Homeowners nearly four years ahead on their mortgage repayments

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Australian homeowners are loading up their offset accounts in record amounts, so much so that the average household is now almost four years ahead on their mortgage payments.

Quick question: do you have an offset account (or several) attached to your mortgage?

They’ve become quite popular in recent years, especially since the RBA’s official cash rate has hit record low levels and impacted the amount of interest you can earn in savings accounts (which we’ll explain in more detail further below).

But first, how much have offset balances increased?

Research from the Australian Prudential Regulation Authority (APRA), provided to The Australian, shows the average balance sitting in offset accounts is now nearly $100,000 – up almost $20,000 since the pandemic kicked off in March 2020.

In total, $222 billion was in offset accounts across the country as of September 2021 – up almost $50 billion from $174 billion in March 2020.

In fact, in the September 2021 quarter alone, offset account balances increased by 10%.

All of this has helped contribute to mortgage holders now being, on average, 45 months ahead on their repayments – up from 32 months prior to the pandemic.

In terms of the various ways Australians have gotten ahead, 57% of prepayments came from offset accounts, 40% via available redraw balances, and 3% through other excess repayments.

So what’s an offset account?

Basically, an offset account is a regular transaction account that is linked to your home loan.

The advantage is that you only pay interest on the difference between the money in the account and the mortgage.

Some banks allow you to have 10 offset accounts attached to your mortgage, too, with cards linked to them that you can use for everyday spending.

How exactly does it work?

Say you owe $350,000 on your mortgage, and have $50,000 in a savings account.

If you move that $50,000 into a full offset account, you’ll only pay interest on $300,000 (which is the loan value minus the amount in your offset account).

The offset account can then continue to be used for all your daily needs, like receiving your salary or withdrawing cash.

So why would you consider an offset account over a savings account?

With the RBA’s cash rate at record low levels, the interest rate you’ll receive on the balance in your bank’s savings account is also at record low levels too.

Say for example that you had a savings account with a 1% interest rate and a mortgage with a 2.2% interest rate.

By allocating money into your full offset account, you’d save more money on interest than you would earn in your savings account.

Additionally, interest on your savings accounts is subject to tax, whereas the interest-saving on your mortgage isn’t.

Is an offset account for you?

Of course, there are additional factors you’ll want to consider, such as account keeping fees and the minimum amount needed in the account to make it useful.

And obviously, savings accounts and offset accounts are not the only two places you can park your hard-earned money. Depending on your risk appetite, there are other options you could consider that might yield a higher return.

The long and the short of it is everyone’s situation is different, but if you think an offset account might be for you, get in touch and we can help you explore your options.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

Think property prices will dip when rates rise? Don’t bet the house on it

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Whether you’re looking to buy, sell or hold, there’s a good chance you’ve wondered whether the property market will tumble when interest rates rise, right? Today we’ll look at what happened to house prices when interest rates were hiked in the past.

Past performance does not predict future results – we’ve all heard that before.

But it’s also said that an understanding of history can help us prepare for the future.

So with all the recent talk of the Reserve Bank of Australia (RBA) increasing the cash rate in 18 months (or so), and fixed rates already going up as a result, now’s an important time to look at what has happened to property prices when interest rates rose in the past.

What does history show us?

History suggests that interest rates do not force property markets into booms or busts, rather it’s often affordability, local economic conditions, consumer sentiment, or access to lending that does, according to a Property Investment Professionals of Australia (PIPA) analysis.

The PIPA analysis looks at the six periods of increasing cash rate movements since 1994, and the corresponding national house price movements, which we’ve summarised below:

June 1994 to December 1994: Cash rate increase: 2.75%. House price increase: 1.1%.

September 1999 to September 2000: Cash rate increase: 1.50%. House price increase: 7.5%.

March 2002 to December 2003: Cash rate increase: 1.00%. House price increase: 35.7%.

March 2006 to December 2006: Cash rate increase: 0.75%. House price increase: 8.4%.

June 2007 to March 2008: Cash rate increase: 1.00%. House price increase: 8.9%.

September 2009 to December 2010: Cash rate increase: 1.75%. House price increase: 10.5%.

So what can we take from those figures?

Well, for starters, for those holding out for a cash rate rise in the hope of buying during a price dip, history is not on your side – not once did house prices fall during the above periods.

PIPA Chairman Peter Koulizos says the strength or weakness of property markets is often influenced by more than just cash rate adjustments.

“There has been much conjecture over the past 18 months that record-low interest rates are the singular reason why property prices have skyrocketed, when the cash rate was already at a former record low of 0.75% before the pandemic hit,” Mr Koulizos pointed out.

