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goughy

Banks, interest rates, and home ownerhip

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So again another rate drop and the big 4 don't pass on the whole thing. Is there an actual genuine reason for this, or is it purely them ripping us off? (I know what I think but I could hope I was wrong).

 

And then, in the future, where do you think they could go? I mean there was a time a few decades ago home loan interest rates were up in high teens. But I also remember my dad telling me (he was an accountant) that back then, even with the high rates the percentage of family income going towards paying home loans was lower than today, and there was a much greater percentage of single income families back then. I would think today that if interest rates reached 10% or more that there would be a huge amount of people who would be screwed. I would think it could end up like the US here. Cept of course we can't just walk away from house and loan like thy can.

 

So I know crap about all this, so much I right in my thinking, and can someone explain it all?

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When interest rates go up, savers never receive the whole amount either, so I don't see why it should be any different for borrowers.

 

In the UK, RBS and Naywest are talking about negative interest. Meaning they will charge businesses that have too much money in their current accounts.

Edited by FatPom

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Some people are going to be seriously screwed if official interest rates every get back to 6.5 - 7%, let along 10%. House prices are continuing to grow faster than average incomes which are starting to slow down even further (latest indications are average wages rises for the next few years are going to be around 2%). Those buying $600K+ average houses with bugger all deposit are either going to have to look at the future, or else the banks are going to have to go down the Japanese path of multi-generation loans. Do the figures, $500K mortgage over 30 years on an average income of $75K does not leave a huge amount left over, and with the generations living longer inheritances are not going to be the long term solution like they used to be.

 

Other factors in the future may change this. Businesses really need to look to embrace more remote work practices so that as people realise they can work from rural centres where housing is affordable, the overall housing costs will come down

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When we were first married, we lived off my wage, rented & saved all of my wife's wage. We went an worked in the UK for 3yrs and all her $'s were sitting in the bank earning about 15%+ or something crazy. When we came back, mortgage interest rates had dropped to about 8% and we bought our first house (a fixer-upper we paid about $20K too much for in 92 - young and naive).

 

Our eldest is renting a room in a flat in a very nice inner Sydney suburb. The young person who owns the flat paid $655K for it in 2013 (supposed to be worth $800K now). It is a bloody tiny. I guess it's ok when you are young and if capital gain keeps going in the right direction, but there is no way I could part with $655K for something that small. You'd get a cracking new or heritage 4-5 bed/2-3 bathroom/2-3 car, 1000m2-5ha block for that here.

 

Our youngest (who will prob end up working in Sydney and is keen to buy a place) nearly had apoplexy when i told her what he paid for that flat. She's been working part-time remotely from Bathurst. Would be good if that continued (as she could maybe afford to buy there).

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Nothing wrong living in Bathurst. We moved here in January from Hornsby Heights and don't regret the move at all.

I grew up in Coogee and in 1979 my wife and I bought land and built a project home in Mt Colah, which back then was considered the outskirts of Sydney, leaving friends and family to make a start. The banks back then did not even consider the wife's wage when getting home loans as they get pregnant, and we paid 17 percent interest on our mortgage. We survived with 1 car and I caught the train to work in the city, we did not travel overseas on holidays.

You don't have to live in Sydney to get a start and you also don't need the latest and greatest in everything to survive.

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One of the younger engineers I know was telling me how easy we had it buying in the 80's. He said they would barely be able to make the repayments on their loan if his wife's mum hadn't "loaned" them $100k.

 

They were in Asia last year & Europe the year before, and their first home has 4+ bedrooms, 2 bathrooms and a 3 car garage.

 

My holidays were to the GC & SC, and my first home was 3 bedrooms, 1 bathroom and no garage. I also took in renters when interest rates hit 17%. Really, is it that much worse?

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Cept of course we can't just walk away from house and loan like thy can.

 

The housing collapse in the USA was caused by large-scale selling of over-valued property to people with no capacity to pay, and no (or minimal) deposit equity, resulting in massive bad debts.

 

I would have thought the USA and Australia are pretty much the same in regards to how that ends up.

 

The property would be sold, and you'd be up for any outstanding balance, which you would deal with via bankruptcy, if you can't recover.

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Buy don't they have no recourse in some states in the US, and you can basically just walk away from it, bank takes it. But you're walking away from the mortgage too? I know this is a huge over simplification of it, but I'm sure that's what I've heard. Leaving Banks with houses with less than they Lent, and no one to buy them.

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No, I think it's basically the same deal.

The bank always owns your house, and if you walk away from your mortgage, the bank takes possession, sells it, and comes after you for any loss.

The system relies on people having significant equity, and other assets that they want to protect, which is why borrowers normally fight tooth and nail to avoid it.

