ANZ Tweaks Mortgage Rates

ANZ today announced an update on variable home loan and business loan interest rates.

Principal and interest owner-occupier home lending

  • Variable interest rates for the 80% of owner-occupier borrowers who repay principal and interest on their standard variable home loan remain unchanged at 5.25%pa.

Investor home lending

  • The variable interest rate paid by property investors will increase by 0.25%pa from 5.60%pa to 5.85%pa effective 31 March.

Interest-only home lending

ANZ will introduce new variable interest rates for customers choosing to pay interest-only on their home loans.

  • New lending. From 22 April, variable interest rates for new investor and owner-occupier home loan customers who choose to repay interest-only will increase.

– Investor variable rate home loans (interest only) will increase by a further 0.11%pa from 5.85%pa to 5.96%pa.

– Owner-occupier variable rate home loans (interest only) will increase by 0.20%pa from 5.25%pa to 5.45%pa.

  • Existing lending. From late July, increases applied to new lending will apply to existing investor and owner-occupier variable home loan customers who choose to repay interest-only. ANZ will be writing to existing interest-only variable home loan customers from May to provide them with advance notice of the change and the option of switching to repay principal and interest on their loan at a lower interest rate without incurring a fee.

Business lending

  • For business borrowers, business variable rate indices will increase by 0.08%pa.

ANZ Group Executive Australia Fred Ohlsson said: “We are pleased to be in a position to keep rates unchanged for the 80% of owner-occupier home borrowers who pay principal and interest on their loan.

“This is a clear signal that we are open for business for Australians either looking to buy a home or looking for a better deal.

“The changes we are making in home lending affect investors and borrowers who only repay interest on their loan. These changes reflect a need to closely manage our regulatory obligations, our portfolio risk and the competitive environment.

“We recognise the day-to-day challenges that home-owners face with their house-hold budgets. We believe this is a balanced decision that reflects the range of regulatory and risk factors, and the pressures on family budgets.

“This is why we are providing our customers with interest-only home loans additional notice and the option to switch to repaying principal and interest to take advantage of the lower rate,” Mr Ohlsson said.

CBA reaching for 100% ownership of Aussie – AFR

From Australian Broker.

The Commonwealth Bank of Australia (CBA) is allegedly in discussions to purchase the remaining 20% share of Aussie Home Loans.

According to the Australian Financial Review’s column Street Talk, the bank is working towards 100% ownership of the franchise with the final price to be based off Aussie’s performance and profits for the year to 30 June.

The 20% claimed to be on the line is now owned by Aussie Home Loans’ founder John Symond. CBA last expanded its share of Aussie in December 2012 when it increased its shareholding from 33% to 80% for an undisclosed amount.

In an interview last September, Symond confirmed to The Australian that he would be stepping back from his role as a fulltime executive at Aussie this year.

“John and wife Amber plan to spend more time overseas after his fulltime role as executive chairman of Aussie Home Loans is completed in the second half of 2017,” a spokesperson told the publication.

Both CBA and Aussie declined to comment when approached by Australian Broker yesterday (22 March).

 

Spotting The Bubble

From The NewDaily.

Former Liberal leader John Hewson has openly said what others have been too afraid to: we’re in the midst of a property bubble.

Dr Hewson, who has a PhD in economics, said parts of Sydney and Melbourne (and possibly Brisbane) are in a “bubble” and a “housing crisis” that risks a US-style “big correction”.

“The bubble’s there because of the pace at which prices have risen. The market is now out of reach of so many people,” he told The New Daily.

“We have very strong demand from the natural rate of population growth plus immigration. But we’ve allowed that to be accentuated by investor demand, through artificial, favourable tax concessions; by foreign demand; and by self-managed super fund demand.”

This is a “difficult situation” to remedy, said Dr Hewson, a former Reserve Bank employee and Macquarie Bank director, because the Australian banks are “exposed” to high leverage on mortgages.

So any government intervention to slacken this artificially-stimulated demand risks dire consequences, he said. “There are no silver bullets.”

This followed his very frank comments to ABC Lateline on Tuesday night, where he repeated the warning of a property market “crisis” created by “neglect and drift”.

