Is it time to fix your home loan?

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on March 30, 2020
Is it time to fix your home loan?

Photo by Kelly Sikkema on Unsplash

With both Australia's central bank and government injecting billions into banks and smaller lenders, interest rates are hoped to plummet further.

However, that may not necessarily be the case.

While many lenders passed the early-March rate cut onto home loans in full, fewer have done so after the second March rate cut, implying the capacity to cut is stagnating. 

This inability to cut further or even supply credit has led to the Government's Australian Office of Financial Management (AOFM) investing $15 billion into smaller lenders and non-bank lenders.

Firstmac was the first institution to receive Government RMBS (residential mortgage backed securities) investment, announcing a $1 billion completed deal on 27 March.

The Government's proportion of that deal was $189.14 million, with the remainder kicked in by institutional investors. 

Firstmac CFO James Austin told Savings.com.au that rather than continuing to slash home loan rates, the cash injection allows lenders to continue lending despite a market freeze due to coronavirus.

"The AOFM objective is for lenders to continuing offering home loan finance to households wanting to seek finance," he said.

"Money flowing through the economy is similar to having oil running through an engine."

But the question remains - is it time to fix?

Many of the lowest advertised interest rates currently on the market for owner-occupiers are fixed rates.

Lender

Fixed
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No ongoing feesFree redraw facility
No ongoing feesFree redraw facility

Live-in Fixed Loan (Principal and Interest) 1 Year

    Fixed
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    NO UPFRONT OR ONGOING FEES
    NO UPFRONT OR ONGOING FEES

    Basic Home Loan Fixed (Principal and Interest) (LVR < 70%) 3 Years

      Fixed
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      Fixed Rate Home Loan (Principal and Interest) 3 Years

        Fixed
        More details

        Fixed Options Home Loan (Interest Only) 2 Years (LVR < 70%)

          Fixed
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          Fixed Rate Home Loan (Interest Only) 4 Years (LVR > 80%)

            Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. All products will list the LVR with the product and rate which are clearly published on the Product Provider’s web site. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of May 26, 2022. View disclaimer.

            Mr Austin said the answer was a mix.

            "Each borrower's individual circumstances will be different," he said.

            "It may be a good option for some but not others.

            "The RBA Governor has highlighted in speeches that he believes the official cash rate will remain at current low levels for up to three years."

            Very few banks have passed the Reserve Bank of Australia's (RBA) emergency cash rate cut to variable rate home loans, with most instead choosing to make large cuts to fixed rate home loans

            Commonwealth Bank, for example, cut fixed 1, 2 and 3-year rates by 70 basis points, yet did not make any cuts to variable loans.

            In the interests of full disclosure, Savings.com.au and loans.com.au are part of the Firstmac Group.

            Is government investment into non-banks and smaller banks common?

            From a historical standpoint, from 2008-13, the AOFM invested about $1.5 billion into Firstmac RMBS across seven separate transactions.

            ME Bank received more than $2 billion across nine transactions, and RESIMAC received $1.5 billion across seven transactions.

            All up, there were 20 lenders involved in this 2008-13 issuance, worth around $15 billion - the same as today, but the investments were slightly different.

            With the announcement on 27 March, the Government's target rate of return on the investment, according to Westpac, "must at a minimum match the return on the 'Bloomberg Ausbond Treasury 0-1 year index'". 

            This return, for reference, at the time of writing is 1.53%. 

            Approximately $955 million of the Firstmac RMBS is AAA-rated - all but $10 million is BBB (investment grade) or better - meaning the Government is investing in relatively 'safe' assets.

            The investment will allow Firstmac and its sister company loans.com.au to continue offering home loans despite the coronavirus turmoil.

            According to Westpac, the $15 billion Government investment represents a significant injection into the market.

            "2019 broke all post-GFC issuance records with a total of AUD45.4bn placed in the public Australian securitisation market," Westpac's credit strategy team said in a report earlier in March.

            "YTD [year to date] issuance in 2020 has languished with only AUD6.5bn placed before markets locked-up."

            Off the back of the RBA cutting its cash rate and introducing quantitative easing, the Government introduced legislation on the $15 billion on 23 March.

            AOFM's $15 billion injection encourages lenders to keep on lending, despite tightening the belt due to coronavirus, according to the Treasury, rather than slash rates specifically.

            "The Government’s actions will enable customers of smaller lenders to continue to access affordable credit as the world deals with the significant challenges presented by the spread of coronavirus," it said in a press release on 19 March.

            "Small lenders are critical to Australia’s lending markets, often driving innovation and providing competition for larger lenders."

            The problem with mortgage holidays

            It's not all rosy for lenders, however: an additional speed bump this time around is the introduction of six-month coronavirus loan repayment holidays, which will not be counted as mortgages in arrears, as set out by the Australian Prudential Regulation Authority (APRA).

            This is despite borrowers potentially being whacked with a bigger repayment amount after their holiday, due to interest still accruing, and a potential lack of funds flowing through residential mortgage backed securities (RMBS). 

            At the wholesale level, repayment holidays could also prevent credit rating agencies from giving mortgage bonds the top-flight AAA or AA ratings, which could hamper investing, according to Westpac's Head of Securitisation and Covered Bond Strategy Martin Jacques.

            "As an example S&P have said that if they expect missed interest payments for six months with full payment after that, the agency would limit the ratings on any affected note to a maximum of A-," he said in a report on 23 March.

            "Fitch does not assign ‘AAA’ or ‘AA’ structured finance ratings to notes that are projected to defer interest in their ratings stresses.

            "Fitch would consider downgrades below the AA category if any material interest deferral would occur."

            However, Mr Jacques did say ratings agencies might not downgrade if the deferral is "temporary and recoverable". 

            S&P said on 26 March that Australian prime RMBS have enough cash reserves to last nine months' worth of falling investment levels, and 11 months for 'non-conforming' bonds i.e. sub-prime bonds. 

            This would cover Australian banks' six-month mortgage holidays being offered - Italian banks, on the other hand, are offering mortgage holidays up to 18 months.


            Disclaimers

            The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered. Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au, and Performance Drive are part of the Savings Media group. In the interests of full disclosure, the Savings Media Group are associated with the Firstmac Group. To read about how Savings Media Group manages potential conflicts of interest, along with how we get paid, please visit the web site links at the bottom of this page.

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            Harrison is Savings.com.au's Assistant Editor. Prior to joining Savings in January 2020, he worked for some of Australia's largest comparison sites and media organisations. With a keen interest in the economy, housing policy, and personal finance, Harrison strives to deliver and edit news and guides that are engaging, thought-provoking, and simple to read.

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