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Home Loan Season up to 1.5% off!!!

Discussion in 'Real Estate' started by AsxBroker, 27th Jan, 2009.

  1. AsxBroker

    AsxBroker Well-Known Member

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    Hi all,

    I couldn't find a home loan discussion group so I put it in under Property, apologies if this isn't the best place.

    On the weekend St George Bank kicked off new lending campaign...

    1.5% discount on the standard variable rate which reduces new loans to 5.4% for the first year and then they revert to the standard variable with a package discount (depending on the size of the loan). Home loan - St. George Your Life Your Home

    Obviously this is to kickstart some extra loans, how long will it take other banks to reduce their rates further. With some serious drops in interest rates in the short term horizon (up to an additional 2% drop before end of 2009, depending on which newspaper you read) it will be very interesting to see how many people start borrowing to invest in either property or shares which are yielding higher returns.

    Cheers,

    Dan

    PS This is general information, before making a lending decision speak to your lending expert, before investing speak to your FPA registered Financial Planner.
     
  2. Chris C

    Chris C Well-Known Member

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    This sounds awfully similar to the whole US sub prime dilemma of offering low introductory rates before reverting back to significantly higher standard variable rates, which I think is especially dangerous when interest rates are already at such low levels. I only hope that banks up the required lending criteria to screen out bad candidates.

    I'd hate to see someone in around 6 - 12 months time, when rates are closer to a bottom, making their financial decisions based on an introductory rate only to find the the rate will likely jump 30% - 40% in the space of a month when their honeymoon period is over. That would really put a lot of new how owners under a lot of stress.

    This scenario doesn't even factor the chance that the economy may make a turn for the better in 2010/2011 such that the RBA might look to raise rates again, potentially even in quick fashion to begin with. Nor does it factor the highly volatile employment situation that is likely to be present throughout 2010/2011 on the back of this recession. And I won't even start on the whole prospect of falling house prices over the next few years...
     
  3. Billv

    Billv Getting there

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    Dan

    It's only for new customers though, otherwise it's a good offer.

    cheers
     
  4. AsxBroker

    AsxBroker Well-Known Member

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    Hi Chris,

    These are standard loans not lo-doc/sub-prime loans.

    The discount is on the standard variable rate so a customer coming off would go from a 1.5% discount to a 0.7% discount (approximately, obviously a bigger loan would get a bigger discount). This means the customer is getting 0.8% in addition to what they would normally get as a discount.

    The current standard variable of 6.89% pa (SGB) and 1.5% discounted rate of 5.39% pa.

    If the RBA rate dropped to zero from 4.25%, then the 1.5% variable rate would drop to 1.14% pa (realistically unlikely that firstly the RBA would drop the rate that far, secondly any bank would pass on a full 4.25% drop). When the additional 0.8% discount comes off the rate would rise to 1.94%. This would be an increase of 41% in loan cost.

    It may happen, it may not happen (interest rates dropping 4.25%). Hopefully one would hope that the RBA realised their mistakes in early 2008 and play a more sensible wait and see approach. Unfortunately with government regulation the actual dollar amount charged only changes after 60 days notice from the lender so the drop in December is only coming into affect on monthly payment amounts in February and February rate drops (and they are coming, anywhere between 0.5% to 1.0%) will only kick in to affect April.

    BV Unfortunately I am already a loan customer :( Hopefully other banks will follow suit :)

    Cheers,

    Dan
     
  5. dudek

    dudek Well-Known Member

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    Chris, I have to disagree with you on this one. I am with ST G. and each time I refinance my loans (portfolio) on average every 3 years my bank manager always gives me introductory 1% discount. It happened to me already 3 times regardless of the times or rates. I have to mentioned that my portfolio is probably bigger than average home loan but still I can’t see anything tricky in this one.
     
  6. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Actually it's not the same.

    Australian banks have offered "honeymoon" rates for quite a long time now, but our lending criteria are still far more strict than they have been in the US. Our honeymoon rates are also typically for only 12 months, and serviceability models will use "comparison rates" (which include fees and post-honeymoon period rates).

    In the US, honeymoon periods were for 3+ years and the jump to full variable was often several percentage points, but serviceability wasn't based on being able to afford the standard variable.

    We've also seen local banks fail to pass on the full rate cuts made by the RBA, so a 1.5% discount to get people in the door is merely just offering a pretty normal 1% honeymoon rate discount plus another 0.5% off which should already have come off their standard variable rate anyway. Essentially they are still gouging on their SVR and the honeymoon isn't as much of a discount as it should be.
     
  7. Chris C

    Chris C Well-Known Member

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    I didn't mean to come across as implying the package was a terrible idea, I think it will be a great way for St George to capture market share and I imagine the majority of applicants won't have a problem servicing the loan. Nor was I suggesting that Australian banks might fall victim to lending to NINJAs. I was more trying to draw parallels between the ideology in which many home buyers in the mid 2000s were buying into the American property market, ie with low interest rates, highly inflated property prices, with loan contracts that involve honeymoon periods before interest rates hikes.

    So I fear that when interest rates are this low, people that have previously been priced out of the market will now believe they can afford the "Australian Dream" without fully understanding the repercussions of rising rates that will be likely on the other side of this recession.

    Obviously taking 1.5% off variable rates, when I'm expecting that the cash rate will get as low as 1.5 - 2.0% will make for very attractive repayments in the short term, but if the cash rate quickly returns to somewhere between 4 - 5% (within a 1 - 2 years from end of the recession) they may find themselves needing to make repayments 2 - 3 times what their initial payment were, which I'm sure would catch the financially illiterate unaware.

    Also with my expectations that property prices aren't going to appreciate in any significant way in the next 2 - 3 years many highly leveraged buyers might find themselves in a situations of being forced into a sale with negative equity in the property.