Mortgage Market
Sydney Morning Herald
Thursday April 10, 2003
There are all sorts of loans out there but sometimes you have to work hard to find them.
One of the biggest wild cards for mortgage borrowers is the variation in interest rates during the life of their loans. What can seem like an affordable repayment at the time of borrowing can suddenly become unmanageable if rates rocket skyward.
And even small increases in rates can make life uncomfortable for borrowers who have stretched themselves financially to get into the property market.
Fortunately for those spooked by last year's talk of rate rises, the outlook for rates now appears to have swung in their favour.
Tony Meer, senior economist at Deutsche Bank, explains: "This time last year the Reserve Bank was expected to put the official cash rate up, pushing up almost one for one housing mortgage rates."
Many economists were predicting there would be a gradual rise in rates in the second half of 2002, a move that would have inevitably fed through to higher mortgage rates.
But rather than increasing rates, the Reserve Bank has held the official cash rate at 4.75 per cent for 10 consecutive months and the consensus now is that the only change in rates in the coming months will be in a downward direction.
"[We believe] in the next three to six months the cash rate, and therefore mortgage rates, will either be stable or will go down," says Meer.
The turnaround in the outlook for rates is largely the result of the impact of the global economy.
Meer says: "Things were looking less and less certain and not just because of the war in the Middle East. The US economy was struggling with a variety of negatives and it was still working out the hangover of the tech bubble."
At the same time Japan and Europe were showing evidence of deep structural problems in their economies.
"That picture is not a great one for a small, open economy like Australia," he says.
The farm sector in Australia was affected by the drought but the domestic economy still grew at a rate of 7 per cent last year.
Two factors, the expectation that Australia's domestic economy will "slow somewhat from the hectic pace we had last year" and the risk the global economy will continue to disappoint, are driving the current view that rates will remain steady or even drop in the second half of this year.
Reflecting these expectations, fixed mortgage rates have dropped to historic lows.
James Dick, senior financial analyst at Cannex, says the average five-year fixed rate is now 6.56 per cent, with the lowest being Super Members Home Loans at 5.99 per cent.
"The closest that we have ever been to this in the past was in November 2001 when the average fell to 6.92 per cent and in January 1994 when the average was 6.94 per cent."
Similarly, Craig James, chief economist at CommSec, points out that three-year fixed housing rates are now at about 6 per cent, well below the standard variable mortgage rate of 6.57 per cent. "There are very attractive conditions for people wanting to fix loans at the moment, or at least fix part of their mortgage."
However, "these bargain-basement rates for fixed loans are not going to last for too much longer. If borrowers want to fix they should move quickly."
On the product front, Kathlene Jones, research director at Cannex, says the time is ripe for finding a good deal in the mortgage market.
"We are seeing more and more of the smaller players jostling to make sure they are very competitive. Rates are very competitive and features are being adjusted at the same time."
Bill Rankin, lending director at Smartline Home Loans, a mortgage broker, reports there are also more opportunities for people on the fringes of the housing market.
St George, for instance, has launched a 100 per cent mortgage, a loan usully only available in connection with new housing developments from the likes of Jennings.
"It means you can borrow 100 per cent of the value of the property," says Rankin.
But the borrower might have to finance some of the costs such as self-insurance (similar to mortgage insurance).
In addition, he says: "The customer has to have very strong repayment ability and his/her credit history would have to be impeccable."
Rankin reports that more lenders are also launching no- or low-documentation mortgages, typically used by self-employed people who are unable to provide evidence of their incomes.
"Most low-doc loans either ask a customer to state what his/her income is and sign a declaration to that effect or to sign a declaration that he/she can afford to pay it off," says Rankin.
OTHER COSTS
On a $220,000 property with a 10 per cent deposit
Deposit $20,000
Stamp duty on purchase $6190
Stamp duty on loan amount $741
Registration of title transfer $62
Registration of mortgage $62
Mortgage insurance $2553
Estimated legal costs $1000
On a $450,000 property with a 10 per cent deposit
Deposit $45,000
Stamp duty on purchase $15,740
Stamp duty on loan amount $1561
Registration of title transfer $62
Registration of mortgage $62
Mortgage insurance $5885
Estimated legal costs $1000
© 2003 Sydney Morning Herald
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