Tim Riley
Are you safe?
We are living in strange times when it comes to finance. In the last 6 months Australian borrowers have been hit with banks and non-bank lenders raising their interest rates independently of the Reserve Bank, have found it harder to obtain finance because of ever changing credit assessment guidelines, and have found it even harder to switch because of prohibitive exit fees and charges.
So are Australian borrower’s powerless to do anything about these changes? Is anyone looking out for people like you who are out there trying to build their wealth and secure their families financial future? What can you do to improve your situation?
Why are we seeing so much change in the financial markets?
There has been much written on the US sub-prime inspired credit crisis as the US, UK and European credit markets have been in turmoil for months. The sub prime mortgage problems have created material losses across many parties; institutional investors, mortgage insurers, banks and other financial institutions.
Without a doubt the effect on the cost of funds has been the biggest effect of the sub-prime crisis on
This in turn has affected investor confidence, particularly in the debt markets. Investment and lending in key market segments has ceased or dramatically reduced. The impact on Australian bank and non-bank lenders and in turn the impact on Australian borrowers, is that where a year ago debt was cheap and risk was lowly priced, now debt is expensive and risk is highly priced.
Chief Economist of BT Financial Group, Dr Chris Caton puts it like this, “its ironic that the willingness of US institutions to lend to everyone a couple of years ago has led to a situation in which no-one wants to lend to anyone, unless its at a high rate. And who would want to lend to another institution that may be bankrupt shortly? One way to think about how a little credit problem becomes a big one if transparency is lacking is this: in front of you are 10 bottles of water, one of which is poisoned. You are offered a bottle. The chances are it is perfectly safe. But would you drink it?”
So, in short, Australian lender’s costs of funds have risen, their margins are being eroded, they don’t want to go out of business and so they have decided to pass these costs onto you and me.
All this is particularly bad timing for us given that our government and Reserve Bank are now locked in a titanic struggle against that nemesis of central banks the world over: inflation. It’s principle weapon in the fight against inflation? Interest rates.
The other impact of the credit crisis on the Australian lending landscape is its impact on competition. When debt was priced cheaply lenders were able to be more aggressive with their pricing. For consumers this meant that they could borrow more (higher Loan to Value ratios (LVRs) across a broad range of products – Full Doc, Low Doc and No Doc) and pay less for the privilege (competitive interest rates).
Some lenders (mainly the banks who don’t rely so much on wholesale funds from overseas as non-banks because they are deposit taking institutions) are taking advantage of the stress the non-bank lenders find themselves in by taking market share of them and restoring their margins on some “higher” risk home loan segment products loan products.
The potential impact of this is that we see is that we could see a decrease in choice for borrowers in the months to come as the position of the big four banks strengthens.
Non-bank lenders are under pressure
RAMs problems are behind them but they were the most high profile victim of the credit squeeze. However, they have not been the only ones. Macquarie Group has withdrawn from the residential mortgage market and Bluestone now have reviewed their entire product offering and are rationing their credit. There are numerous other medium and small sized non-bank lenders who are continuously reviewing their product mix to ensure their viability in the short term.
A recent JP Morgan Fujitsu report into the mortgage industry noted that “as a result of pricing issues and credit availability non-bank lenders have seen a significant drop in settlement volumes.” Their exclusive reliance on expensive wholesale funds from overseas has seen a virtual absence of any growth in non-bank lending since August 2007. What’s more as Mike Branson, Joint National Head of Capital Markets Advisory, KPMG predicts “the capital markets are likely to be in turmoil for some months to come. There is no certainty of when more regular access to liquidity may return.”
So banks are gaining market share and all lenders are doing whatever they can to retain their current customers. And not by increasing service levels, rather by imposing restrictive exit costs on consumers and pushing fixed rate products which lock consumers in for longer.
What is being done to protect you?
