Are Australian banks safe?

Are Australian banks safe?

by | Mar 16, 2023 | Investments, Markets and Economy, Wealth Management

Spoiler alert: Australian banks are safe and what’s happened in the US and with Credit Suisse over the past week does not represent a threat to your bank deposits nor to the Australian economy in general.

The US

Silicon Valley Bank (SVB) was the sixteenth largest bank in the US, with $209 billion in assets, and collapsed last week largely due to poor management.

With the explosion in venture capital investing over the pre-COVD period, SVB had experienced incredible growth by banking standards: deposits had quadrupled in five years. However, it had a massive concentration of depositors, 93% were corporate compared to a median of only 34% in the US’s 10 largest banks, and most were venture capital-backed businesses with relatively large deposits. This left the bank vulnerable to an old-fashioned run on its deposits.

In an effort to make a bit of extra money, SVB had invested a lot of those deposits into US government bonds, which are super safe, but some were long dated, out to a few years. If they had have invested in 3-month bonds, there wouldn’t have been a problem, but the bank chased the higher yield of 3 and 5-year bonds. This left the bank vulnerable to a rise in interest rates, which reduces the value of bonds. Given SVB’s CEO sat on the board of the San Francisco Fed, which had been warning of ongoing rate hikes, you can see how poor management was.

With venture capital investors slowing their rate of handing out money since last year, some of those depositors were forced to draw on their deposits to run their companies and fund basic working capital.

SVB was forced to sell some of its government bonds and take a loss on them, which was reported to the market and they unsuccessfully tried to tap shareholders for $2.25 billion in new equity. This caused some of the venture capitalists to worry that if more and more depositors started wanting their money back, SVB wouldn’t be able to meet the demand, so they jumped on Twitter or sent text messages telling their investee companies (the depositors) to get their money out ASAP. This caused that old fashioned bank run to snowball, and at one point SVB had copped $42 billion worth of withdrawals in six hours.

By Thursday of last week, it was lights out for SVB. The Federal Deposit Insurance Corporate (FDIC) moved in that day, stayed all night assessing the state of withdrawal requests, and announced it had taken control of the bank by Friday. That’s the day all hell broke loose for US banking shares, with the regional bank index falling some 16%. By Sunday night the Federal Reserve announced all depositors would be made good, but equity investors will lose their money, which is exactly the way it’s supposed to work: depositors have faith a bank will look after their money, while investors take on the risk of a company screwing up.

In summary, the SVB situation was idiosyncratic, i.e. a situation peculiar to that bank. There have since been two other smaller US banks closed down by the FDIC, mainly because they had excessive amounts of deposits tied up in crypto assets. Certainly, it wouldn’t have happened if the Fed had not been raising rates, but there’s a popular expression on Wall Street that the Fed keeps raising until something breaks.

It’s worth bearing in mind, the US banking industry is structured very differently to ours. There are literally hundreds of small banks, a legacy of the Great Depression era. Since 2001, there have been 563 banks go belly up in the US, with about 500 of those as a result of the GFC. If Australia’s banking system was able to withstand that, it will be fine with what’s happening now.

Credit Suisse

Credit Suisse has been a mess for years, with a string of scandals and poor investments going back over decades, which culminated in a growing number of clients taking their money and business elsewhere by the end of last year. The bank’s CEO tried to woo back customers, but last week the Securities and Exchange Commission (SEC) in the US (equivalent to ASIC here), queried the bank’s annual report. Combined with the SVB situation, panic started to set in.

Then on Wednesday, CS’s biggest shareholder, the Saudi National Bank, said it wasn’t going to be able to invest any more into the bank because it was hitting regulatory limits. That caused CS’s share price to plunge, and they asked the Swiss central bank to issue a statement of support, which it did.

However, other banks around the world started worrying about counterparty risk, in other words, looking at contracts where CS was on the other side, and trying to buy protection. Pretty soon, the cost of that protection skyrocketed, implying a high likelihood of default.

