Changes to Interest Rates

We recently wrote regarding significant changes in the Australian residential investment loan market over the past couple of months. This intervention by APRA (Financial System Regulator) sparked the beginning of a process for Australian Lenders to not only reduce the volume of investment lending, but just as importantly, to bolster the amount of capital Lenders hold in their balance sheets to ensure we have a stronger financial system.

The first round of capital raising for several lending institutions was achieved by issuing more shares to investors. On 14th October 2015 Westpac announced an increase of 0.20% to home loan interest rates, which was outside of any Reserve Bank movements. The increase in capital requirements by APRA is one of the core reasons for this increase.

Other lenders may stall this process however, we feel it is only a matter of time before all mainstream Lenders increase home loan and investment loan interest rates in the very near future. This will likely unfold in the next few weeks.

What should I do?

As we mentioned in our previous posts, our recommendation is not to make any quick decisions, as any potential refinance could end up costing more. Instead, should you wish to discuss your loan please feel free to contact us by email or phone (03) 9882 2500 so we can discuss your individual financial position.

financial services

Interest Rate Update – October 2015

Cash Rate – No Change

The Reserve Bank of Australia (RBA) has just announced it will maintain the official cash rate at 2.00%.

The RBA remains comfortable to provide a period of stability, to allow business and consumers some certainty over the coming months particularly following the recent change of political leadership. The financial markets are currently pricing in the next change in the cash rate for December with a 0.25% reduction. Unless there is significant untoward domestic and global economic data it is our view the RBA will hold the cash rate at 2.00% for some time.

Should First Home Buyers have access to superannuation for a home deposit?

“Should First Home Buyers have access to superannuation for a home deposit?”

Source: Digital Finance Analytics 30/09/2015

DFA recently published 5 reasons why first home buyers should not be able to use superannuation towards a house purchase, summarised as follows:

First, measures to boost demand for housing, without addressing the well-documented restrictions on supply, do not make housing more affordable. Giving prospective first homebuyers access to their superannuation will help them build a house deposit, but it would worsen affordability for buyers overall. Unless supply increases, more people with deposits would simply bid up the price of existing homes, and the biggest winners would be the people who own them already.

Second, the proposal fails the test of superannuation being used solely to fund an adequate living standard in retirement. The government puts tax concessions on super to help workers provide their own retirement incomes. In return, workers can’t access their superannuation until they reach a certain age without incurring tax penalties.

While paying down a home is an investment, owner-occupiers also benefit from having somewhere to live without paying rent. These benefits that a house provides to the owner-occupier – which economists call housing services – are big, accounting for a sixth of total household consumption in Australia. Using super to buy a home they live in would allow people to consume a significant portion of the value of their superannuation savings as housing services well before they reach retirement.

Third, most first homebuyers who cash out their super would end up with lower overall retirement savings, even after accounting for any extra housing assets. Owner-occupiers give up the rent on their investment. With average gross rental yields sitting between 3% and 5% across major Australian cities, the impact on end retirement savings can be very large. Consequently, owner-occupiers will tend to have lower overall lifetime retirement savings than if the funds were left to compound in a superannuation fund
Frugal homebuyers might maintain the value of their retirement savings if they save all the income they no longer have to pay as rent. In reality, few will have such self-discipline. Compulsory savings through superannuation have led many people to save more than they would otherwise. A recent Reserve Bank study found that each dollar of compulsory super savings added between 70 and 90 cents to total household wealth. If first homebuyers can cash out their super savings early to buy a home that they would have saved for anyway, then many will save less overall.

Fourth, the proposal would hurt government budgets in the long run. Superannuation fund balances are included in the Age Pension assets test. The family home is not. If people funnel some of their super savings into the family home, gaining more home equity but reducing their super fund balance, the government will pay more in pensions in the long-term.

Government would be spared this cost if any home purchased using super were included in the Age Pension assets test, but that would be very hard to implement. For example, do you only include the proportion of the home financed by superannuation? Or would the whole home, including principal repayments made from post-tax income, be included in the assets test? The problems go away if all housing were included in the pension assets test, but this would be a very difficult political reform.

Fifth, early access to super for first homebuyers could make the superannuation system even more unequal than it is today. Many first homebuyers are high-income earners. Allowing them to fund home purchases from concessionally-taxed super would simply add to the many tax mitigation strategies that already abound.

Consider the case of a prospective homebuyer earning A$200,000. Their concessional super contributions are taxed at 15%, rather than at their marginal tax rate of 47%. Once they buy a home, any capital gains that accrue as it appreciates are tax-free, as are the stream of housing services that it provides. Such attractive tax treatment of an investment – more generous than the already highly concessional tax treatment of either superannuation or owner occupied housing – would be prone to massive rorting by high-income earners keen to lower their income tax bills.