So it seems that the current market situation is reversing some of the ground that has been made over the last 10 years in making credit (and therefore housing) accessible to more people through innovation in mortgage lending. Market control is shifting away from borrowers, regardless of their strength as the banks increase their premiums, ration their credit and make it more difficult for borrowers to leave.
This decrease in choice cannot be good for competition. Less competition is not good for consumers. So is there anything being done to reverse the trend?
The Mortgage & Finance Association of Australia (MFAA) and government are both actively working to help borrowers.
Early termination fees
The government via ASIC recently conducted a Review of mortgage entry and exit fees which found that mortgage fees, especially early termination fees represented a considerable cost to many borrowers and was an impediment to switching.
It found that early termination fees are higher in
Lenders mortgage insurance
ASIC also found that lenders’ mortgage insurance (LMI) is a barrier to switching as lenders normally pass the associated cost on to borrowers. In a letter to CEO of the MFAA Phil Naylor, Treasurer Wayne Swan encouraged lenders to allow “borrowers to capitalize the cost into the loan principal (rather than requiring an up-front payment); ensuring that any refund that is received by the lender when a borrower refinances is passed on in full to the borrower; and ensuring that borrowers are fully aware of the impact of LMI costs when they are comparing loan products.”
Complexity of fees
ASIC also found that the complexity of home loan products and the way they are described makes it difficult for consumers to identify the applicable fees and compare products. Swan has suggested that “given the potential for these weaknesses to undermine the effectiveness of competition in the mortgage industry, I would encourage the industry to examine methods of simplifying fee terminology and improving disclosure.”
National Finance Broking Regulation
So the government is committed to an industry-based solution to remove impediments to borrowers switching lenders.
Part of this commitment is the implementation of a Commonwealth regulatory framework for the regulation of mortgage credit and advice which is supported by the MFAA. As members of the MFAA, mortgage brokers don’t have any control over these developments, but as Bill Zheng, CEO of Investors Direct says “we fully support the initiatives that are taking place to ensure that our client’s and borrowers in general continue to have choice and that the standard of service delivered by the broking industry improves.”
What options do you have to protect yourself?
Money at the moment is tight; many non-bank lenders are under stress and are rationing credit because they are finding it hard to raise more money. Bill asserts that “the money they are raising is expensive, so as investors you need to quickly review your portfolio in light of these changes and get things moving while there is still a reasonable amount of choice in the market”.
He goes on to advise that “in times like these there are three main things you can do to protect yourself:
1. Consolidate your cash
“You should consider lowering your gearing and consolidating your cash to create a reserve to make sure that you a) don’t run out of cash to cover your interest repayments and b) are available to move quickly and take advantage of opportunities that will start to appear in the market.”
2. Diversify your debt
“Diversify your debt with different lenders to keep your single debt exposure low with each lender. This is to protect you from being monitored by lenders you are over exposed to if times get worse.”
3. Get the right advice
“All mortgage brokers provide you with at least the following: work out how much you can borrow, select the right product from the right lender for you, lodge the application for approval, and help you to settle the mortgage.”
“A quality investor focused mortgage broker can also help you:
· Define your finance strategy for your portfolio;
· Work out your future potential capacity;
· Manage lender’s risk so that you can avoid loans being recalled during bad times;
· Select the right order of lenders for your growth;
· Set up your finance for taxation and asset protection purpose;
· Provide you lending criteria to help select better quality properties;
· Inform you on lending potentials on each property you want to purchase;
· Update you on the lender’s attitude towards the property you want to purchase;
· Update you regularly on what is new in the finance market to help you grow your portfolio;
· Point you to the right direction for help in areas of investment taxation, asset protection;
· Assist you with knowledge and experience in property related areas such as property selection, renovation and development;
· Be an unemotional reference for your investment decision;
· Calm you down when you’re too excited, cheer you up when you are down;
· Help you develop a better financial management system.”
With the market the way it is at the moment, now it is even more important that you are getting the right advice from people that have the right experience.
Copyright © 2001-2008 Investors Direct™
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