A you can imagine, a lot of investors started having flashbacks to the death of Lehman Brothers in 2009, and worrying what threats CS poses to the global banking system. However, CS has substantial liquid assets it can call on as well as access to central bank lending facilities. The CEO has said it has sufficient cash-like liquid assets to pay back half its deposit liabilities and loans from other banks.

Subsequently, the Swiss National Bank has said CS “meets the higher capital and liquidity requirements applicable to systemically important banks” and it stands ready to provide CS with liquidity. CS has announced it will borrow SFR50 billion to meet any liquidity demands from depositors and buy back a bunch of debt that was trading way below its issue price.

Is this the start of another GFC?

No, it’s a very different situation. However, stress levels in financial markets have certainly risen which is being reflected in bond market dislocation, which will result in higher funding costs for banks. It depends on how markets and central banks respond to a crisis, and so far, the US Fed and the Swiss National Bank have done very well.

How will it affect Australian banks?

In 2016, the Australian bank regulator, APRA, announced it wanted Australian banks to have “the strongest balance sheets in the world”. At the time the banks pushed back, but lost, and now their balance sheets are indeed very strong.

Their funding costs may rise a bit, and access to capital markets may be restricted while markets are unsettled, but there is no risk of any bank failures in this country.

As for depositors, the federal government already guarantees deposits up to $250,000 and we’ve seen the US regulator increase that to pretty much no limit for the SVB depositors.

A silver lining?

It is entirely possible this will cause central banks around the world to pause their interest rate rises while markets are in turmoil.

The link between lending and property; what’s in store for 2023?

The link between lending and property; what’s in store for 2023?

by | Nov 29, 2022 | Mortgage Broking (Loans)

The correlation between lending approvals and property prices has long been established as providing a 4-6 month ‘crystal ball’ into future property prices. The relationship can be clearly seen in the following chart which plots each data series over the past 20 years.

 

The correlation between lending approvals and property prices has long been established with loan approvals generally providing a 4-6 month ‘crystal ball’ into future property prices. The relationship can be clearly seen in the following chart which plots each data series over the past 20 years. Source: ANZ     Property prices declining Let’s first establish where the property market currently sits. CoreLogic’s national Home Value Index (HVI) fell for the sixth consecutive month, as values across the nation retreated a further -1.2% in October. Annual declines are currently isolated to Sydney, Melbourne and Hobart yet there is some evidence the rate of decline is now gathering pace in the other capital cities, especially Brisbane. Source: CoreLogic It was not only the capital cities which experienced the pullback. CoreLogic’s Regional Market Update showed residential property values in six of the twenty-five most popular lifestyle markets recorded falls of 6% or more last quarter. This included Richmond-Tweed (-11.7%), Southern Highlands and Shoalhaven (-7.1%), Sunshine Coast (-7.1%), Gold Coast (-6.4%), Illawarra (-6.1%) and Newcastle and Lake Macquarie (-6.0%). From September 2020 to April 2022, national house values rose 32.5%, while unit values rose by a milder 16.1% over the same period. Since peaking in April, house values are now reversing at a more rapid rate, falling -5.3%, while values across the medium to high-density sector have declined by a more moderate -3.0%. How does borrowing capacity affect overall lending? The amount a bank will lend a prospective borrower is largely determined by two factors; interest rates and credit policy. In 2019, in response to the pandemic, The Reserve Bank of Australia (RBA) quickly cut its official interest rate to 0.1%. At the same time the banking regulator, APRA, removed the minimum 7.25% interest rate required to be used when banks assess the serviceability of a loan. In a short space of time borrowers had access to much higher levels of debt and overall lending accelerated to all-time highs. Since May, the RBA has raised the official interest rate by 2.75%. To put this in perspective, a joint household with disposable income of $150,000 and expenses in line with the Household Expenditure Measure (HEM) has had their borrowing capacity lowered by 20-25%. To further add to the tightening, the buffer used for the assessment of a loan has been increased from 2.5 to 3.0% above the offered rate. What does the current lending data tell us? Whilst borrowing capacity is not an exclusive influence on overall lending, The Australian Bureau of Statistics’ September Lending Indicator’s report show that the value of new borrower loan commitments has fallen 18.5% over the first three quarters of this year, with owner-occupier loans contributing most to the decline. These falls are notably more than that seen in property prices over the same period. Source: Australian Bureau of Statistics, Lending Indicators September 2022 Source: Australian Bureau of Statistics, Lending Indicators September 2022 During September 2022, in seasonally adjusted terms for owner-occupier housing loan commitments, largest falls were recorded in the Northern Territory (25.2%), Queensland (13.8%) and Western Australia (13.2%) further reinforcing that the softening is now spreading outside of the two largest markets of Sydney and Melbourne. Source: Australian Bureau of Statistics, Lending Indicators September 2022 Investor lending also saw declines, however not to the degree of owner-occupied commitments. Tasmania led the way with a 26.6% decline followed by the ACT (12.2%) and Western Australia (8.7%). This goes some way to partly explaining the more modest declines in units versus house values across the nation. Source: Australian Bureau of Statistics, Lending Indicators September 2022 Crash or correction? With overall property values now 6% lower than their peak and an aggressive interest rate tightening cycle, many commentators warn that a housing market crash is imminent. For a property market to

