October 2007 – Mortgage Rates in Australia

Mortgage rates are a hot topic in Australia at the moment. Two issues are at the forefront of any discussion on mortgage rates today.

Firstly there is general concern amongst borrowers in Australia that mortgage rates may further increase over the short term. The Reserve Bank has increased the Official Cash Rate (OCR) a number of times this year and it is currently sitting at 6.50% p.a. These increases immediately impact on the cost of funds for lending institutions, both bank and non-bank, and as a result mortgage rates have also increased, with the banks standard variable rate now at 8.32% p.a. and the non-bank lenders generally in the market with mortgage rates around 7.75% p.a. By increasing the OCR the Reserve Bank is well aware that mortgage rates will follow suit. Under its charter, the Reserve Bank is responsible for formulating and implementing monetary policy that will contribute to:

(a) the stability of the currency of Australia;

(b) the maintenance of full employment in Australia; and

(c) the economic prosperity and welfare of the people of Australia.

These objectives have found practical expression in a target for consumer price inflation, of 2-3 per cent per annum. Controlling inflation preserves the value of money and is the main way in which monetary policy can help to form a sound basis for long-term growth in the economy.

So, how does an increase in the OCR and mortgage rates generally help achieve these inflation targets? As the mortgage rates increase across Australia, borrowers have less surplus cash to spend, there is less demand for consumables, businesses have less money to invest and as a result the economy is slowed down and the inflation rate is held in check. If the economy is too slow the Reserve bank can effectively reduce mortgage rates (by reducing the OCR) and thereby provide borrowers with more surplus funds. This increases demand for consumables and one sees greater economic activity.

It is ironical that because in Australia we are enjoying strong economic growth and have employment at an all time high we end up finding our mortgage rates increasing. If we were to save more rather than spend and borrow, inflation would not be increasing at the level it is and mortgage rates would remain steady.

But would they? This brings me to the second issue which has had a significant impact on mortgage rates and has made headlines in newspapers in Australia over the past few months. In the past mortgage rates in Australia have been pretty much domestically driven (i.e. by the Reserve Bank) but more recently we have seen mortgage rates influenced by problems occurring in international financial markets. The main culprit is the United States where there have been unprecedented mortgage defaults which have frightened off would be global lenders and investors in mortgage securities. Even though mortgage rates in Australia remain relatively low and defaults here are not a significant problem (in other words they remain a sound investment), the US default crisis has scared off potential investors. As a result mortgages are no longer flavour of the month and those that are still prepared invest are seeking a higher rate of return. Consequently the cost of funds world wide increases for debt securities and mortgage rates across the world increase as result. As noted earlier the banks current standard mortgage rates sit at 8.32% p.a. variable which is up to .50% more than the non bank mortgage rates of 7.75% p.a. Because the banks’ mortgage rates were considerably higher than the non-banks before the impact of the US situation, to date they have been able to hold their rates. The non-bank lenders, who have historically priced their mortgage rates below the banks, have had to move their mortgage rates sooner because they simply don’t have the profit margins, the “fat” in their pricing, which most banks enjoy.

The banks are endeavouring to gain market share with claims that they are holding their mortgage rates (8.32% p.a.) but hopefully borrowers will recognise that the mortgage rates of the non-bank mortgage manager lenders remain competitive. They might also want to consider where mortgage rates would be without the mortgage manager competing with the banks for their business. Prior to the non- bank mortgage manager entering the market, the banks’ mortgage rates contained profit margins of up to 3 % p.a. Back in the 1990s the non-bank lender was able to enter the market and compete aggressively for business because they were not trying to maximise profit at the expense of borrowers but rather offered mortgage rates that were well below the major banks. The banks were initially quite arrogant, holding their mortgage rates and profit margins, thinking that lower mortgage rates would not be enough to woo borrowers. Little did they realise that the non-bank sector not only offered lower mortgage rates but also professional and friendly service. It took around 3 years before the banks finally reduced their margins and offered mortgage rates that were somewhat more competitive.

