Lender breaks four per cent home loan barrier
Australia’s largest mutual bank has broken ranks with competitors by offering a home loan under four per cent. Heritage Bank today announced the lowest rate in its 139-year history at 3.99 per cent with a 5.58 per cent comparison rate. Heritage Bank chief executive John Minz said there would likely be few occasions in Australian history where interest rates would be as low as they currently are.
“We combed through 139 years of our own ledgers to see if we’d ever offered a lower rate, but even at the peak of the Great Depression in 1932, our rates for advances to buy property were typically around five per cent per annum,” Mr Minz said. "Our rates went close to four per cent per annum immediately after the Second World War, but then increased as the Reserve Bank of Australia took over the implementation of monetary policy in 1960,” he said. “We also looked at historical newspaper articles and Australian Bureau of Statistics data to see if we could find any evidence of other banks’ fixed home loan annual percentage rates ever being lower, but found nothing.”
Heritage is able to offer the new one-year fixed home loan rate because it is customer-owned, unlike the majors who are focused on returning profits to shareholders, Mr Minz said. “That mutuality means Heritage Bank can focus on generally delivering more competitive rates than the big four banks,” he said.
The lender’s entire offering of fixed rate loans are currently under the five per cent mark, with its two-year rate fixed at 4.49 per cent (5.53 per cent comparison rate), three-year rate fixed at 4.89 per cent (5.54 per cent comparison rate) and five-year rate fixed at 4.99 per cent (5.47 per cent comparison rate).
Fixed rates position banks for the cross sell
A former mortgage manager believes locking in borrowers for five years with a fixed-rate mortgage buys lenders more time to sell them insurance and wealth products. Over the past month fixed-rate home loan prices have dropped below the five per cent mark as lenders compete for market share. Until now this has been put down to cheaper funding, but former National Finance Club owner Andrew Clouston believes a more astute strategy lies behind the fixed-rate frenzy.
“It is a very competitive market at the moment,” Mr Clouston said. “In that market you are always going to get people or institutions that are trying to grab their market share,” he said.
“The good thing about doing that with fixed rates is you get to secure a customer for a reasonably secure period of time. “That is why I believe you are seeing such good pricing in the five-year markets, because that does secure a customer relationship for a long period of time and most institutions now are very motivated to develop customers, particularly new customers, to bank into multi-product customers.”
The trend among borrowers has traditionally been to float rates, but recent reports suggest fixed-rate mortgages are gaining momentum.
Bendigo and Adelaide Bank has seen the proportion of its variable home loans drop and the number of fixed-rate loans increase in the 12 months to June 30. Variable loans now represent 70 per cent of the regional bank’s loan book, down from 79 per cent in 2012/2013, while fixed loans increased from 21 to 30 per cent.
Mr Clouston said lenders will be weighing up the potential gains of retaining borrowers over a three to five year period. “I am sure it is a key driver when you look at taking what might be a temporary hit on your margin in an environment where people are actively looking for better rates because there are better rates out there, you need to have some upside on it, and the upside on it if you can attract new customers to your institution is it gives you that opportunity to sell other products to those customers,” he said.
As banks continue to bolster their wealth management platforms, Mr Clouston expects fixed-rate customers will be targeted for new product offerings. “We know now that all the major banks have all got quite robust wealth management platforms now with regards to financial advice, and there are quite few with significant insurance offerings,” he said. “There is quite a bit of additional product that, with a long-term relationship with the customer, they have the opportunity to embed into those customers and therefore secure the relationship for even longer than that three to five-year fixed period.”
Waters not so rough for FHBs
When I read the paper, I am often faced with stories about struggling first home buyers. The idea that first home buyers are struggling to get onto the property ladder is reinforced by data from the Australian Bureau of Statistics which shows that first home buyers accounted for just 13.2 per cent of all home loan approvals in June – well down on historical averages.
According to the Australian Bureau of Statistics, first home buyers have traditionally made up more than 20 per cent of all home loan approvals.
So why is the proportion of first home buyers entering the market shrinking? If the papers are to be believed, rising property prices are making it harder for first home buyers to purchase property. According to recent research conducted by RP Data, Australian property values climbed 10.1 per cent over the 12 months to July 2014.
And while there is no denying this growth is significant, it should be noted that the 10.1 per cent property price growth was largely driven by Sydney and Melbourne. Over the last year, Sydney’s property prices have spiked by almost 15 per cent, while Melbourne’s property values have surged 11 per cent. But while prices are surging in both Sydney and Melbourne, the story is a little different in Perth, Adelaide and Canberra, where property values climbed just 3.0 per cent, 4.3 per cent and 1.9 per cent respectively over the past year. Further, when you look at how Australia’s capital cities’ dwelling values have changed from the previous market peak, the results are surprising.
While Sydney’s median property value has climbed by an incredible 18.7 per cent since the last market peak, other capital cities have actually gone backwards.Adelaide, Darwin, Brisbane and Hobart have all recorded negative growth since the last market peak, with median dwelling values falling 1.7 per cent, 3.3 per cent, 4.6 per cent and 8.9 per cent respectively.
When you combine this fall in dwelling values with the fact that we are currently enjoying historically low rates, it may be fair to say that it is now actually easier for some first home buyers to get onto the property ladder.
The trick to being a successful first time property buyer is to keep an open mind. While many potential first home buyers may have their hearts set on buying a property to live in, depending on where they wish to buy, they simply may not be able to afford it. But just because potential first home buyers may be unable to purchase where they want to live, that shouldn’t stop them from buying altogether. At Mortgage Choice, we are seeing an increasing number of first home buyers purchasing an investment property before an owner-occupied property.
According to the latest First Time Investor survey, 21.1 per cent of respondents purchased an investment property before an owner -occupied property – up from 18.2 per cent in 2011. First home buyers shouldn’t be afraid of buying an investment property before an owner-occupied property, especially in this market.
With new data showing the residential property market is now Australia’s single largest and most valuable asset class, there really are significant benefits to be gained from investing in property. Better yet, provided first home buyers invest wisely and buy in an area that boasts great rental yields and property price growth, they may be able to build equity in their investment property in no time at all, providing them with the opportunity to buy an owner-occupied home in their dream location.
Of course, before diving into property ownership, it is important for first home buyers to do their due diligence and make sure they are making the right investment for them and their future needs.