Source: ANZ


Property prices declining

Let’s first establish where the property market currently sits.

CoreLogic’s national Home Value Index (HVI) fell for the sixth consecutive month, as values across the nation retreated a further -1.2% in October. Annual declines are currently isolated to Sydney, Melbourne and Hobart yet there is some evidence the rate of decline is now gathering pace in the other capital cities, especially Brisbane.

 

Core logic change in swelling values

Source: CoreLogic

 

It was not only the capital cities which experienced the pullback. CoreLogic’s Regional Market Update showed residential property values in six of the twenty-five most popular lifestyle markets recorded falls of 6% or more last quarter. This included Richmond-Tweed (-11.7%), Southern Highlands and Shoalhaven (-7.1%), Sunshine Coast (-7.1%), Gold Coast (-6.4%), Illawarra (-6.1%) and Newcastle and Lake Macquarie (-6.0%).

From September 2020 to April 2022, national house values rose 32.5%, while unit values rose by a milder 16.1% over the same period. Since peaking in April, house values are now reversing at a more rapid rate, falling -5.3%, while values across the medium to high-density sector have declined by a more moderate -3.0%.

 

How does borrowing capacity affect overall lending?

The amount a bank will lend a prospective borrower is largely determined by two factors; interest rates and credit policy. In 2019, in response to the pandemic, The Reserve Bank of Australia (RBA) quickly cut its official interest rate to 0.1%. At the same time the banking regulator, APRA, removed the minimum 7.25% interest rate required to be used when banks assess the serviceability of a loan. In a short space of time borrowers had access to much higher levels of debt and overall lending accelerated to all-time highs.

Since May, the RBA has raised the official interest rate by 2.75%. To put this in perspective, a joint household with disposable income of $150,000 and expenses in line with the Household Expenditure Measure (HEM) has had their borrowing capacity lowered by 20-25%. To further add to the tightening, the buffer used for the assessment of a loan has been increased from 2.5 to 3.0% above the offered rate.

 

What does the current lending data tell us?

Whilst borrowing capacity is not an exclusive influence on overall lending, The Australian Bureau of Statistics’ September Lending Indicator’s report show that the value of new borrower loan commitments has fallen 18.5% over the first three quarters of this year, with owner-occupier loans contributing most to the decline. These falls are notably more than that seen in property prices over the same period.

 

Lending indicators

Source: Australian Bureau of Statistics, Lending Indicators September 2022

 

new loan commitments

Source: Australian Bureau of Statistics, Lending Indicators September 2022

 

During September 2022, in seasonally adjusted terms for owner-occupier housing loan commitments, largest falls were recorded in the Northern Territory (25.2%), Queensland (13.8%) and Western Australia (13.2%) further reinforcing that the softening is now spreading outside of the two largest markets of Sydney and Melbourne.