The next few months will determine whether the US mortgage crisis will be a short term problem for mortgage rates or whether the meltdown in America will have a long term impact on mortgage rates in Australia. In the meantime keep an eye on mortgage rates across the market, sit tight because no matter which lender you are with, mortgage rates over the next few months will be a little unpredictable but inevitably are likely to settle down again.

The Right Way to Beat Rising Mortgage Rates

The variable rate mortgage is really a bank loan that features a fixed introductory interest rate to get a to some degree short period of time – typically from 2 to Ten years based upon the item – and after that time, the mortgage changes up and also down depending on the loan’s margin, caps, plus the index that the loan is tied to. Almost always, the actual fixed interest rate to the specified stretch of time is leaner than conventional 17 to 46 year fixed rate mortgage products and solutions.

What countless applicants may well are not able to seem to comprehend is that these loan officials as well as mortgage brokers put on commitment into determining whether a borrower is even qualified to have a home mortgage loan. When it reaches as a result of the wire, they can rather are satisfied with a smaller amount of a commission than no commission at all. And here, you have the room to barter and escape a bundle of money immediately, plus on the lifetime of the mortgage loan.

You can find risks and rewards when it comes to considering a 5 year variable rate mortgage. The advantage is that you could reduce costs by locking inside a lower interest rate with the first five years. Rates are typically lower the shorter the promotional period on this form of mortgage, so a shorter variable rate would have less interest rate when compared to a long run mortgage. Plus, it usually is possible to make additional principal reduction payments monthly or quarterly to try to shorten lifespan in the loan. Saving money using a variable rate mortgage having a lower interest rate for the fixed introductory interval may assist you to make those additional payments.

Any new home buyer will show you that unusual closing costs and interest rates can be tricky, at best. Mostly, they could be downright intimidating because if they are too high it may mean paying much more for your home mortgage. You’ll be able to negotiate interest rates and closing costs, community. could be a tricky prospect. Loan officers and mortgage brokers often get a portion from the total mortgage loan amount as commission, so they really would like to understand the borrower obtain the highest number of fees and interest possible. It is their bread and butter, as it were.

When it comes to what’s so great about these lower mortgage rates, it is critical to take into account the amount of time you could possibly are now living in your property, your current and projected future income, your ability to spend a larger monthly mortgage payment if the 5 year ARM adjusts to your higher rate before you close against each other, and the savings it is possible to achieve while paying lower interest rates in the fixed period.

Fortunately that borrowers will have the possibility to call their particular interest rate and closing costs with Offer to Lenders. Decide what you look for the purchase price to be and let lenders compete to win the house mortgage loan. “Name your rate and your closing cost” and win each and every time should you your sufficient research! Lenders are definitely more willing to be a little more flexible since they’re not charged for ones offer, so they can afford to present the most beneficial mortgage deal possible without any obligation to consumers

till closing day.

It is strongly recommended that you just meet with a mortgage and tax professional when weighing the potential for loss, rewards, and attributes of a variable rate mortgage. While most of these mortgages will help cut costs for a while, it’s important to use a long-term plan when scouting for a variable rate mortgage. A licensed mortgage loan officer may help you comprehend the implications of selecting the best mortgage accessible in industry.

One instance certainly where an 5 year variable rate mortgage will make sense is that if you recognize you likely will never be in your own home for longer than 5 years. Then chances are you’ll wager that you close out of the loan before it could alter to a potentially higher rate.

Once you understand the desired financial disclosures to your mortgage loan, you need to check out these with careful scrutiny. This is when there is a fees and rates that can be negotiated. Things like document processing fees and underwriting costs are incredibly negotiable. By looking around and gathering competitors’ rates and charges, you are able to essentially ‘force’ your mortgage lender to offer you the fees and rates that you’d like, within reason. Home appraisal and inspection fees can oftentimes be negotiated directly while using appraiser and the inspector, so you can may well avoid some dough doing this, too.