“There are clearly a number of factors at play, including some buyer hysteria I’m afraid to say, but one of the main reasons for our booming market conditions is easier access to credit, which was simply not the case two years ago when rates were also low.”

Most borrowers can also afford a rate rise: RBA and PIPA

The RBA doesn’t seem overly concerned about borrowers being able to afford their mortgages when the cash rate rises.

RBA assistant governor (economic) Luci Ellis recently told a parliamentary committee that the majority of borrowers were paying off more of their home loans than required by their contracts, particularly during COVID.

“People have been socking away money in offset accounts and redraw accounts during this period. And particularly where you had lockdowns, some people were not spending as much as they ordinarily would,” Dr Ellis explained.

“If and when rates do eventually rise, a lot of people will not actually need to raise their actual repayment, because they’re already paying more than they need to.”

It’s a sentiment shared by Mr Koulizos: “While we don’t expect rates to rise for a year or two yet – and when they do, they are unlikely to ramp up rapidly – the monthly mortgage repayments on an (average) $574,000 loan may increase by about $73 per week if the interest rate increased one percentage point.”

Get in touch if you’d like to know more

The moral of the story? You don’t have to sit around and wait for a cash rate increase to make your next move.

If you’re looking to crack the property market with your first purchase, get in touch today and we can run you through a number of government schemes that can help make it easier for you.

And if you’re already a homeowner and are concerned about what an increase in the cash rate might mean for your current mortgage (or next purchase), we’d be happy to run you through a number of options available, which could include fixing your rate, or putting extra funds into an offset account in advance.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

Open banking is ramping up, so how are lenders using your data?

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Open banking is here and it’s charging full steam ahead. So just how are lenders and fintechs using your shared data in this brave, new, data-fuelled world? A new report has shed some interesting insights.

With all that’s gone on over the past two years, one of the nation’s biggest banking overhauls in recent memory has slipped under the radar.

It’s called ‘open banking’, and it aims to allow you to easily and securely share your banking data with your bank’s competitors to make it more convenient for you to switch banks when you think you’ve found a better deal on a financial product.

For example, instead of spending hours and hours gathering documentation (such as bank statements, expenses, earnings and identification documents) to refinance your home loan, you could simply request that your current bank sends the info across for you.

But, like most things, it comes with a trade-off: you’ve got to share your banking data with the prospective lender, fintech or allied professional to make it happen.

So just how do they use your data?

Australian open banking provider Frollo has just published the second edition of its yearly industry report, The State of Open Banking 2021, which surveyed 131 professionals representing banks and lenders, fintechs, technology providers, and brokers across the country.

The report shows open banking data availability has accelerated dramatically.

In the first 10 months of 2021, 70 banks started sharing consumer data and 14 businesses became accredited data recipients – including three of the four big banks.

This is an increase from just five data holders and five data recipients in 2020.

And more financial institutions are getting ready to jump on board.

The industry survey shows 62% of respondents plan to use open banking data within the next 12 months, and 38% within the next 6 months.

So what are they using the open banking data for?

Well, the most popular uses can be grouped into three categories:

– Lending: income and expense verification is highly valued by 59% of survey respondents.

– Money management: multi-bank aggregation and personal finance management were highly valued by 50% of respondents.

– Verification: customer onboarding (49%), identity verification (38%), account verification (34%) and balance checks (30%) were all highly valued.

For open broking, get in touch

Now, it’s important to note that open banking isn’t the only way you can make life easier on yourself when it comes to switching up financial products.

That’s what we’re here for!

We’re an open book – always happy to check whether you can apply for a better deal on your home loan somewhere else.

And as you know, we pride ourselves on taking on the vast majority of the legwork, whether we’re harnessing the power of open banking or not.

So if you’d like to explore your options, get in touch today – we’d love to help you out!

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

Seismic shift: two major banks hike fixed interest rates

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Are the days of ultra-low fixed interest rates over? It’s looking increasingly so, with two major banks increasing their fixed rates this week. So if you’ve been thinking about fixing your mortgage lately, it could be time to consider doing so.

Do you know how when one tectonic plate shifts, others around it soon follow?

Well, in the past week, the Commonwealth Bank (CBA) and then Westpac hiked the interest rates on their 2-, 3-, 4- and 5-year fixed-rate home loans by 0.1% (for owner-occupiers paying principal and interest).

Meanwhile, ING also lifted its fixed rates on 2- to 5-year terms by 0.05% to 0.2%.

For mortgage-holders, it’s a clear ol’ rumbling sign that the days of super-low fixed interest rates are coming to an end.