 

new loan commitments owner occupier

Source: Australian Bureau of Statistics, Lending Indicators September 2022

 

Investor lending also saw declines, however not to the degree of owner-occupied commitments. Tasmania led the way with a 26.6% decline followed by the ACT (12.2%) and Western Australia (8.7%). This goes some way to explaining the more modest declines in units versus house values across the nation.

 

new loan commitment investor housing

Source: Australian Bureau of Statistics, Lending Indicators September 2022

 

Crash or correction?

With overall property values now 6% lower than their peak and an aggressive interest rate tightening cycle, many commentators warn that a housing market crash is imminent.

For a property market to “crash” a large number of owners are forced to sell into a falling market, with limited buyers, as they can no longer afford to make their mortgage repayments. The rate of delinquency loans, or loans in arrears for more than 30+ days, is a key metric in predicting a crash.

The latest data released by Fitch Ratings, show mortgages that are 30 and 90 days in arrears were down by 0.07% to 0.82% and 0.04% to 0.4% respectively for the 3 months to June 30 – the lowest level since tracking began in 2002. As more recent data is released, delinquency rates will be something to watch as the aggressive tightening cycle further filters through to the broader economy.

 

What will 2023 bring?

The value of new lending will be largely dependent on where the RBA take interest rates over the next year, however, if lending continues to act as a precursor for property, we can expect house prices will continue to ease at least throughout the first half of 2023.

If you’d like to discuss your specific circumstances, or simply interested in what lending options are available, please do get in touch.

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Refinancing, when does it make sense?

Refinancing, when does it make sense?

by | Aug 16, 2022 | Mortgage Broking (Loans)

In June 2022, in seasonally adjusted terms, the value of lender to lender refinancing for owner-occupier housing rose 9.7% to a new record high of $12.7 billion. It was 24.6% higher compared to the year before. With rising variable rates and the maturity of historically low fixed rates being meaningful contributors to household affordability, more Australians are assessing their current loan to ensure they are not paying more than they need to. So, what do you need to consider before refinancing your own loan?


The benefits of refinancing

 

1. Getting a better interest rate

The first task before refinancing is to contact your current lender and request the best rate they can offer. Most lenders have a ‘retention rate’ aimed at keeping your business but is generally not as competitive as rates designed to attract new borrowers. From there, you can accurately compare the rates on offer elsewhere and it may well be that your current lender is still the best place for you.

It’s important to note that the rates widely advertised are generally available to a limited niche of borrower types and may not necessarily be applicable to your personal circumstances and objectives. A good mortgage broker will be able to help find the most appropriate loan and rate.

2. Reducing your minimum monthly repayments

Borrowers often solely associate a reduced rate with reducing their monthly repayments yet in many cases extending the term of the loan, usually back to 30 years, contributes to most of the reduction. It is important to recognize that the loan will therefore take longer to pay down without making extra payments in addition to the minimum. Alternatively, you can choose a shorter loan term if you feel you are comfortably able to afford the extra repayments.

3. Consolidating your debt

Often, for example, credit card, automotive finance or ATO debt is charged at a much higher interest rate than that of your home loan. Refinancing provides an opportunity to consolidate this debt into one cost-effective monthly repayment.

4. Accessing the equity in your property

If you have available equity and can service the additional repayments, refinancing can provide an opportune time to borrow additional funds for non-structural home renovations, to go on a holiday or even provide the deposit to purchase a new investment property.

5. Other circumstantial benefits

This can include benefits such as removing a guarantor or changing lenders after fixing past credit issues.

The cost of refinancing

Refinancing follows a similar application process to that of a new home loan so therefore will require an investment of time and effort. You must provide the lender, or your mortgage broker, with a number of supporting documents to enable the assessment of your application. Once approved, you are required to discharge your current mortgage and update items such as your building insurance policy to reflect the new lender’s details. Lastly, you will need to set up and familiarise yourself with a new online access and update any existing direct debits. A good mortgage broker can help you with the specifics and timing of these administrative tasks.