Variable rate mortgages have obtained some negative awareness nowadays as numerous men and women found themselves not working or maybe without enough equity left inside their residences so that you can refinance. Nonetheless, inside the right situations, a variable rate mortgage affords returns regarding prospective lower temporary interest rates.

At the end for the day, each individual has to examine precisely what is their utmost financial determination. Were still in uncertain occasions in the state with the economic system and also the quantity of residences which have been traditional bank managed. A lot of banks are not releasing homes yet. Whenever they do will house values keep falling? After that get lucky and interest rates then? Will interest rates keep rise, or will interest rates reduce allowing more people the opportunity to spend money on most of these foreclosed households? These are typically uncertain times regarding mortgage interest rates plus the sale involved with properties.

What You Need to Know About Mortgage Rates

Mortgage rates involve a number of factors and it is helpful to have a better understanding of how they work before choosing a mortgage.

Mortgage Rate vs. Annual Percentage Rate (APR)

To put it simply, the mortgage rate is the rate of interest charged on a mortgage. In other words, it is the cost involved in borrowing money for your loan. Think of it as the base cost. Mortgage rates differ from the annual percentage rate (APR). The mortgage rate describes the loan interest only, while APR includes any other costs or fees charged by the lender. The US Government requires mortgage lenders to provide their APR through the Truth in Lending Act. It allows consumers to have an apples to apples comparison of what a loan will cost them through different lenders. Keep in mind that lenders may calculate APR differently and APR also assumes you will hold the loan for its full amortization so it is still important to carefully compare and consider when selecting a loan.

How is the Mortgage Rate Determined?

First, the Federal Reserve determines a rate called the Federal Funds Rate. The Federal Reserve Bank requires that lenders maintain a percentage of deposits on hand each night. This is called the reserve requirement. Banks will borrow from each other to meet their reserve requirements. When the Federal Funds Rate is high, banks are able to borrow less money and the money they do lend is at a higher rate. When low, banks are more likely to borrow from each other to maintain their reserve requirement. It allows them to borrow more money and the interest rate goes down as well. The interest rates fluctuate with the Federal Funds Rate because it affects the amount of money that can be borrowed. Because money is scarcer, it is more expensive.

Also, when the Fed decreases their rates, we tend to spend more. Because loans are more inexpensive, people are more likely to use them to invest in capital. Also, because interest rates are low, savings accounts are reduced because they are not as valuable. This creates a surplus of money in the marketplace which lowers the value of the dollar and eventually becomes inflation. With inflation, mortgage rates increase so the Fed must carefully monitor their rate to ensure that our economy remains level.

Basically, the Federal Funds Rate is a large determinant of what the mortgage rate will be on a given day. And the Federal Funds Rate is largely determined based on the market including factors such as unemployment, growth, and inflation. However, there is no single mortgage rate at a given moment that every borrower will pay. This is because there are also other factors which determine an individual’s mortgage rate, and why they different people will have different rates.

Individual Determinants

There are several things that a lender can examine when determining your mortgage rate. One key factor is your credit score. A higher credit score makes you less risky to lend to and can significantly improve the rate you have to pay. You can also purchase “points” which are pre-payments on your loan interest. Speak with your lender to discuss points and how they might affect your loan. Finally, the amount of down payment can also change the interest rate. Typically, if you have more money up front, you have to borrow less, and you reduce the risk for the lender and your cost for the loan.

Mortgage rates are generally changing daily. Some lenders will stabilize their rates more than others, but it is always wise to compare rates between lenders at the same time and on the same mortgage type. It is also important to know that when a lender provides you with a rate, it is not a guarantee that tomorrow, the rate will still apply. Until you have chosen a mortgage and lock your rate in place with the lender, fluctuations can occur. As with any financial decision it is important to do your research and understand what you are getting into. It’s always wise to consult with your lender for personalized advice.