The former Liberal politician’s comments contrast starkly with those of major bank CEOs, big-name property developers like Harry Triguboff, Prime Minister Malcolm Turnbull and Treasurer Scott Morrison, who have all assiduously avoided the B-word.

An economic ‘bubble’ is when prices rise far above the true economic value of an asset — in this case, dwellings.
Dr Hewson is at odds with many conservatives who believe in the ‘efficient market hypothesis’. This is an economic theory that says ‘bubbles’ cannot, by definition, exist because prices always reflect economic reality.

But he’s in good company with former Commonwealth Bank CEO David Murray, ASIC boss Greg Medcraft and Treasury secretary John Fraser.

The Reserve Bank, tasked by Parliament with preserving the “economic prosperity and welfare of the people of Australia”, recently strayed as close to candidness as is possible for a regulator that can panic markets with a single word.

Its latest coded warning: there has been “a build-up of risks associated with the housing market”.

This was buried at the bottom of the minutes of the RBA board’s March meeting, published on Tuesday. It was the briefest of mentions, but many experts read into it deeply.

The bank noted rising property prices in Melbourne and Sydney, the “considerable” number of apartments coming onto the market over the next few years, resurgent growth in investor lending, and household debt rising faster than household income.

The implicit warning was confirmed later on Tuesday when the Financial Review reported that three regulators – the RBA, ASIC and APRA – have formed a working group to explore tougher mortgage lending rules on the banks.

Whether the word “bubble” passes their lips or not, the experts are worried.

Latest Loan To Income (LTI) Data

We have updated our core market model with household survey data this week. One interesting dynamic is the LTI metrics across the portfolio. We calculate the dynamic LTI, based on current income and loan outstanding.  This is not the same a Debt Servicing Ratio (DSR), and is less impacted by changes in mortgage rates. It is also a better measure of risk than Loan To Value (LVR)

LTI has started to become an important measure of how stretched households are. For example the Bank of England issued a recommendation to the PRA and the Financial Conduct Authority (FCA) advising that they should ‘ensure that mortgage lenders do not extend more than 15% of their total number of new residential mortgages at loan to income ratios at or greater than 4.5’.

In response, UK banks trimmed their offers. For example,

NatWest is lowering its loan-to-income ratio for some borrowers, which means they won’t be able to borrow as much to buy a home.

House buyers who stump up a deposit between 15 and 25 per cent will only be able to borrow up to 4.45 times their annual income, down from the previous maximum of 4.75 per cent.

The new multiple will apply to both single and joint earners.

The move suggests a rising number of borrowers are having to stretch themselves to be able to afford to buy a home as prices continue to rise.

Turning to Australia, we start with a state by state comparison.  The AVERAGE loan in NSW is sitting at close to 7, ahead of Victoria at over 5, and the others lower. This highlights the stress within the system for property purchasers in Sydney, with affordability a major barrier.

Across our household segments however, the three most exposed segments are the most affluent. Wealthy Seniors sits about 9, followed by Young Affluent at 8 and Exclusive Professionals at 7.5. On the other hand, Young Growing Families are at around 5.5 (still above the Bank of England threshold).

Looking at type of buyer, First Time Buyers are sitting at 7.5%, with those trading up at 6%. Holders are sitting at 4.5%

Finally, here is an average by age bands, and plotted against relative volumes of mortgages. Pressure is highest in the 60+ age groups, this is because incomes tend to fall as households move towards part-time or retirement, but these days more will still have a mortgage to manage.

The dip in volumes in the 25-29 group is explained by many in this band choosing education, or starting a family, rather than home purchase, and the peak volume for purchase in after 30.

Overall LTI is a good indicator of affordability pressure, and the regulators could [should?] impose an LTI cap to slow lending growth, counter building affordability risks and rising housing debt.

 

RBA Minutes Touch On Property Risks

The RBA minutes, out today, talks to risks in the housing sector.

Recent data continued to suggest that there had been a build-up of risks associated with the housing market. In some markets, conditions had been strong and prices were rising briskly, although in other markets prices were declining. In the eastern capital cities, a considerable additional supply of apartments was scheduled to come on stream over the next few years. Growth in rents had been the slowest for two decades. Borrowing for housing by investors had picked up over recent months and growth in household debt had been faster than that in household income. Supervisory measures had contributed to some strengthening of lending standards.