The benefits of a reduced rate can often be absorbed by the costs of refinancing. These fees may include, but are not limited to the following:

    • Loan application fee: Charge for applying with a new lender.
    • Settlement fee: The new lender may charge a fee to cover the legal costs of issuing your new mortgage.
    • Discharge fee: A discharge fee of around $150 to $400 is usually charged by the current lender in order to release you from the mortgage.
    • Break costs: This may be applicable if you are on a fixed rate and wish to refinance before the term expires. The fee is calculated based on the set borrowing costs of the lender as well as factors such as time to maturity. It’s important to gain a break cost estimate before deciding to refinance.
    • Government fees to register and transfer the property: The applicable state’s Land Titles Office will charge a fee to update the registration of your mortgage on the property title record.
    • Ongoing fees depending on the lender, and loan, you choose: These charges could include monthly account keeping fees, annual package fees or even fees for accessing your additional repayments.
    • Lenders Mortgage Insurance (LMI): A one-off fee only applies if you borrow more than 80% of the value of your property.


Is it worth it?

The ultimate decision on whether to refinance clearly comes down to your personal circumstances. If you are refinancing for a better rate it’s imperative to consider the potential interest saved in relation to the cost of refinancing. This is largely influenced by the reduction in rate and the size of your loan. Let’s consider an example in the following table:

Loan balance Reduction Maximum interest saved per annum Cost of refinancing
$150,000 0.3% p.a. $150,000 * 0.3% = $450 $1,000
$1,000,000 0.3% p.a. $1,000,000 * 0.3% = $3,000 $1,000

 

Clearly, the second example makes financial sense however the benefits of refinancing a $150,000 loan will not be realised for 2-3 years. In this case, other factors need to be considered such as whether you intend to pay down the loan ahead of time or if you’re refinancing for other objectives than simply a better rate.

Lenders looking to attract new customers often offer financial incentives to refinance in the form of cash-back offers. These range from between $1,500 and $5,000 and are cash payments made directly to the borrower to assist with the cost of refinancing. In the above $150,000 example, a lender with the same terms, however offering a $1,500 cash back, could significantly influence your decision.

Each cashback offer has specific and varying qualifying criteria and it’s important to ensure you meet eligibility. At the risk of sounding like a broken record, a good mortgage broker will be familiar with the current offers and eligibility to help you with a cost-benefit analysis. 

If you’d like to discuss your specific circumstances, or simply interested in what rates are available, please do get in touch.

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To fix or not to fix

To fix or not to fix

by | May 17, 2022 | Mortgage Broking (Loans)

The variable versus fixed mortgage rate decision will affect a homeowner for years to come and could be the difference in thousands of dollars of accrued interest. 

At its May meeting, the Reserve Bank of Australia acted to curb soaring inflation by raising the official cash rate by 0.25%. With Governor Lowe warning that this is expected to be the first of many rate hikes over the next 12-18 months, many are wondering if they should fix their home loan to safeguard against rising rates. The right answer depends on your unique situation and tolerance for risk. 

Let’s start by looking at the advantages and disadvantages of each.

Variable rate loans

Advantages
  • The main advantage is flexibility.
  • Unlimited extra repayments which will help you pay your loan off sooner.
  • It takes advantage when interest rates are decreasing by lowering interest repayments.
  • Allows you to refinance or restructure your loan at any time, for example, by accessing excess equity for renovations.
  • Variable home loans generally come with more features such as a redraw facility or offset account.
Disadvantages
  • When interest rates rise, so too do your repayments.
  • As interest rates can change at any stage you lack a level of certainty over what your repayments will be in the future. This can make detailed budgeting quite challenging.

Fixed rate loans

Advantages
  • The main advantage is payment certainty, allowing you to budget your repayments for the foreseeable future. This leads to a greater sense of financial security.
  • Your interest repayments will be lower if, during the term, the variable rises above the fixed rate.
Disadvantages
  • Most fixed rates limit extra repayments to around $5,000 per year therefore if you benefit from a lump sum of cash, like an inheritance or bonus, you cannot place this directly onto the loan without penalty.
  • You do not benefit when interest rates go down during the term of the fixed loan.
  • There are penalties for breaking a fixed rate before maturity which makes restructuring or refinancing to another lender much more expensive. These penalties also apply if you sell your property within the fixed rate term.
  • Fixed rates generally do not come with additional features such as a redraw facility or an offset account.

