The Mortgage Revolution and its Impact on Property Investors
For many home buyers, a mortgage is something they wish they didn’t need to have when they buy their homes. A mortgage simply represents an interest repayment burden every month.
However, for many experienced investors, a mortgage represents the opportunity of not using your hard earned money to acquire an appreciating asset.
In the good old days, the most prominent feature of a mortgage was the interest rate. This has changed recently; interest rates have become less prominent in a borrower’s consideration. This is because a mortgage product can now have features to take care of your deposit, ongoing repayment to match your rental return, holidays, sick and parental leave, separate financial controls, etc.
Looking back, the revolution of the mortgage industry is not dissimilar to the food industry. The days when people would buy anything cheap to quickly fill their stomachs have gone. There is now plenty of food around; hence the variety of food has increased to meet more sophisticated needs of the buyers. Most people are now looking for food they like, rather than the cheapest.
Coming back to the mortgage industry, right now there is a massive amount of money floating around in domestic and international markets looking for a home. This includes our ever increasing superannuation contribution and surplus money above the basic needs of our day to day existence.
The days where the banks are the only main source of money have gone and the variety of mortgage products is rising at the pace that Australia has never seen before.
If the food industry is any reference to follow, you shouldn’t be surprised to see new mortgage products appearing with different packaging in Safeway for you to throw them into your shopping trolley!
So let me give you an overview of the mortgage industry revolution for residential properties, and see how you can benefit from it as a property investor.
The Australian mortgage industry has gone through 3 Eras of revolution:
1. The Dinosaur Era
These were the “good old days” where Banks were the main lenders, you had your standard variable rate products and by hedging them you had your standard fixed rate products.
In the Dinosaur era, the lenders were saying ‘we have the money, take it or leave it’.
2. The Monkey Era
Then people started to realize that lending can be a very profitable business and many players entered the market to compete with the banks, especially in the last two decades.
These new lenders started to compete against the banks on extra features and lower rates.
For example, after enough evidence suggested certain groups of borrowers presented lower risk, you had the advent of the professional package. Honeymoon rates are introduced to allow home buyers to buy furniture; whole heaps of account features are introduced as well: split accounts, salary direct debit, line of credits that that mean you don’t have to make repayment until the limit is used up, redraw and offset accounts to make good use of your surplus cash flow, etc.
However, there are still no significant efforts made by lenders to add value for borrowers. Most of the new features in this era still focused on the ease of moving money around between accounts. They really paid lip service to borrowers’ needs more than anything else.
In the Monkey era, lenders were saying ‘we know we have to compete, let’s see how little we can do to get away with things.’
3. The Human Era
In the last 2 years, the paradigm of the mortgage industry has completely shifted. Lenders are now focusing more on becoming partners of the borrowers, i.e. they start to think about what really matters to the borrowers.
In today’s property market, the two things really matter to the borrowers are their repayments and deposit.
Repayments:
In June 2006, the launch of the Cash Flow Mortgage signified the start of an era in which mortgage lenders have begun to consider how to make repayments work for the borrowers.
With mortgage products similar to the Cash Flow Mortgage, the mortgage repayment scheme has now become adjustable depending on the borrower’s income stream.
There are now many mortgage lenders looking at creative ways to help borrowers to take away their burden of repayment. The competition is getting hotter in this space as we speak!
Deposit:
In 2007, quite a few lenders are releasing mortgage products that can put the deposit in for the borrowers in exchange of profit share or higher repayment stream in the future. Some lenders even allow lower repayment along the way in exchange of better profit sharing position as well.
By lenders getting into the deposit side, they have literally become business partners rather than financiers. People who haven’t accumulated enough deposit can get into their properties sooner, investors who don’t want to use their money can get higher leverage, etc.
This space is highly contested as well; we will keep you up to date on this as they happen.
In the Human era, lenders were saying ‘we have too much money and don’t know what to do with it. We will do anything for you as long as you take our money.’ What does all this mean to you as a property investor?
We see a couple of changes in how you may conduct your business as property investors:
1) The rapid change of the mortgage industry offers enormous opportunities to property investors that this country has never seen in the past. You need to surround yourself with mortgage professionals who understand these changes and can offer you business opportunities you may or may not be aware of;
2) There will be more and more people going into the residential property market due to the abundance of mortgage products available, this will in turn push property prices up even higher at a faster pace;
The best time to buy a property is always when you were legally allowed to, and the second best time is always now.
3) Average number of properties per investor will increase, there will be more and more property investors that can have 4 or more investment properties, and so you need to get educated more than ever if you were to build a large property portfolio.
4) Lenders offering deposit assistance indicates the start of a rising property market. I say this for a couple of reasons:
- Lenders understand that the act of lending itself inflates property prices. They wouldn’t offer you deposit to have a profit share later if they are betting on property prices to go down;
- More people can get into property market than before, with similar and limited supply, the demand for properties alone will drive prices up;
5) Lenders offering deposit assistance can also create a bubble to burst one day. I don’t think it will happen in the next few years, as it will take some time for the general market to take up the equity offer from the lenders. So if you are already in the property market or buying more at the moment, you are likely to benefit from the price rise in the near future.
You need to watch how the market is going over the next few years, if capital gain goes above 10% too much and too fast in most areas, I will adjust my property investment strategy accordingly.
I heard some lenders using housing affordability as the reason to promote the equity shared type mortgages to help people get into properties sooner, but they forget that they are the ones that actually make the property prices even more unaffordable in the first place.
The best way to encourage more violence is to suppress violence; the fastest way to make property unaffordable is to make them affordable.
In summary
Humans are more destructive than monkeys, because we are also more constructive.
The Australian mortgage industry made the transition from monkey to human in 2006, property investors need to lift their game as we are not dealing with monkeys any more!
This article was written by Bill Zheng, founder and CEO of Investors Direct™, a leading property finance company that provides financial solutions exclusively for property investors and non-institutional developers. Bill has been a keynote speaker for numerous high profile property and finance conferences throughout Australia and around the world.
For further details about Investors Direct™, please go to www.investorsdirect.com.au.
Copyright © 2001-2007 Investors Direct
Bill Zheng
Investors Direct
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