsurge in the benchmark T30 US bond yields, an expert working with Digital Finance Analytics, said the effect of the aggressive Fed rate hike has a significant impact on Australia’s economy.
The expectation of international markets that the incoming US president will cut US taxes and strongly favor substantial infrastructure spending is just a part of the so-called ‘Trump effect’. Lenders will have to spend more to continue their capital markets funding in response to this. Local lenders will be forced to increase their share in the deposit market and strengthen capital buffers. This means rates will just continue to rise all throughout 2017.
This October, the overall value of loan commitments fell by 0.2%. The 0.8% decrease in value of owner-occupied loans is considered to be the main cause of the overall deflation. Investment loans, however, grew by 0.7% during the same period.
The increase in value of investment housing commitments is still lower than last year’s peak. This is mainly due to increased mortgage rates and stringency on non-price lending terms. These numbers show the market is adjusting accordingly without any external mediation from regulators.
The Commonwealth Bank of Australia (CBA), the country’s largest mortgage lender, hinted an increase in reference rates. The ME Bank, which is held by 29 industry super funds, will follow CBA’s lead, hiking reference rates of variable products by up to 10 basis points starting January 2017. CBA has yet to announce their planned figures but has already cautioned mortgage brokers that rates are still subject to change.
The reference rate is the rate applied to a loan. The type of product, its purpose, and repayment type all affects the overall rate. The interest rate, or annual percentage rate, is the amount added on a loan through a set period of time. The bank computes this rate by determining the reference rate and then including or excluding premiums or discounts for the margin.
Property brokers expect buyers to get smaller discounts due to the increase in reference rates. This increase in reference rates negatively affects the margin rates. The managing director of the mortgage brokerage firm Foster Ramsay Finance said that property buyers should be warned that they will no longer enjoy discounted rates as much as those of the previous years.
The rate increase causes many borrowers to look for products which offer fixed and variable components. Lenders will, of course, follow this suit by giving more competitive discounts. Lenders are vigorous in keeping their share in the market, leading to new avenues in giving discounts to borrowers.
Many major banks, led by Australia’s big four –NAB, CBA, ANZ, and WBC – and non-bank lenders have announced rate increases mainly on fixed and variable products.
The ME bank, along with similar smaller lending firms, usually depends on complex securitized funding although it’s gradually switching to a deposit-based model after the 2008 global financial crisis. The bank has been very assertive in growing its lending portfolio while maintaining a firm foot on the security market.
Lenders such as Bluebay Home Loans which is based in Perth, are hiking up their rates by up to 31% on their 2 to 5-year fixed rates.
The rise in swap rates is also causing an increase in the cost of deposit funding and variable rates for new investment loans, those of which has higher than 80% loan-to-value ratios, by more than 80 basis points. Variable loans for new homeowners with loans averaging between $400,000 to $700,000 and a loan-to-value basis of 80% are being cut by almost 90 basis points.
If rates increase by about 50 points over the next 12 months, annual mortgage payments will swell by about $1,200 on average. The nationwide average is around $444,000, with Sydney having a median of $544,000.
Despite all these rate increases, home investment loans will most likely remain strong due to a large number of loans for high-density residences nearing approval. However, economists at the Housing Industry Association (HIA) said they’re expecting an evident slowdown in home loans this 2017. The number of home loans will start to gradually dwindle as the end of 2017 approaches.