So why are banks increasing fixed interest rates?

The Reserve Bank of Australia (RBA) has repeatedly insisted the official cash rate isn’t likely to rise until 2024 at the earliest.

But it seems the banks don’t believe them. The banks think it’ll happen sooner.

CBA, for example, is currently predicting the RBA will increase the official cash rate in May 2023, while Westpac is predicting a rate hike in March 2023 – both well before the RBA’s 2024 timeline.

Given that’s about 18 months away, the major banks are now adjusting the fixed rates on fixed terms of 2-years and longer, in order to head off the expected rise in their funding costs.

“Lenders are scrambling to lift fixed rates before they start to feel the margin squeeze,” explains Canstar finance expert Steve Mickenbecker.

“Borrowers shouldn’t be so complacent as they must expect rises inside two years, and the closer they get to that point, the less attractive the fixed rates alternative will be.

“They may want to consider fixing their interest rate for three years or longer, while the going is still good.”

Variable interest rates cut

Interestingly, a number of the banks – including CBA and ING – simultaneously slashed interest rates on some of their variable-rate home loans this week.

And CBA even cut their 1-year fixed rate by 0.1% (for owner-occupiers paying principal and interest).

So why did they do this when (longer-term) fixed rates are going up?

Well, aggressively competing for customers on variable-rate mortgages (and 1-year fixed) makes sense for lenders when a cash rate hike is predicted to be at least 18 months away.

They can always increase their variable rates when needed, but they can’t do the same for borrowers locked in on longer-term fixed-rate mortgages.

So what’s next?

As mentioned above, when the big banks make a move, it’s not uncommon for other lenders to follow suit – as seen with ING this week.

So if you’ve been on the fence about fixing your rate, it’s definitely worth getting in touch with us sooner rather than later.

We can run you through a number of different options, including fixing your interest rate for two, three, four or five years, or just fixing a part of your mortgage (but not all of it).

If you’d like to know more about this – or any other topics raised in this article – then please get in touch today.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

Bar raised for borrowers: tougher home loan serviceability tests

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Some borrowers will soon find it harder to get a mortgage after the banking regulator announced tougher serviceability tests for home loans. So who will they impact most?

The Australian Prudential Regulation Authority (APRA) will increase the minimum interest rate buffer it expects banks to use when assessing the serviceability of home loan applications from 2.5% to 3% from the end of October.

This means that banks will have to test whether new borrowers would still be able to afford their mortgage repayments if home loan interest rates rose to be 3% above their current rate.

APRA estimates the 50 basis points increase in the buffer will reduce maximum borrowing capacity for the typical borrower by around 5%.

“The buffer provides an important contingency for rises in interest rates over the life of the loan, as well as for any unforeseen changes in a borrower’s income or expenses,” APRA Chair Wayne Byres wrote in a letter to the banks.

Why is APRA increasing the buffer?

This move doesn’t come out of the blue. Federal treasurer Josh Frydenberg flagged tougher lending standards a week prior following a meeting with the Council of Financial Regulators.

And it’s due to a combination of factors.

Firstly, interest rates are at record-low levels, and secondly, the cost of the typical Australian home has increased more than 18% over the past year – the fastest annual pace of growth since the late 1980s.

That combination has made financial regulators a little worried that some homebuyers are starting to stretch themselves too thin and borrow more debt than they can safely afford.

Mr Byres adds that 22% of loans approved in the June quarter were more than six times the borrowers’ annual income. That’s up from 16% a year prior.

As such, APRA did consider limiting high debt-to-income borrowing but believed it would be more operationally complex to deploy consistently.

“And it may lead to higher interest rates for some borrowers as lenders effectively seek to ration credit to this cohort,” APRA adds, but it doesn’t rule out limiting high debt-to-income borrowing in the future.

Which borrowers are most likely to be impacted?

The increase in the interest rate buffer will apply to all new borrowers.

However, the impact is likely to be greater for investors than owner-occupiers, according to APRA.

“This is because, on average, investors tend to borrow at higher levels of leverage and may have other existing debts (to which the buffer would also be applied),” APRA adds.

“On the other hand, first home buyers tend to be under-represented as a share of borrowers borrowing a high multiple of their income as they tend to be more constrained by the size of their deposit.”

What could this mean for your home loan borrowing hopes?

If you’re worried about how this latest announcement from APRA could impact your upcoming application for a home loan, then get in touch today.

We can apply APRA’s new loan serviceability tests to your personal circumstances to help you determine your borrowing capacity and focus your house hunting.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.