In past rate cycles a sharp rise in interest rates is always followed by a sharp fall in rates, usually within a year of the peak. This happens because the blunt instrument of interest rate rises cripples forward momentum in the economy and the RBA has to back-peddle quickly to stop the economy going into recession.

What this means for borrowers is some relief from mortgage stress and an opportunity to think about property investment again. When interest rates fall and the stock market crashes, more attention is focused on residential property and demand for property investment increases. There is a huge undersupply of residential property in Australia, which is predicted to cause an increase of 10% in rental prices, and elevate property values over the next two years. Many astute investors are buying now while price expectation and buyer activity is subdued.

Fixed or Variable?

In times of rising interest rates, many borrowers choose to fix their rates, only to regret their decision later, when rates descend rapidly. Borrowers are often reminded of the time in the 80’s when interest rates went to 18% and fear causes them to fix rates near the peak of the cycle. Acting out of fear can often lead to regret. The media searches for the most emotive headlines to get our attention, such as “Interest Rates to Skyrocket”.

In April this year the CBA’s 3 year fixed rate peaked at 9.25% when the RBA slammed us with five rapid increases in a row. 5 months later CBA is offering the 3 year fixed at 8.39%, a strong indication of the bank’s view of where interest rates are heading.

It can be costly to break a fixed term loan contract, as the lenders will charge high exit fees. Fixing for long terms often backfires when a loan needs to be increased, refinanced or paid out due to sale. If borrowers want some assurance and certainty, then it is possible to fix part of their loan using a loan split, rather than locking in the full amount. The best time to fix rates is near the bottom of the rate cycle. Generally this is indicated by a reversal in the official interest rate movement by the RBA.

Australia is prone to inflationary pressure and while rates are dropping now, they may not reach the lows we saw in 2001. Be prepared to research the situation by watching the movement of fixed rates by the banks. You can see their forecasts of where they think rates will go in the difference between 1 year and 5 year rate spreads.

Mortgage brokers do not have perfect crystal balls. We cannot give direct advice about whether to fix rates or not. We can, however, point you in the direction of information so you can make your own, informed decision.

Residential Property to recover in 2009-10

Despite the pessimism caused by global credit woes, Australian property is set to bounce due to undersupply and lower interest rates. In a new report that forecasts strong growth in the next 15 years, BIS Shrapnel economist Rachel Logie predicts that pent up demand for residential property will be released from 2009/10 as credit conditions start to ease.

Interest rates are expected to go down in the next two years because the “RBA would not allow the sharp slowdown in retail spending and building approvals witnessed in the first half of 2008 to cause further contraction in employment, spending and investment”.

The report also said that “We are witnessing an overblown crisis of confidence and the effects of a global credit squeeze rather than a debt constrained slowdown”. Logie forecasts a return to strong economic growth, “once the current episode of overdone pessimism has receded”.

Refinancing can save Thousands of Dollars

Nothing lasts forever. Home loans, on average, are being refinanced every 2.5 to 3 years. The reason for this is the rapid changes in the credit market and borrowers having more choices in a competitive lending market.

The biggest change at the moment is the demise of the global credit market which most affects lenders who raise capital from securitisation, rather than by deposited funds. Non-bank lenders have been hit hard with the cost of funding their loans and as a result have whacked customers hard with rate increases, particularly Low-doc borrowers.

By refinancing to more competitive lenders we are now cutting interest rates by 1 to 2% for our borrowers. Some of our current options include Low-doc rates of 8.59% and Full-doc rates from 8.29%. These will drop even more after the October 9^th RBA meeting! If your loan is at a higher rate, we offer a free service to review your current loan and calculate the costs to refinance and the savings we can create for you by refinancing. Give Vincent a call on 02 6685 7888 to find out more.

Loan Approvals are Easy Now

Some people can be excused for thinking that it would be difficult to get a loan approved now, considering the daily commentary about the perilous state of the global credit market. The truth is however the opposite. We are getting all of our applications approved and noticing a relaxation of credit conditions with our selected lenders.

I know other brokers who have about a third of their applications declined, the difference being our care and scrutiny in ensuring that each application is placed with the right lender and fully meets all their credit criteria before submitting the application.

A good broker does more than get customers to fill in forms. We work with the lending profile, covering weaknesses and anticipating credit issues before submission. We also know our lenders, ensuring that the loan goes where it will be approved first time. We also fight for the deal, challenging decisions and never giving up on the client.

Some brokers are lazy. They use one or two lenders and do not keep up with the rapid changes in the industry. They look for the low hanging fruit, the easy deals and do not like taking on challenging lending scenarios.

At 888 we enjoy challenges and creating approvals where other brokers just give up at the first obstacle. We also have a dedicated customer care process, ensuring you receive constant communication about your loan progress and how much we value your business. Please call us before applying for your next home loan. We are really good at what we do.

Please call us on 02 6685788 if you would like more information.