For many of you who are old enough to remember, Castrol, the oil and lubricant company, had a catch phrase of “oils ain’t oils”, generally meaning that all oils weren’t the same. In some ways interest rates have a similar theme and what I am generally talking about here is that interest rates which are heading to the 2.5% marker after the last rate are not the true interest rate indicator that Banks currently use.
The media have in recent weeks stated that the last 2 rate cuts will see property prices again move upwards, implying that borrowers will be able to afford larger loans at lower rates. I would caution this rhetoric at this stage and I say this because the assessment rates used by lenders when determining servicing remains at very high rates. As of this newsletter issuing only 15 of 50+ lenders have reduced their servicing rate and no commercial lender has yet to do so.
Of the 15 lenders who have reduced their serviceability rates, Macquarie leads with a 5.30% floor rate compared to MyState at 6.20%. In addition a buffer rate applies for existing debts, which essentially means a rate used plus the existing mortgage rate. In this instance the 15 lenders are all using 2.50%. For example, if you are looking to refinance at a rate of 3.50%, the lender would calculate the higher of the 2 rates, and in this case it would 6.00%. If he loan is brand new, the floor rate would apply.
APRA announced 6 weeks ago that lenders could revise their assessment rates to 2.5% above the current rate offered by the lender, however it has taken some time to take effect. I am hoping this will soon apply to Commercial lending.
Whilst we are seeing some green shoots in mortgage assessment rates, Credit card limit assessment rates have now increased from 3% to 3.8% monthly, and therefore this can be somewhat expensive if you have high credit limits despite that you may pay of your card monthly. For example, a $20,000 card limit with a nil balance would still show an annual interest cost of $9,120 which can wipe out additional borrowings that you may need, and this applies for both Commercial and Residential loan assessments.
As a tip, if you are looking for finance, I would suggest undertaking a review of all your bank accounts before applying, closing any discarded accounts, ensuring you haven’t been hit with excess or dishonour fees, reducing credit card limits or closing credit cards where you don’t need them, and checking your everyday account as lenders continue to monitor personal expenditure when comparing this with their household expenditure minimum requirements. It is also a great exercise to do because you may save yourself some unwanted expenditure such as annual or monthly fees.
In over 34 years of being in this industry I have never seen rates this low and it is likely to go even lower with some economists forecasting a further 2 interest rate cuts. With changes to serviceability test rates, and lenders now comfortable with interest only loans this does provide a great opportunity to jump into the market with a pre-approval. This is particularly the case for First Home Buyers who can avail of the Federal Government guarantee deposit scheme from 1 January 2020, in addition to stamp duty and new build exemptions.
I continue to re-iterate the need for a pre-approval prior to purchase should you now be looking. Don’t fall in love with a property until you obtain your finance.
If there is any finance question you may have we are ready to take your call and discuss the options available.
I look forward to hearing from you.