Right now, borrowers are spoilt for choice. Everywhere you look there are amazing deals, incredible low rates for variable, fantastic fixed rates and even money back offers to refinance.
Are we in the Golden Age of mortgage finance? Will we look back in 20 years and reminisce how good things were? Is this as good as it gets?
Well, yes and no.
If we only look at interest rates there is no doubt we are seeing the lowest numbers in a generation. Can you believe sub 4% interest rates for owner occupied home loans? Remember the GFC? Who would have expected to see such low figures when the GFC hit back in 2008.
And yet here we are. Look at the number of Lenders prepared to give you a low, low rate. Even a simple Google search will show you an amazing array of Lenders all offering sub 4% loans and all ready to grab your business.
Or are they?
You see, numbers can be deceiving. Behind the scenes, the Banks’ lending criteria have been tightened and are reviewed on a regular basis. The ongoing APRA recommendations continue to have an impact on the level of investor borrowing and by default, owner occupied borrowing. The sad fact is the gap between interest rate and borrowing capacity has never been wider. In years gone by they were linked by a combination of bank calculators with add on margins and the Reserve Bank Cash Rate. Aside from variables such as living expenses, borrowing capacity was generally favoured every time rates were lowered.
Unfortunately, this isn’t the case anymore. There are more variables involved that can be manipulated behind the scenes than ever before. Existing expenses such as loan repayments are a very good example of this at work. As you know, loans can be offered with interest only and Principle and Interest options. Most investors will obviously choose Interest Only for the cash flow benefit. What is happening now is that Lenders are applying a margin onto interest rates then making the repayments Principle and Interest regardless of which option you are on. So your actual repayments are no longer the figure used for assessment of your ability to repay a new debt. Further complicating the issue is that not all Lenders treat repayments the same way.
Another aspect we should consider in all of this is how much control the Banks have over their customers. The Mortgage gives the Bank the right to sell the property obviously but it also allows them to change the conditions as well. Are they likely to? Well, if you meet your side of the bargain then no, not really. But what if they are having issues with their funding and interest only is causing them issues across their loan book for example.
But that’s not all. Each and every criteria critical to the assessment and approval process is treated differently by each Lender. Even non-Bank Lenders that use the same Funder can have different criteria for the same borrowers. In fact the rates are affected more by the level of Risk the Lender is prepared to accept than any other condition.
Out of all of this complexity there is one thing that’s very clear.
The choice of Lender is not determined by the lowest rate.
Obviously, choosing a Lender based on rate has one fundamental flaw. The rates can change. Market influences may affect how sharp your Lender can be because the interest rate reflects the strength or weakness of a Lenders funding position at any given time. From a Lenders point of view there is constant juggling of the funding position going on behind the scenes. That’s why you see “special” offers being made as they seek to strengthen up their position, especially with Fixed rate terms. If they get that wrong, if the funding position is not working, they could resort to changing the loan conditions. For example Interest Only changed to principle and Interest or removing or suspending redraw balances. Naturally, like any market change, customers may decide to move to another Lender with more favourable conditions, if any exist at that point in time.
To get that you have to be in the demographic that the Lender wants to catch. We are in a low rate environment no doubt, but we are definitely not in a low Risk environment. Low rates apply to low risk customers and you would be surprised how much you are affected by bank lending criteria. Yes, some of the smaller Credit Unions and non-bank lenders have attractive rates but they are even more at the mercy of the Risk and Return game.
Sound unfair? It is. Sound Complicated? It is. But these are the very reasons why a serious property investor needs to develop a strong focus on what’s important. Having the discipline to ignore the lure of the low rate and stick to safety and flexibility within your portfolio will stand you in good stead.
Now more than ever, investors need to have a trusted Broker close at hand.