The Australian — Wealth:
With mortgage providers jostling for business in a highly competitive market, there is a loan to suit almost anybody, reports Ed Charles
July 19, 2006
WITH low interest rates and competition among mortgage providers we are able to borrow more money than ever before to buy homes.
In some cases it is possible to borrow four times one’s salary.
The problem is that the median cost of a home in Sydney is 8.5 times the median pay package, according to the Demographia International Housing Survey (using September 2005 figures).
Sydney is the seventh-most expensive city in the world to buy property.
The same survey found that 10 of Australia’s regional housing markets were unaffordable.
Given this disparity and Australia’s continuing love affair with property it is no surprise that the local mortgage market is one of the most innovative in the world.
There is a mortgage to suit almost anybody, with flexibility being the name of the game.
Tony McCoy, a director of Mortgage Force in Melbourne, says: “They are all heading down the track of service orientation and providing more benefits in their packages.
“There is just so much competition for the dollar and the margins aren’t that high.”
We haven’t yet got to the point of inter-generational mortgages as seen in Japan, where the kids become responsible for the parent’s debt. But in the past year reverse mortgages have become popular for older people who want to realise the equity in their homes without moving out.
And that ultimately means not leaving the home to their children.
With changing demographics and people staying longer in the workforce, the terms of loans are increasing typically from 25 to 30 years.
Lindsay Rogers, an Aussie Home Loans brokers, says: “Most people take the 25-year loans and don’t realise that there are now 30-year loans.
“I suggest to people that they always take the maximum you can because you can always pay extra and pay it off faster if you want. But if you want a bit of a break and you are on a shorter loan term you’ve got problems.”
Earlier this year financial information company Cannex put out a paper discussing the 40-year mortgage.
The point of these long-term loans is that they help in amortising the term for paying off the borrowings on a property.
The Cannex paper said: “Surprisingly, the US experience suggests that 40-year mortgages are now also the home loan of choice in the luxury home market. These products have attracted home buyers at the high-end of the housing market.
“These are people wanting to leverage themselves into homes in the next price bracket, or who simply have better things to do with their cash flow than pay off their own home.”
The idea is that monthly payments can be reduced – by about $100 on a 30-year year $250,000 loan – although the overall interest cost is increased by about $150,000.
Already GE has rolled out the 40-year loan locally at a competitive rate – 7.14 per cent for $300,000.
Another bank is thought to be launching soon a 50-year loan, according to one mortgage broker contacted.
Interest-only loans also offer a similar function. By reducing the amount paid the borrower can service a higher debt.
This can allow buyers to climb higher up the property ladder, profiting later from any capital gains.
For the moment, the big banks are keeping an eye on the 40-year loan.
Damien MacRae, head of secured finance at Westpac, says of the 40-year mortgage: “It is certainly something that all lenders including Westpac are keeping an open mind about. There’s pros and cons on the 40-year mortgage.”
Currently, the most popular products for larger borrowers are the professional packages.
They are targeted at people borrowing over $250,000 and usually offer a discount of up to 70 percentage points.
Many tend to package in transaction accounts and credit cards for an annual fee. While each bank has its own individual nuances, mortgages are a commodity nowadays and there is very little difference between products.
Tony McCoy, a director of Mortgage Force in Victoria, says: “If you sat down and did a calculation – we’ve got some software that provides an average annual comparison rate which takes in all the upfront and ongoing plus interest rates – they are pretty much in the same ball park. There is not much difference.”
Packages are ideal for the time-poor, people who don’t mind paying about $300 or more a year for convenience.
“We’ve got a fairly good spread of clients and a fair percentage of them say ‘I just want one home loan, the cheapest one, no ongoing fees etc’,” McCoy says.
“They organise just the basic type (of home loan). They go out there and hunt out for the cheapest credit card and the cheapest transaction account.”
Carl Huybers, mortgage consultant with Mortgage Choice in Victoria, says: “A lot of people like to keep it pretty simple.
“They don’t like lots of extra fees, they like to get rid of fees.
“But then there is the other side of the coin, they also like to make sure that they’re utilising all the resources they have.”
Discounts are also available for green loans, the most significant lender being Bendigo Bank.
The loans are for new houses that beat government green-home standards, giving a 0.5 per cent discount – making a loan rate of 7.1 per cent.
However, seeing as this rate is higher than many professional packages, Huybers says that it is more of a marketing story than a loan that offers an economic benefit. All banks now offer investment loans priced to compete with owner-occupier loans, especially since the market for investment properties has slowed.
“It’s pretty rare that you will find a difference in interest rate,” McCoy says. You can get them on the package deal. Interest-only has been around forever for investors; there’s nothing special about them.”
The loan rate can be cut further by paying up to one year in advance on investment loans, which has advantages for investors with large tax liabilities.
Because of the expense of housing for first-home buyers, the 100 per cent mortgage is becoming popular.
The downside is that mortgage insurance can be as high as 4 per cent.
Many lenders including Westpac, St George, and the Commonwealth Bank are helping first-home buyers in this market with the relatively new family pledge-style product.
This allows children to buy a home on a 100 per cent mortgage but a limited (sometimes unlimited) guarantee is taken on the parents’ property. This means that the children can benefit from the first-time home owners grant and reduced stamp duty.
For the most part these loans are exactly the same as any other loan, apart from the pledge taken on the parents’ property.
For many people the thing to look for in these products is flexibility in the pledge side. Westpac, for instance, isn’t interested in second mortgages and is mainly targeting parents who have paid off their home loans.
“At the end of the day the majority will be unencumbered anyhow,” MacRae says.
However, Aussie has launched one of the new generation of family-pledge products, which takes a limited guarantee over the parents’ property in addition to a mortgage.
Rogers says that this type of loan with Aussie isn’t a product but “a policy”.
It’s just part of the new flexibility available in home loans.