Dwelling investment had rebounded in the December quarter; much of the strength had been concentrated in New South Wales. Even though building approvals had fallen significantly in recent months, the substantial amount of building work in the pipeline suggested that dwelling investment would continue to contribute to growth in coming quarters. Conditions in established housing markets had continued to differ significantly across the country. Over recent months, conditions appeared to have strengthened in Sydney and had remained strong in Melbourne; these cities had continued to record brisk growth in housing prices, and auction clearance rates had remained high. Housing loan approvals and credit growth had picked up for investors, primarily in New South Wales and Victoria. In contrast, housing prices and rents had fallen in Perth for two years or so, and apartment prices had declined in Brisbane.

Rural exports had grown strongly in the December quarter, reflecting strong farm production following favourable weather conditions in many areas over the second half of 2016. As a result of this and the higher prices for bulk commodity exports, there had been a trade surplus in the December quarter for the first time in almost three years. The current account deficit had narrowed to less than 1 per cent of GDP, the smallest deficit since 1980; the trade surplus was partly offset by a widening in the net income deficit as some of the increase in mining profits had accrued to foreign owners.

Household consumption growth, which had been relatively subdued in mid 2016, picked up in the December quarter, consistent with retail sales. Liaison with retailers suggested that recent trading conditions had been around average and household perceptions of their personal finances had also been around average.

The pick-up in consumption growth stood in contrast to the ongoing weakness in labour incomes, with the household saving ratio declining in the December quarter. Members noted that over the past two decades movements in the Australian household saving ratio had been much larger than those in other similar economies. One contributing factor was likely to have been that Australia had experienced a much larger terms of trade cycle than other developed economies with significant commodity exports. Differences in the evolution of household saving ratios across the states suggested that the terms of trade had played an important role in households’ saving and spending decisions.

 

Genworth Australia Downgraded

From Australian Broker.

One of Australia’s leading providers of lenders mortgage insurance (LMI), Genworth Financial Mortgage Australia, has had its ratings revised from stable to negative.

S&P Global Ratings announced the move yesterday (20 March), 11 days after the company announced the loss of a major customer. The unnamed partner – a second tier bank – opted to terminate the agreement upon the expiry of its contract on 8 April.

“The outlook revision to negative reflects our expectations of a possible weakening of Genworth Australia’s competitive position, and subsequent operating performance, as a consequence of the continued decline in the insurer’s market position,” analysts wrote.

Over the past three years, Genworth has lost two large clients with the most recent loss accounting for around 14% of its gross written premium during the 2016 fiscal year (ending 31 December).

“As a result, we expect Genworth Australia’s full-year 2017 gross written premium to contract further, which is below our previous expectation of modest premium growth.”

This follows a larger than anticipated decline in gross written premium of around 25% during the 2016 fiscal year. While the company remains the largest provider of LMI insurance in the market, these declines have put pressure on its competitiveness, market position and earnings resilience, analysts said.

“We recognise the decline in gross written premium has been partially driven by industry-wide contraction reflecting regulatory measures to curb investor lending growth and reduced lender risk-appetite for high loan-to-value ratio loans.”

The new negative outlook means S&P has a one-in-three chance of further lowering Genworth’s ratings over the next two years. This would occur if there is a material deterioration in the firm’s competitive position or operating performance, or there is evidence of excessive risk taking through inadequate pricing or looser underwriting standards.

S&P could revise the outlook to stable over the next two years if Genworth’s competitive positions stabilises and its operating performance is sound while its underwriting discipline and pricing remains solid.

Consumer advocates call for further ASIC reviews into brokers

From Mortgage Professional Australia.

ASIC’s Review into mortgage broker remuneration does not go far enough, according to consumer advocacy group CHOICE. In a panel hosted by ASIC at their 2017 Annual Forum, CHOICE’s head of campaigns and policy Erin Turner argued, “we can’ just settle for tweaks to the system…I hope this is the first report of many”.

