Economist Justin Fabo from Macquarie gives his economic and 2019 Spring housing market update.

It’s a tough call to decide if now is a good time to lock in your home or investment loan with a fixed rate. It depends on many variables particular to your specific situation so call Giles at Home Loan Station to discuss your circumstances and see what your immediate savings will be.

Owner/Occupied loans with Principal & Interest repayments, with the Loan-to-Value ratio < 60% – Then the lowest variable rates at the moment are around 3.0%. Larger more reputable banks have specials starting at 3.18% & 3.24%, with some small lenders starting at 3.11%. The Big 4 are starting at 3.35% with their basic no frills loans.

Fixed Rates from some of these lenders start at 2.94% locked in for 2 or 3 years (owner/occupied, <60% LVR, P&I Repayments).

Looking into one’s crystal ball or reading tea leaves to foresee if the world trade and financial system can navigate through the current minefields without blowing up. The Australian economy was very “subdued” in the June quarter, but the election result, two cuts to interest rates, some relaxing of loan servicing rates and the govt working with the banks to implement sensible Royal Commission recommendations has given the property markets of Sydney and Melbourne a much needed shot of confidence. After a slow first few weeks of the Spring selling season with limited stock, the Spring market is showing solid auction results with prices achieved making up for recent losses. A confident Sydney and Melbourne property market should help the economy getting back onto its feet without more drastic measures. Then interest rates should hold with further cuts held in reserve.

Now might be a good time to lock in a lower rate for a short term if you are currently paying in the high 3% to 4% variable range.

All bets are off if the US/China trade war really gets out of hand, the UK gets further Brexit paralysis, the derivative markets hit the rocks, US/Iran start slugging it out etc, etc.

Much has changed over the past 6 months with the govt via APRA allowing banks to reduce the qualifying interest rate by approx 2% for servicing calculations. When lenders check you capacity to repay a loan, they would use a home loan interest rate of approx 7.25% to 8%. If you could afford your new loan at about double the actual home loan interest rate, then you PASS and the lender will then check everything else for qualification. The reason for a high qualification rate is that if interest rates were to RISE over the next few years, clients need to have the capacity to pay the higher interest costs. It’s no good everyone borrowing to the max, assuming a 3% interest rate with huge stress and repayment defaults if the interest rate was to increase by only 1%.

Most lenders have reduced their qualifying rates dowm from approx 7.5% to approx 5.5% which will result in people being able to borrow more to buy their dream home or investment property. Actual interest rates have recently been reducing and expected to reduce even more, so a 5.5% qualifying rate seems quite safe in today’s market. That said, some banks were criticized heavily during the recent Royal Commission for under estimating clients actual living expenses, with some clients getting into financial difficulty and claiming that the bank never asked about their lavish lifestyle, or childcare costs, private school fees or ongoing medical expenses. Now banks perform detailed analysis of clients living expenses, ask all the right questions, and if the results are low or reasonable, they often ignore frugal living expenses and use a high base-line of living expenses. If your income is considered high, they now assume your living expenses will also be increased compared with applicants on a modest income.

The result of all these changes is…………no change.
Working through many different client situations using the updated lender in-house calculators, the benefits delivered from the approx 2% lower qualifying rate have mostly been consumed by increases to the clients minimum allowable living expenses. Some lenders do allow frugal living expenses to be used, but they need to be extensively proved. The exercise of documenting living expenses in detail and using bank statement analysis tools and monthly spending home budget tools is very useful for all concerned.

Negative Interest Rates – are they coming to Australia?

There is a lot of news at the moment of further interest rate cuts to be delivered if Australia does in fact lurch into its first recession in almost 30 years. Typically it requires cuts of approx 4% to home loan interest rates to get the domestic economy back into growth mode. That’s well and good when home loan interest rates were at close to 18% during the “Recession we had to have” according to the prime minister of the day, Paul Keating. During the 2008-2010 Global Financial Crisis (GFC) home loan interest rates were up at around 9.5% variable. Now home loan interest rates are at around 3% to 3.5% variable so does this mean that they may dip to -0.5% or even lower?
It’s an exciting but scary thought. It’s terrible news for people with cash savings stored at the bank and needing a return on that money to live on. It will push many people into buying shares that pay dividends and more property. It will cause massive asset bubbles which is not a good thing. Interest Only loans may become very popular again if the bank is going to pay you each month to have a loan. Property prices could boom if people are being paid to buy houses.
More likely is that banks won’t pass on cuts in full in their quest to maintain record profits. Australia as a lucky country still has much going for it such as tourism, iron ore, coal, educating overseas students, farming industries, more record immigration to support housing and construction, service industries and specialist manufacturing. Yes there may be a downturn, but unlike negative home loan interest rates launched in Denmark, I don’t think we will see negative home loan interest rates here anytime soon.