Finance Market Update - 31 July 20
Rates for home loans are in a race to the bottom but getting a loan is taking a long time. In this update we talk about property prices not falling much this year and why we can expect to see lower mortgage rates in the future.
The time it is taking to get a loan is has been taking a lot longer recently.
There are a few reasons for this which we are going to talk about in this update, but before we dive into why let us touch on where property prices are.
On average, since the virus crisis started and between March and June house prices in Sydney have fallen by only $23k (2% for houses, 1.9% for units) while Melbourne just $32k, according to data from Domain.
This is a marginal fall compared to the fear-mongered 20% or 30% drop which would have equated to hundreds of thousands of dollars in lost value.
Before the virus crisis house prices in Sydney were booming and recorded a 10.5% rise over the year with units rising 7.3% as well, all in line with my predictions that property prices were going to reach or exceed the 2017 peak values.
It is worth noting that the March to June quarter was the worst time, based on number of infections and deaths, during the virus crisis so far.
The expectations of many economists were that the dire facts and figures would be present in that quarter’s numbers, and indeed it probably will be, but looking at the property market alone does not seem like it slowed down very much.
I want to reiterate another prediction I made recently, that property prices will recover almost all lost ground in 2020 before being set up for a boom in prices in 2021. There are Five Forces fighting for this boom, but they are up against significant down pressures of unemployment, low incomes, credit tightening and physical restrictions, however, I remain optimistic that the forces will prevail, and property prices will lift.
Whether or not they will lift into or are already in a bubble is a conversation for another time.
Getting back to long waiting times on loan applications, banks are taking anywhere from 2 days to 30 days or more to approve a mortgage application.
And in some cases, you could be waiting over three months to get your home loan refinanced.
There have been a few banks offering cash back bonuses which is a great incentive, but it often means their ques fill up quickly as people rush to get the money which causes massive delays.
The big banks can take months to get a refinance approved and even more time after that to even pay the incentive.
In one example, Westpac has just announced they are going to ‘on-shore’ and bring back a thousand loan processing jobs to speed up its times in dealing with home loan applications. They have been one of the hardest hit with waiting times blowing out so this is a welcome change, but it will take time to see it in practice.
On top of the internal constraints banks have there is the economic recession and health pandemic we are in right now that they have to navigate through while being responsible lenders, so they are being very cautious with new lending which is understandable, but results in longer times to approvals, or declines.
For now, it is reasonable to expect home loan applications to take a bit of time.
How low can they go
For the first time in our countries history you can get a home loan with an interest rate of below 2%.
There are always caveats on something that looks to good to be true, and in this case there are strict conditions of where you must live to get it, or that is only an ‘introductory’ or ‘honeymoon’ rate that reverts to a much higher rate after the first year.
But rates this low will become more common soon.
At the moment certain lenders are just trying to ‘buy’ more clients with low rates and for the most part the seemingly low rate is a marketing exercise by lenders to buy market share and new customers.
But with competition so fierce for (quality) home loan borrowers right now we could easily see banks in a race to the bottom.
In May, there was a record breaking $15 Billion of home loans refinanced so it makes sense for lenders to be embarking on these marketing campaigns and lowering rates.
That is not to say they are not worth getting or looking at, but that you need to know what you are getting into.
For example, the ‘honeymoon’ rate of 1.99% variable and an excellent low cost home loan rate which will revert back to around 2.6% in a year, and you need a 20% deposit or more, have PAYG (no self-employed) income, and be ok to not having a transaction account or offset account as part of the loan. There is a redraw but that is different to an offset.
For many people this is not the ‘best’ choice considering what you give up to get this low rate as having an offset could save you more than the lower rate.
But this might soon change as we see more mainstream banks and lenders move their rates lower in an ever-competitive market.
We could reasonably expect that standard variable rates, which are the most common type of rate most home loan borrowers have, will go down before they go up, and indeed stay down for a few years.
In many ways the home loan market is in a race to the bottom, and we are awfully close to the bottom right now but there is a bit of depth left.
Right now, competitive fixed rates are hovering around 2.2% and variable rates around 2.6%. If your home loan rate starts with a 3 or you want to see how much you could save Let’s Talk.