Turner highlighted three issues in mortgage broking: a gap between consumer expectations and reality; conflicts of interest; and the need for system wide reforms beyond commission. In particular she criticised the current regulation for its stipulation on providing ‘not unsuitable’ advice. Mortgage brokers who provide advice on investments, tax and SMSFs should be ASIC’s next target, Turner said.

Turner’s comments did not go unopposed on the panel. Sitting with her was the MFAA‘s Cynthia Grisbrook, NAB’s Anthony Waldron and AFG‘s Brett McKeon. One awkward encounter saw Turner use an extravagant broker conference on a cruise ship as an example of banks’ soft dollar benefits, only for McKeon to explain that in fact it was AFG who ran the cruise.

One point that most parties did agree on (NAB excepted) is that the ongoing Sedgwick Review by the Australian Bankers Association should not be allowed to determine changes to commission. This was despite ASIC’s report referring to the Sedgwick Review at several points, and Stephen Sedgwick himself moderating the panel.

Banks slammed for out-of-cycle rate hikes

From The NewDaily.

Labor leader Bill Shorten has launched a stinging attack on the big banks for hiking home loan rates independent of the Reserve Bank — the first time this has happened in two years.

NAB broke ranks on Thursday by announcing it would lift its owner-occupier variable rate by seven basis points, from 5.25 to 5.32 per cent, as of March 24.

The controversial repricing will punch a $20 hole in the monthly budget of a family with a $400,000 loan, and over 30 years will add about $6000 to what they pay the bank.

Westpac followed on Friday by matching NAB’s variable rate at 5.32 per cent, an increase of three basis points, also effective March 24.

The remaining two, Commonwealth and ANZ, refused to tell The New Daily if they would follow their competitors, citing price-signalling laws.

Prime Minister Malcolm Turnbull said the decision to lift rates was a matter for the banks and that unhappy customers should “go somewhere else”, prompting Opposition Leader Bill Shorten to brand him “out of touch”.

“When the Reserve Bank’s keeping the official interest rates at record lows, I don’t like the banks increasing the mortgages of every Australian,” Mr Shorten told journalists.

“The banks have made record profits and here they are again, charging mortgage holders even more for the cost of their mortgages and unlike Mr Turnbull, I do have a view. Unlike Mr Turnbull, I wouldn’t give the banks a massive tax cut. I would give them a royal commission.”

bank variable rates

The hikes are especially unpopular because banks usually link their rate movements to the Reserve Bank’s cash rate. But the RBA hasn’t moved since August last year, making these “out-of-cycle”.

The banks blame rising wholesale funding costs in the US, rising rates on savings deposits, and demands from regulators for them to keep more capital on hand to protect against a financial crisis.

Mike Ebstein, a former ANZ senior executive, said the market domination of the Big Four makes it highly likely for rates to rise en masse.

“Based on past track records, they usually follow each other. That’s what happens in a concentrated market,” Mr Ebstein told The New Daily.

“In this day and age, big institutions are generally more interested in keeping the balance of everybody happy than stealing market share. And at the end of the day, shareholders aren’t too concerned if CBA has 32 per cent share or 27 per cent share. What they want is return on funds and the dividends rate.”

There was some good news, though. NAB has launched a special introductory fixed rate of 3.69 per cent for first home buyers, while also lifting its investor variable rate 25 points to 5.8 per cent. This is sure to be greeted happily by those who fear that investors are squeezing out first home buyers.

IFM Investors chief economist Dr Alex Joiner said the banks wanted to boost their profit margins while also cooling the east coast property boom.

“It’s a reflection of the strength of the market in Melbourne and Sydney and even the banks becoming a little wary of that strength. But they also feel as if they can reprice a little without it affecting them too much. They are trying to preserve their margins, given their costs have increased.”

The Reserve Bank would be happy with the outcome, as higher bank rates will help constrain house prices and household debt without the need for an official cash rate rise, which would harm the economy, Dr Joiner said.

The hikes come as newly-released figures show just 11.6 percent of Australians see property as the best place to put their investment, the lowest since The Melbourne Institute of Applied Economic and Social Research started the survey in 1974

Westpac announces changes to variable interest rates

As expected Westpac today announced changes to interest rates across a range of variable lending products for home owners and investors.