The problem in the USA with the sub-prime mortgage thing was that over-valued properties had been "sold" to people with minimal income, no equity and no significant assets. When the reality of that perfect storm finally hit, there was no market to resell them into. The resulting crash meant that properties were effectively worthless and the mortgages were junk.

The banks were then in a lose-lose situation, no way to recover the loss by selling the property, no way to recover the loss by chasing the borrower.

 

People just walked away from the property and either declared bankruptcy (if you have nothing to lose, it’s not such a bad deal) or the banks just cut their losses (it costs money to send someone broke and get nothing from it) and just wiped the debts, and in some states they legislated to force the banks to accept that option.

In Australia, one of the results of the GFC and the sub-prime mortgage disaster (and in return for the Govt guarantee) was the implementation of the so-called "responsible lending" legislation, where banks are now required to ensure that a borrower can demonstrate the ability to repay a debt. i.e. No 0% deposit home-loans to 95-yo pensioners.

 

I know a little bit about this because, even though I work in IT, I work for a company that specialises in debt management. I readily admit to not knowing shit about the details, but have a basic overview understanding of it.

 

Edit: One of the implications of the "responsible lending" legislation is that if the banks can't demonstrate that they took all the required steps, they may well be required to just cop it sweet for any loss, similar to the way some debtors in the USA were able to walk away from debts caused by irresponsible lending policies. I know for a fact that we've had a few clients where we've forced the bank to suck it up and wipe a debt, because they lent money to people who should never have gotten past even the most basic of credit checks.

Edited by XCOM!

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...

 

My holidays were to the GC & SC, and my first home was 3 bedrooms, 1 bathroom and no garage. I also took in renters when interest rates hit 17%. Really, is it that much worse?

Yes housing affordability is tracked by economists. The percentage of mortgage repayment against salaries has been on an upward trajectory since the 60s. Home ownership as a percentage of population is heading in the opposite direction.

 

Basically, with 2 tiered inflation, salaries have not kept up with house prices. The wealth concentrates into a smaller number of the population and governments do things like remove house prices from CPI to conceal what is actually going on.

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No, I think it's basically the same deal.

 

The bank always owns your house, and if you walk away from your mortgage, the bank takes possession, sells it, and comes after you for any loss.

 

The system relies on people having significant equity, and other assets that they want to protect, which is why borrowers normally fight tooth and nail to avoid it.

 

The problem in the USA with the sub-prime mortgage thing was that over-valued properties had been "sold" to people with minimal income, no equity and no significant assets. When the reality of that perfect storm finally hit, there was no market to resell them into. The resulting crash meant that properties were effectively worthless and the mortgages were junk.

 

The banks were then in a lose-lose situation, no way to recover the loss by selling the property, no way to recover the loss by chasing the borrower. People just walked away from the property and either declared bankruptcy (if you have nothing to lose, it’s not such a bad deal) or the banks just cut their losses (it costs money to send someone broke and get nothing from it) and just wiped the debts, and in some states they legislated to force the banks to accept that option.

 

In Australia, one of the results of the GFC and the sub-prime mortgage disaster (and in return for the Govt guarantee) was the implementation of the so-called "responsible lending" legislation, where banks are now required to ensure that a borrower can demonstrate the ability to repay a debt. i.e. No 0% deposit home-loans to 95-yo pensioners.

 

I know a little bit about this because, even though I work in IT, I work for a company that specialises in debt management. I readily admit to not knowing shit about the details, but have a basic overview understanding of it.

That's more or less how the GFC got started, it started with the sub-prime crisis. The mortgage guarantee AND the relaxing of the divide between savings and investment banks saw a spillover of risky behaviour from the investment side of banking into the mortgage lending business. Then mortgage broking separated the mortgage originator from the mortgage holder and then the boys in Wall Street packed this all up into an expanding business ventures and sold shares into what effectively had become Ponzi schemes.

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Yes average house prices are going up, but not really by the amount the statistics show. In the 80's, an average house was 3Be & 1Ba with a cheap oven and lino floor. Now an average hose is 4Be & 2Ba, dishwasher, expensive oven/microwave/coffemachine, carpet & porcelain tiles, etc etc etc.

I bought at the edge of suburbia. No-one wants to buy there now cause it's too far out.

 

OK, it is harder, but people also expect a lot more in their home than they used to. If couples only ever intending to have 1 kid didn't have to build a home with 4 bedrooms, just to comply with covenants and not under-capitalise their land, then housing would be more affordable.

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The banks boost the savings interest rate which looks like they've passed on something but it's a smaller business so they come out ahead. However rather than just make lending rates cheaper they then can negotiate a lower rate with business they see as desirable/profitable - like with investors that have a few properties and plenty of assets.

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Yes average house prices are going up, but not really by the amount the statistics show. In the 80's, an average house was 3Be & 1Ba with a cheap oven and lino floor. Now an average hose is 4Be & 2Ba, dishwasher, expensive oven/microwave/coffemachine, carpet & porcelain tiles, etc etc etc.

