Not so fast: Why the RBA may not cut rates

Not so fast: Why the RBA may not cut rates

With Sportsbet.com.au paying only $1.45 for a cut, and $2.60 for no change, you may say the smart money is on an RBA cut for tomorrow.

But with the market only pricing in a 64 per cent chance of a rate change, it’s far from a sure thing. There are likely a few questions in Glenn Steven’s mind ahead of one of his last meetings as RBA chief. 

  1.  Fear of spurring on house prices further

Australia’s two biggest cities have very high house prices. Exorbitantly high in some areas of Sydney, with prices up another 9 per cent in the year to July 31. That’s around 80 per cent growth since the slight breather they took during the GFC. Most of the growth was in the last few years. 

On the other hand, there’s Perth down 5.61 per cent and Darwin down nearly 8 per cent. Hobart is only up 2.3 per cent in the seven and a half years since the GFC. Even with today’s abysmally low term deposit rates, you’re still able to get that return in a year, government guaranteed. Australia’s housing market is a mixed bag, but one thing is for sure – in the absence of other factors, RBA cuts encourage people to borrow more, and this drives up prices.

The saving grace here is thanks to the RBA’s mates over at APRA, the banks are already reining in investor and low deposit lending, which are the two hot topics as far as house prices go. If you live in your property and have more than 20% equity, based on current deals in market 98.67% of the last 3 RBA cuts have been passed on to you (if your lender didn’t – time to look elsewhere!).

In contrast, if you’re an investor with only 5 per cent equity, you will have missed out on 44 per cent of those cuts, by way of lenders starting to charge more for investors and people with low deposits. We’ve seen the emergence of the ‘Ideal Borrower’, and they’re getting rates 0.33 per cent lower on average than less than ideal borrowers. The banks have been doing this over the past year as a result of stern warnings from APRA about shoring up their balance sheets and limiting their growth in investor lending to 10 per cent at most. They do this by charging more for the less than ideal borrowers, and offering extra hot rates to their ideal borrower. 

2. Knowledge the cuts are losing their punch

We’re at historic low rates already… for Australia. Many similar countries (think Europe and Japan), are at zero or negative official interest rates.

The RBA is lucky enough to have witnessed countless other economies on their journey to zero. They’ve got there for a reason – low rates are one of the main tools available to central banks when they are looking to grow their economies.

The idea is that with lower rates, two main things happen for consumers. Firstly, you’re getting less in return for keeping your money in the bank, so you have an incentive to spend it or invest it elsewhere in the economy.

Secondly, and this is a big factor for our property-obsessed economy and variable rate normal home loans, with lower rates, people pay less on their mortgage and have more money to spend elsewhere. Or you can put in back into your home loan to pay it down much quicker. Either way, the more spare cash / less debt situation is aimed to get you spending more, sooner. 

The problem for the RBA here is that each extra cut has a little less impact on the economy, and as they approach zero, there’s less of them in the tank for future use.

The RBA has been slowly trimming rates for a long time now, and consumers have learned that this is generally the sign of a weak economy, be it local or global. We saw a double cut of -0.50 per cent in May 2012 and multiple full 1.00 per cent cuts when the GFC was peaking back in late 2008 / early 2009.

With a current RBA rate of 1.75 per cent, they know they have to use each cut increasingly wisely. This adds up to a growing hesitation to cut in any given month, and this applies to the August meeting as much as any.

What does this mean for borrowers?

 Regardless of what the RBA decides to do, there’s some lessons in there for borrowers, and potential borrowers.

Firstly, when searching for property and weighing up whether to take on a new home loan, make sure you have a close look at what the market you’re buying into has been doing, to help work out what it’s going to do in your first few critical years of a home loan – where debt is high and only a small portion of your repayments go towards paying down that debt (most will go towards covering the interest).

Secondly, if you’re an ‘ideal borrower’ (remember: living in the property, with 20% or more equity), you’re hot property for lenders so make sure you’re getting a good deal – look for under 4 per cent even before any more RBA cut.

Finally, gone are the days you need to wait for the RBA to give yourself a rate cut. There’s over 100 lenders out there and they set rates based on a range of factors, the RBA is only one of these. Lenders are actively on the hunt for new customers, offering extra low rates to get you in the door.

At very least, compare what rates are available, arm yourself with the right info and get on the phone to your lender. It could be a very valuable phone call, and be ready to switch if you don’t think you’re being looked after.

If you’re on an average rate, switching to one of the lowest rates on the market will give you 3 RBA cuts or more all in one go, and that’s before Tuesday’s meeting even starts.

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Learn more about home loans

How can I get ANZ home loan pre-approval?

Shopping for a new home is an exciting experience and getting a pre-approval on the loan may give you the peace of mind that you are looking at properties within your budget. 

At the time of applying for the ANZ Bank home loan pre-approval, you will be required to provide proof of employment and income, along with records of your savings and debts.

An ANZ home loan pre-approval time frame is usually up to three months. However, being pre-approved doesn’t necessarily mean you will get your home loan. Other factors could lead to your home loan application being rejected, even with a prior pre-approval. Some factors include the property evaluation not meeting the bank’s criteria or a change in your financial circumstances.

You can make an application for ANZ home loan pre-approval online or call on 1800100641 Mon-Fri 8.00 am to 8.00 pm (AEST).

Interest Rate

Your current home loan interest rate. To accurately calculate how much you could save, an accurate interest figure is required. If you are not certain, check your bank statement or log into your mortgage account.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

How much of the RBA rate cut do lenders pass on to borrowers?