  • Variable home loan rate for owner occupiers will increase by 0.03% to 5.32% per annum for customers with principal and interest repayments1;
  • Variable home loan rate for owner occupiers will increase by 0.08% to 5.49% per annum for customers with interest only repayments;1
  • Variable residential investment property loan rate will increase by 0.23% to 5.79% per annum for customers with principal and interest repayments1; and
  • Variable residential investment property loan rate will increase by 0.28% to 5.96% per annum for customers with interest only repayments1.

George Frazis, Chief Executive of Westpac Consumer Bank, said today’s decision takes into account a number of economic and regulatory factors.

“Today’s changes are in response to increasing funding costs. Despite home loan interest rates being at historically low levels, both deposits and wholesale funding of mortgages have increased over the last nine months.

“We understand the significance of interest rate changes to our home loan customers, so we take a very careful approach to these decisions,” Mr Frazis said.

“We try to balance the needs of both owner occupiers and investors in making these decisions while continuing to provide customers with a competitive offering across our range of products.

“Importantly, we are offering lower interest rates to customers who make principal payments to encourage customers to pay down their home loan in this low interest rate environment.”

Customers with interest only home loans who wish to move to principal and interest repayments can do so without paying a switching fee until 17 June 2017.

Variable lending products for small businesses will also increase by 0.08%2.

1 Changes are effective 24 March 2017.

2 Changes are effective 3 April 2017.

ASIC acts against alleged contraventions of FoFA obligations

ASIC says it has commenced proceedings in the Federal Court of Australia against Wealth and Risk Management Pty Ltd (WRM), and related companies Yes FP Pty Ltd (Yes FP) and Jeca Pty Ltd (trading as Yes FS) (Yes FS), in relation to various alleged breaches of the Corporations Act 2001 and the Australian Securities and Investments Commission Act 2001, including alleged breaches of best interests obligations. ASIC is seeking injunctive relief, declarations of contraventions and financial penalties.

 

WRM is licensed to advise retail clients about, and deal in, life risk insurance and superannuation products. WRM authorises advisers, generally employed by WRM’s corporate authorised representative Yes FP, who provide personal financial advice to retail clients referred to them by Yes FS, via the website yesfs.com.au.

ASIC alleges that:

  • on numerous occasions since December 2015, WRM Advisers have provided advice that is conflicted and in breach of the best interests obligations contained in the Corporations Act;
  • WRM has breached s912A(1) of the Corporations Act by not:
    • doing all things necessary to ensure that the financial services covered by its licence are provided efficiently, honestly and fairly; and
    • has not taken reasonable steps to ensure that its representatives comply with financial services laws;
  • Yes FS has contravened s911A and/or s911B of the Corporations Act by carrying on a financial services business without holding an AFSL;
  • Yes FS has contravened s1041H of the Corporations Act 2001 and s12DA of the ASIC Act by engaging in misleading and deceptive conduct; and
  • WRM, Yes FS and Yes FP contravened s12CB of the ASIC Act by engaging in unconscionable conduct in connection with the supply or possible supply of financial services.

The first hearing of the matter is listed before the Federal Court of Australia at 9:30am on 31 March 2017.

Background

Part 7.7A of the Corporations Act 2001 (Cth) was enacted as part of the “Future of Financial Advice” (FoFA) reforms which are aimed at ensuring that financial advice companies and their advisers act in the best interests of the client. ASIC alleges in this case that WRM has breached s961L of the Corporations Act.

Regulatory Guide 175Licensing: Financial product advisers – conduct and disclosure provides guidance to help licensees understand ASIC’s expectations for meeting the best interests duty, and to ensure that it is consistent with ASIC’s guidance in Regulatory Guide 244Giving information, general advice and scaled advice.

Section 912A of the Corporations Act 2001 sets out the general obligations of Australian Financial Services Licensees.

Section 911A of the Corporations Act 2001 requires any person carrying on a financial services business in Australia and providing financial product advice to hold an AFS licence or be a representative of an AFS licensee.  ASIC contends that the conduct that is the subject of this action required Yes FS to have an AFS licence or be an authorised representative of an AFS licensee.