I bought at the edge of suburbia. No-one wants to buy there now cause it's too far out.

 

OK, it is harder, but people also expect a lot more in their home than they used to. If couples only ever intending to have 1 kid didn't have to build a home with 4 bedrooms, just to comply with covenants and not under-capitalise their land, then housing would be more affordable.

I think you're right that people want more however these sorts of covenants tend to exist in what would normally not be considered first home buyer's areas. This is all exacerbated by much higher youth and young adult unemployment. Gone are the days where Bill the apprentice has paid off his block of land down the coat by the end of his apprenticeship. People are generally starting to save for a deposit later due to the shortage of permanent highly paid employment, and as these jobs disappear overseas to China and India the real wage/salary are dropping for a larger amount of people. The amount that can afford to be greedy and want more in their first home are a select few. That is why home ownership as a percentage of the population is falling.

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Every time they lower interest rates it also affects those with savings in banks, young and old.

It really annoys me that it's all about those with mortgages and how it helps them, but very little concern for those trying to survive on bank interest or trying to save enough deposit for a loan.

Not all retirees are well off with multiple properties and benefitting from negative gearing.

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Mortgage rates were 18% in the UK when I left in the late 80s, they were lower in Oz by about 1%. Not sure what they were in other countries in Europe (depended on the country I guess, this was before 'New Europe even existed).

 

In the US you can walk away from your home and hand the keys back. UK is the same deal as Oz, the banks will continue to chase you for any loss incurred through a fire sale.

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Every time they lower interest rates it also affects those with savings in banks, young and old.

It really annoys me that it's all about those with mortgages and how it helps them, but very little concern for those trying to survive on bank interest or trying to save enough deposit for a loan.

Not all retirees are well off with multiple properties and benefitting from negative gearing.

 

 

This is what I said in my post above. Savers never ever got the whole rate increase, so why should borrowers?

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17% interest on my first home loan + fees that made it effectively 18% and SFA capital growth. Imagine buying a house on a credit card, that's pretty much what it was like. Tell that to young folk today and they won't believe you.

 

Nowadays I'm at the other end of the stick having retired debt and the low rates hurt my income.

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So yesterday one of the big 4 reduced lending rates , but not up to the full amount. I did notice however, that they IINCREASED their deposit rate.

 

Some of my own thoughts. When the RBA cuts interest rates IN THE AUSTRALIAN market, everyone thinks that all loans should drop. Funding is complicated at a corporate level. Focusing on the banks, their funding comes from multiple locations - interbank, their own deposit funds, other Corp/Govt funds, offshore to name a few. The trick naturally is to get the best funding structure. This includes sources and terms (spot and term funding).

 

As a simplistic example using your shopping grocery budget as how banks fund their book. If you bought your shopping at Aldi (40%),and at Woolies (60%). If Aldi drop their prices by .25%, you are not going to save .25% on your grocery bill. You will only reduce your bill by .25% of 40%. Just the same, if the bank only gets a certain percentage of their funding from official cash rate situations then you would not expect a full .25% reduction in the overall rate.

 

FM

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As a simplistic example using your shopping grocery budget as how banks fund their book. If you bought your shopping at Aldi (40%),and at Woolies (60%). If Aldi drop their prices by .25%, you are not going to save .25% on your grocery bill. You will only reduce your bill by .25% of 40%. Just the same, if the bank only gets a certain percentage of their funding from official cash rate situations then you would not expect a full .25% reduction in the overall rate.

 

FM

That makes perfect sense IF most of their other funding sources haven't dropped by just as much if not more.

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So yesterday one of the big 4 reduced lending rates , but not up to the full amount. I did notice however, that they IINCREASED their deposit rate.

 

It's true that the banks have a problem attracting deposits for funding, if they let interest rates fall to a point where it's unattractive for investors, and so may be addressing that.

 

However, it's also true that the banks know they have much more flexibility in adjusting those rates, without the media stirring up rage and moral indignation.

 

We'll see if the deposit rate increase sticks, or if they quietly wind it back once the heat has gone out of this latest RBA rate-cut campaign by the PM and media.

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Agree X and M. I know of one banks funding mix (but am not allowed to advise). All have different mixes and levels of funding. A few years ago when rates were higher, a couple of the banks were down near 55% of self funded, and a broad mix of official cash rate top-up and offshore funding.

 

And.... transparency is always the key without giving up your business model.

 

Unfortunately, the banks are an easy political target. For some good reasons as well as bad reasons.

 

FM

 

PS: Also, if banks have a tight cash position or feel their risk position is higher, they will prop up the deposit rate/pay extra for offshore funding or reduce the appeal of lending.

Edited by Flanman

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The doom and gloom predictions have been going for ages, morning TV the worst one day like on here it will be carnage, then two weeks later it is all good.