When the Reserve Bank of Australia cuts its official cash rate, there is no guarantee lenders will then pass that cut on to lenders by way of lower interest rates. 

Sometimes lenders pass on the cut in full, sometimes they partially pass on the cut, sometimes they don’t at all. When they don’t, they often defend the decision by saying they need to balance the needs of their shareholders with the needs of their borrowers. 

As the attached graph shows, more recent cuts have seen less lenders passing on the full RBA interest rate cut; the average lender was more likely to pass on about two-thirds of the 25 basis points cut to its borrowers.  image002

How much deposit will I need to buy a house?

A deposit of 20 per cent or more is ideal as it’s typically the amount a lender sees as ‘safe’. Being a safe borrower is a good position to be in as you’ll have a range of lenders to pick from, with some likely to offer up a lower interest rate as a reward. Additionally, a deposit of over 20 per cent usually eliminates the need for lender’s mortgage insurance (LMI) which can add thousands to the cost of buying your home.

While you can get a loan with as little as 5 per cent deposit, it’s definitely not the most advisable way to enter the home loan market. Banks view people with low deposits as ‘high risk’ and often charge higher interest rates as a precaution. The smaller your deposit, the more you’ll also have to pay in LMI as it works on a sliding scale dependent on your deposit size.

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

Monthly Repayment

Your current monthly home loan repayment. To accurately calculate how much you could save, an accurate payment figure is required. If you are not certain, check your bank statement.

Does Australia have no-deposit home loans?

Australia no longer has no-deposit home loans – or 100 per cent home loans as they’re also known – because they’re regarded as too risky.

However, some lenders allow some borrowers to take out mortgages with a 5 per cent deposit.

Another option is to source a deposit from elsewhere – either by using a parental guarantee or by drawing out equity from another property.

What is a low-deposit home loan?

A low-deposit home loan is a mortgage where you need to borrow more than 80 per cent of the purchase price – in other words, your deposit is less than 20 per cent of the purchase price.

For example, if you want to buy a $500,000 property, you’ll need a low-deposit home loan if your deposit is less than $100,000 and therefore you need to borrow more than $400,000.

As a general rule, you’ll need to pay LMI (lender’s mortgage insurance) if you take out a low-deposit home loan. You can use this LMI calculator to estimate your LMI payment.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

Savings over

Select a number of years to see how much money you can save with different home loans over time.

e.g. To see how much you could save in two years by switching mortgages,  set the slider to 2.

How long does NAB home loan approval take?

The time required to get your home loan from NAB approved can vary based on a number of factors involved in the application process. 

Once you have applied for a home loan, a NAB specialist will contact you within 24 hours over the phone to take down relevant information, including your total income, debts (existing loans, credit cards, etc.), assets (car, shares, etc.), and your monthly expenses (food, utility bills, etc.). Your lender might also ask for information related to the property you want to purchase, including the type of dwelling and preferred postcode.

NAB will then verify all your information and check your credit score, and if the details stack up, you should be given a conditional approval certificate. This certificate stipulates how much money NAB is willing to lend you and is typically valid for 90 days. 

Once you have your conditional approval, you can start browsing for properties that you like and that fit within the budget that NAB has provided. After you find a suitable property, you’ll need to give a copy of the signed deed to NAB, following which you should get full approval and access to the funds. This process can take up to 4-6 weeks. 

Can I take a personal loan after a home loan?

Are you struggling to pay the deposit for your dream home? A personal loan can help you pay the deposit. The question that may arise in your mind is can I take a home loan after a personal loan, or can you take a personal loan at the same time as a home loan, as it is. The answer is that, yes, provided you can meet the general eligibility criteria for both a personal loan and a home loan, your application should be approved. Those eligibility criteria may include:

  • Higher-income to show repayment capability for both the loans
  • Clear credit history with no delays in bill payments or defaults on debts
  • Zero or minimal current outstanding debt
  • Some amount of savings
  • Proven rent history will be positively perceived by the lenders

A personal loan after or during a home loan may impact serviceability, however, as the numbers can seriously add up. Every loan you avail of increases your monthly installments and the amount you use to repay the personal loan will be considered to lower the money available for the repayment of your home loan.

As to whether you can get a personal loan after your home loan, the answer is a very likely "yes", though it does come with a caveat: as long as you can show sufficient income to repay both the loans on time, you should be able to get that personal loan approved. A personal loan can also help to improve your credit score showing financial discipline and responsibility, which may benefit you with more favorable terms for your home loan.

How to break up with your mortgage broker

If you find a mortgage broker giving you generic advice or trying to sell you a competitive offer from an unsuitable lender, you might be better off  breaking up with the mortgage broker and consulting someone else. Breaking up with a mortgage broker can be done over the phone, or via email. You can also raise a complaint, either with the broker’s aggregator or with the Australian Financial Complaints Authority as necessary.

As licensed industry professionals, mortgage brokers have the responsibility of giving you accurate advice so that you know what to expect when you apply for a home loan. You may have approached the mortgage broker, for instance, because you have questions about the terms of a home loan a lender offered you. 

You should remember that mortgage brokers are obliged by law to act in your best interests and as part of complying with The Australian Securities and Investments Commission’s (ASIC) regulations. If you feel you didn’t get the right advice from the mortgage broker, or that you lost money as a result of accepting the broker’s suggestions regarding a lender or home loan offer, you can file a complaint with the ASIC and seek compensation. 

When you first speak to a mortgage broker, consider asking them about their Lender Panel, which is the list of lenders they usually recommend and who may pay them a commission. This information can help you decide if the advice they give you has anything to do with the remuneration they may receive from one or more lenders.