What, then, should the federal government do to make housing more affordable?

Prime Minister Malcolm Turnbull has tasked Jamie Briggs with rethinking policy for Australia’s cities.

Above all, new federal Minister for Cities Jamie Briggs should support policies to boost housing supply, especially in the inner and middle ring suburbs of major cities where most people want to live, and which have much better access to the centre of cities where most of the new jobs are being created. The federal government has little control over planning rules, which are administered by state and local governments. But it can use transparent performance reporting, rewards and incentives to stimulate state government action, using the same model as the National Competition Policy reforms of the 1990s.

Other reforms, such as reducing the 50% discount on capital gains tax and tightening negative gearing, would also reduce pressure on house prices and could be implemented straight away. Such favourable tax treatment drives up house prices because it increases the after-tax returns to housing investors. The number of negatively geared individuals doubled in the 10 years after the capital gains tax discount was introduced in 1999. More than 1.2 million Australian taxpayers own a negatively geared property, and they claimed A$14 billion in net rental losses in 2011-12.

There are no quick fixes to housing affordability in Australia. Yet any government that can solve the problem by boosting housing supply in inner and middle suburbs, while refraining from further measures to boost demand, will almost certainly find itself rewarded, by voters and by history.

Interest Rate Forecast

Australia – Interest Rate Forecast for 2016

Changes to investment loans

In the past couple of months we have seen significant changes in the Australian investment loan market.

As you may have seen recently in the media, the Australian Prudential Regulation Authority (APRA) – the prudential regulator of the Australian financial services industry – is concerned about the recent strong growth of lending to property investors, particularly in Melbourne and Sydney. APRA’s concern is that a real estate market slow-down could see a dramatic increase in loan defaults.

Accordingly, APRA has strongly recommended that lenders benchmark the growth in their investment loan portfolios at no more than 10% per annum and, additionally, directed the five major Banks to increase the amount of capital they hold against their residential loan portfolios.

As a result, interest rates on investment loans (in particular interest only and Line of Credit facilities) have increased across all major lenders. There has also been a host of changes to lending policies; all aimed at ensuring a sustainable growth in the home loan investment sector and improving the strength of Australia’s financial services industry. Many changes have already been implemented, but we feel there are plenty more to come.

Should I Refinance?

If you have noticed an increase to your investment loan rate, please be assured that your lender is not the only lender making these changes. Our recommendation is not to make any quick decisions, as any potential refinance could end up costing more, but to contact us by email or phone (03) 9882 2500 so as we can discuss your individual financial position.

Interest Rate Update – September 2015

Cash Rate – No Change

The Reserve Bank of Australia (RBA) has announced it will maintain the official cash rate at 2.00%.

Notwithstanding the extreme market volatility last week the RBA remains comfortable to remain on the sidelines until there is significant financial data which influences the next change. The reduced Australian dollar, improvement in our employment numbers and the proposed interest rate increase in the United States is providing the RBA with comfort to defer any movement at this stage.

Interest Rate Update – August 2015

The Reserve Bank of Australia (RBA) has announced it will maintain the official cash rate at 2.00%.

The decision has been influenced by a low Australian dollar (currently under 73 U.S. cents), a low inflation rate which still falls short of the RBA’s target range of 2 to 3 per cent and a relatively stable unemployment rate of 6.0 per cent.

Although the RBA’s broader economic outlook will be released in its quarterly monetary policy statement on Friday it is unlikely we will see a change to the cash rate before the end of the year.

Interest Rate Update – May 2015

The Reserve Bank of Australia (RBA) has announced it will reduce the official cash rate by 0.25% to 2.00%, the lowest in recorded history.

Following last month’s RBA decision to leave the cash rate on hold with a very “dovish” tone in their issued minutes the RBA has now decided to reduce the cash rate by 0.25% to endeavour to stimulate the economy further, likely coupled with budget measures next Tuesday. Economic indicators remain mixed with a sub-par growth economy, business outlook remaining soft, inflation under control and the Australian dollar remaining too high. On a positive note quarterly inflation (2.3% YTD) remains under control within the RBA band of 2–3%. Building approvals were also up 18% over the 12 months to March 2015.

Interest Rate Update – April 2015

The Reserve Bank of Australia (RBA) has announced it will maintain the official cash rate at 2.25%.

Following last month’s RBA decision to leave the cash rate as is “for the time being” it has again decided to await more financial data before it decides on further action to try to boost the domestic economy. The next quarterly inflation figures are due to be released at the end of this month together with another full round of monthly data. The RBA will then be able to digest this information in order to understand both the impact of the February rate cut and the falling iron ore price before another cash rate reduction, possibly in May.