 

Since the GFC we have had low rates, that is 8 years of low rates, should investors wait for them to go up

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If you haven't asked your lender for a better rate, you are crazy! Get your broker to do it if they haven't already or we can help you do this. (There is no cost to you do this and we are unlikely to receive any payment from the lender to do this for you) - we have had some great success in getting lender to reduce their rate or put you onto a better product with your current lender in the interests of retention to that bank.

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Agreed Hellman.

 

Go to a broker - a DIFFERENT broker than you used last time. The new broker will want to secure your business and will try and find the best deal.

 

We refinanced our investment property a few months back and got a mortgage rate 1 whole percent below what our previous rate was ....

 

Only unfortunate thing was that I locked in 50% of the mortgage on fixed interest (4.09%), thinking that surely rates couldn't get much lower ..... standard rate has gone down 0.5% since then .... and could head lower.....

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interesting insights, they got bailed out and are getting richer on us,

 

http://www.abc.net.au/news/2016-08-08/verrender-four-myths-busted-why-we-need-banking-royal-commission/7699794

 

Swan and Rudd did more than pink batts to prevent GFC impacting oz

 

I was working in the banking industry in the GFC (in HR function). Say what they want, the behaviour during that time was criminal. The bonuses I saw being paid out right after the GFC was insane, 8 figure amounts being paid to bankers that were in areas deemed to be in crisis and required hand outs from the government. There was no behaviour showing of any crisis, redundancies were paid out to remove dead wood, otherwise it was snouts in the trough like usual.

 

I'd be more than happy to speak to a commission about what I saw - it was a major part why I resigned from there and have refused offers to go back into that industry since

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I was working in the banking industry in the GFC (in HR function). Say what they want, the behaviour during that time was criminal. The bonuses I saw being paid out right after the GFC was insane, 8 figure amounts being paid to bankers that were in areas deemed to be in crisis and required hand outs from the government. There was no behaviour showing of any crisis, redundancies were paid out to remove dead wood, otherwise it was snouts in the trough like usual.

 

I'd be more than happy to speak to a commission about what I saw - it was a major part why I resigned from there and have refused offers to go back into that industry since

yeah, it seems to be an industry that no one wants to look at too hard.

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Agreed Hellman.

 

Go to a broker - a DIFFERENT broker than you used last time. The new broker will want to secure your business and will try and find the best deal.

 

We refinanced our investment property a few months back and got a mortgage rate 1 whole percent below what our previous rate was ....

 

Only unfortunate thing was that I locked in 50% of the mortgage on fixed interest (4.09%), thinking that surely rates couldn't get much lower ..... standard rate has gone down 0.5% since then .... and could head lower.....

 

I don't necessarily agree with that statement, we have had heaps of success in securing better deals for our clients, even with the same lender. We actually have a consultant where that his is sole role to contact 'old' clients and see if we can get their current bank to sharpen their pencil.

How brokers are paid is an upfront commission and an ongoing trail commission so it's almost always in our best interest to ensure that you are on the same deal

Re your 4.09% - check with your current lender re the break cost to move it back to variable as if their variable rate is comparable to the fixed, they may only have nominal break costs

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Hi Hellman,

 

I didn't mean to tar all brokers with the same brush .... I know there are some good operators our there.

 

If people give good service and are professional then I always continue to support them (from local coffee shops to bike shops to mortgage brokers).

 

I have just had 2 experiences in the last couple of years where I went back to brokers that I had previously used (like most, I refinance every few years). On two occasions I found it near impossible to get them to talk to me. My only conclusion was that they were still getting a trailing commission and thought their time was better spent chasing new clients rather than keeping old ones.

 

It wasn't until I went to a new broker that I got some service.

 

Having said that, I will revise my advice to this:

 

"go see your friendly mortgage broker, who can probably get you a good deal on refinance. If you aren't happy with their service, then you can move on to another broker who will, no doubt' be looking at securing your business"

 

:smile1:

 

Thanks for the advice on break costs. I'm currently watching the interest rate situation .... if it creeps much lower I will probably have a look into break costs to get even lower .....

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So, 3 months since the Banks made much noise about increasing their deposit rates as being the justification for not passing on the last interest rate cut... they have all now quietly wound back the deposit rates by .5% or more... just like we knew they would.

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I don't necessarily agree with that statement, we have had heaps of success in securing better deals for our clients, even with the same lender. We actually have a consultant where that his is sole role to contact 'old' clients and see if we can get their current bank to sharpen their pencil.

How brokers are paid is an upfront commission and an ongoing trail commission so it's almost always in our best interest to ensure that you are on the same deal

Re your 4.09% - check with your current lender re the break cost to move it back to variable as if their variable rate is comparable to the fixed, they may only have nominal break costs

 

as a broker I'd agree with you Hellman

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