Let’s take a quick look at the current market trend and we will briefly introduce how to avoid potential loss incurred by variable interest rates.
The unhealthy competition caused by restriction on investment property
Since APRA imposed restrictions on banks’ acceptance on the growth rate of investment properties, unhealthy competition like interest pricing wars among banks have long been criticised. ANZ Chief Executive Officer Shayne Elliott said that although home-loan buyers would benefit from low interest rates in short-terms, the long-term decline in bank profits should not be underestimated:
1.Bank’s profit decreases, return on equity declines and it will affect the shareholders’ interests.
2.The financial industry is increasingly unstable, and the possibility of banks’ bankruptcy or financial crisis increases.
The restriction on investment property loan growth has been revoked
The good news is that Wayne Byres, APRA’s chairman, said last week:” It’s time to revoke the current restriction on that investment loans growth should not excess 10%.”
In December 2014, 10% growth rate limit has firstly been imposed on investment loan. It is even criticised by the Productivity Commission, indicating that such regulation has restricted competition in the industry.
Another important loan restriction about the interest-only loans portion will continue to remain under 30% in the near future.
Wayne stated that the restriction on repayment of interest-only loans is relatively new (executed in March 2017). So he wanted to wait for the following outcomes before considering implementing a new policy, which indicates this limit will remain existence in the short term. Such change in policy will be beneficial to a freer financial market and real estate market as a whole.
First-home buyer flow into the market
The loans for first-home buyer have reached its peak during five years, accounting for 18% of owner-occupied loans in November 2017 according to Australian Bureau of Statistics.
Here are some tips for first-home buyers:
- Consider locking in part or all of your fixed interest on the loan
- Consider conducting a pest inspection if buying an established property
- Rate your developers and their background before purchasing a property
- Contact our mortgage brokers for pre-approval loan
- Access to historical transaction data of this local suburb (contact VIP Mortgage for free)
Market trends on loan interest rate
Westpac and St. George announced that special offers for fixed interest have been ceased and the interested rate would increase since 7th March. There are some predictions that all major banks are likely to increase interest rates whereas CBA lowered the P&I repayment and interest only repayment for investment property.
Although there is still a restriction posed by APRA in terms of interest only repayment for investment property, different banks appear to have different appetites. The price war may be outdated for major banks whereas non-major banks will introduce more promotions to seize market shares. Please be careful of choosing fixed interest rate whether Rate Lock is selected. if not, it might vary before settlement.
What is Rate Lock?
The advantage of Rate Lock is that the repayment interest rate is fixed during a certain period so that the potential loss brought by variable interest rate could be minimized. However, it should be pointed out that the fixed interest rate we are talking about is of settlement date rather than application date.
So clients should select fixed rate and lock the interest rate before settlement. Our recommendation is that clients could select Rate Lock to lock the interest rate during the period when interest rate is subject to change. Once the Rate Lock application has been approved, then the fixed rate can be locked for 90 days. However, once the Rate Lock has been processed, it cannot be modified within 90 days.
When can we choose Rate Lock?
You can choose submit the Rate Lock application either at the point of application or after submission. Generally speaking, some banks cannot use Rate Lock to fix the interest rate on pre-approval before purchasing the property.
How much will you lose due to change in interest rate if you don’t choose Rate Lock?
Take Mr. Huang as an example. He’s applying for an interest-only loan for an investment property at bank A which worth $600k. He would like to lock in for two years and the fixed interest rate he applied for is at 4.09%. After discussing with our consultant, Rock Lock would be the choice. The one-off payment is only 0.1% of the loan, which is $600. The loan was about to be approved next week, but the interest rate suddenly increased to 4.45%. If he weren’t choosing the Rate Lock, there would be an extra $180 a month for the loan which can accumulate to $4320 over two years. This means Mr. Huang is better off by choosing Rate Lock.
Quotes for Rate Lock
The quotes of Rate Lock from major banks are slightly different, basically around 0.1% to 0.15% of the total loan amount. For More information, please contact VIP Mortgage Solutions consultants.