The number of borrowers looking to refinance their home loans has increased over the past six months because of the uncertainty of interest rates in Australia. Currently the Reserve Banks’ Official Cash Rate (OCR) is at an 11 year high. Interest rates have increased in Australia for both international and national reasons, and all Australian lenders and borrowers have been effected.

On the international front America has experienced unprecedented home loan defaults because of poor lending practices that have operated there. Lenders, confident that house prices would continue to increase (they thought the value of the property would always be sufficient to cover the debt in the event of default) were happy to provide new finance or to refinance a loan without properly checking the borrower’s position to make monthly payments at standard interest rates. Both new and refinance loans were generally on a honeymoon basis during the first year but after that escalated quite quickly to reflect market rates, which a number of borrowers simply could not manage.

Whole townships, mainly poorer ones, have suffered. Once borrowers were in default they found it very difficult to refinance. As defaults in these poorer townships increased, there was a glut of property for sale and as a result, supply of property being sold exceeded the demand for new purchases. This oversupply led to quite a drop in property values. As a consequence, lenders and investors lost money because when properties were sold the price was not sufficient to cover the investment mortgages or home loans. Unlike Australia, in America the lender has no recourse to the borrower for any shortfall loss he incurs on the sale of a mortgaged property.

Because so many investors have lost money on their mortgage investments they have decided not to lend for new loans or the refinance of any mortgages unless they receive a much higher return for their investment. Some lenders have withdrawn from the market altogether. So, unlike property in the USA, on the money side of the equation, world wide demand is exceeding supply. More people want to borrow money, than there are investors who want to lend it. Whenever demand exceeds supply you will see the cost of the product increase (be it money, a mortgage or bananas) and this is what we are all experiencing in the current mortgage environment. The cost of money has increased and this added cost has been passed on by lenders to their customers.

You may wonder why circumstances in the United States impact on Australian interest rates. The reality is that for a long time banks and non-banks have relied on the international money markets to fund mortgages. There simply is not enough savings and deposits held in Australia to meet the demand for home purchases and the mortgages people need to acquire them. Money is a global commodity and Australian lenders access international markets for the majority of their lending requirements.

So, the cost of money to our fund mortgages has increased because of the situation in America, but in Australia we have experienced a “double whammy”. Our mortgage rates have increased further because of Australia’s very strong national economic conditions (our economy is thriving on the back of a resources boom), unlike America, where there is talk of a recession and the economy is very slow. The problem with a strong economy is that there is a lot more money around to spend and greater spending leads to inflation. Again it is a supply and demand issue – if consumers are cashed up, they want bigger TVs, larger fridges, a racier car – the cost of these items invariably increases as demand increases. The Reserve Bank of Australia has a target inflation rate of between 2 – 3% p.a. If inflation looks like exceeding this acceptable range then the Reserve Bank uses monetary policy to control inflation. How does it do this? If the Reserve Bank wants to stop us spending so much, it increases the Official Cash Rate. All interest rates (mortgage rates, credit card rates, car leases, corporate and small business loans) reflect the OCR plus a “margin”. Immediately the Reserve Bank increases the OCR, mortgage rates and all interest rates also increase. As borrowers we have all experienced these interest rate increases over the past 2 years or so.

The question is whether as a borrower, you decide to refinance to another lender or sit tight and ride the interest rate rollercoaster until rates stabilise. If you have a good relationship with your existing lender, you feel your business is valued, you have a loan that suits your needs and your interest rate is competitive (not necessarily the cheapest) then it seems most unlikely that a refinance will deliver any long-term gain for you. There may be some temporary relief if honeymoon rates are offered but over the term of your loan it is unlikely that you will see a significant difference in your repayments. Remember, all lenders are ultimately operating in the same global market when it comes to money – if you are having difficulty managing your monthly repayments or are dissatisfied about any aspect of your mortgage, then, taken you are generally happy with your lender, make your lender your first call to see how they may be able to help you.

To refinance can be a costly exercise and unless there is a significant long-term rate advantage or better features offered you may find that it is not a worthwhile exercise.

Vicky Edema has been the Managing Director of Austral Mortgage Corporation since 1992, the company provides an easy to use mortgage calculator or
loan calculator tools and offers various options for mortgage
refinance.




Tags: recourse, lenders, borrowers, high interest rates, house prices, home loan, property for sale, home loans, honeymoon, shortfall, property values, glut, oversupply, townships, loan defaults