U.S. mortgage meltdown - What it means for Australia
The U.S. sub-prime meltdown continues to make its unwanted mark on liquidity in Australia, as many lenders opt to re-price their mortgage products.
While there is no doubt the sub-prime lending market here has suffered as a direct result of the U.S. housing crisis, the ripples are now lapping over into our prime mortgage market. In the last couple of days, the cost of loan products, mainly from the non-lenders, has moved northwards. This is in addition to the 25 basis point interest rate rise we experienced courtesy of the Reserve Bank in August.
The tightening up on lending by major global money wholesalers affects banks and non-banks to varying degrees but these consumers should be aware that these institutions employ many variances when pricing loan products.
All non-banks are very different in their financial make-up and exposure to offshore funding, and it would be a mistake to interpret every rate rise as the result of offshore funding difficulties.
Factors which can contribute to a loan appearing to cost more include the end of a promotional discount, revamping the product to include more features, or amalgamating the product into a suite of offerings. Banks and non-bank lenders can also re-price loan products to keep the advertised interest rate attractive while adding to fees and charges. This can be picked up by consumers in the Comparison Rate, or AAPR, which gives the real cost of the loan by adding the fees and charges into the advertised interest rate.
The home loan ripple here caused by the default tsunami in the States should serve as a wake-up call to borrowers and prospective borrowers to reconsider their exposure to debt. Allowing for contingencies such as a further official interest rate rise will help ensure ongoing financial security.
Those looking to borrow should always find out as much as they can about the product they are interested in. If consumers are concerned about the security of a lender, they should simply ask where the institution is getting its funding from and ascertain the stability of those funds before making a decision.
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