As you can see, there is a lot more to consider than simply a bet on where interest rates are heading.

After considering these characteristics, if the certainty of fixed rate repayments is still appealing you should then consider whether you will likely be better off with the fixed rates on offer.

A common misconception is that if the variable interest rate rises higher than the fixed rate over the term of the loan then you will pay less interest. Of course, there are periods during the term when the variable rate will be lower so you must instead consider the average rate over the term. Take an example where a rate was fixed 1% above the current variable rate for a period of 2 years. After 1 year the variable rate had steadily risen to meet the fixed. To break even, the variable would need to continue to rise another 1% (approx.) over the final year of the term. When calculating the exact breakeven point, you must also consider the timing of the rate rises and that the loan balance may steadily decrease over the term.

The calculations in the table above are based on a 30 year $800,000 loan with monthly principal and interest repayments.

Hedge your bets

Often borrowers are drawn towards the certainty of fixed repayments but do not want the additional payment restrictions that come with it. By splitting the loan, you can essentially enjoy the benefits of both. To calculate the variable split, you should consider how many extra repayments you are likely to make over the term of the fixed rate as well as how much your balance will reduce by your regular payments. A good mortgage broker can help you with this calculation. You may also consider an even split if you are undecided which rate will work best for you.

 

If you’d like to discuss your specific circumstances, or simply interested in what fixed rates are available, please do get in touch.

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Open banking: What this means for you and your data

Open banking: What this means for you and your data

by | Feb 21, 2022 | Industry News, Mortgage Broking (Loans)

Open banking is widely regarded as the most significant change in the retail banking landscape for decades but many of us have never heard of it. So what is it and how does it affect me?

Whilst the term originated from Europe, Australia passed the Consumer Data Right (CDR) legislation in August 2019 which gave consumers exclusive right to their own data and enabled them to choose whether to share it with third parties. In the following years the banks and other lenders were forced to securely share some of their banking data with other accredited data recipients (ADR). The types of data include details of home loans, investment loans, personal loans, transaction accounts, closed accounts, direct debits and scheduled payments, as well as payee data. It’s important to reiterate that this data cannot be shared without the consent of the customer.

So how does this change things?

By ensuring that consumers have exclusive right to their own data, according to the Australian Banking Association (ABA), benefits to customers will include;

  • Streamlining the application process for certain financial products
  • Saving significant time and administration when switching from one bank to another
  • The availability of more products tailored to your particular financial circumstances

The changes are aimed to promote more competition within the financial services industry providing smaller tech based emerging companies the data to efficiently design products that better suit their customers. Imagine applying for a loan or credit card where, in a few clicks, your savings and credit data is used to immediately approve your application and determine the rate you are offered. There is no need to provide any supporting documents and the lengthy processing delays which have hampered the industry for years are a thing of the past.

How secure is my data?

To receive and share your data an ADR must become accredited by the Australian Competition and Consumer Commission (ACCC) to ensure they have the required level of security and data privacy settings. This process can take as long as 4-6 months and involves significant upfront and ongoing legal and labor costs. For a long time the cost of accreditation, and ongoing regulatory maintenance, was seen as a barrier for smaller companies to access the data. To overcome this, last year the Australian government approved a representative model which will come into effect this month.

As mentioned earlier consumers will need to provide consent for ADRs to access their data and the information will be deleted or de-identified after a maximum of 12 months unless permission is once again granted. You can also withdraw your consent at any time and your data must be deleted immediately. Each company that you grant permission should always provide you with the following information:

  • What information you’re sharing and how it will be used
  • Who will have access to your data
  • How long they’ll have access to your data for
  • How you can manage and withdraw consents

When will I see the benefits of this?

The type of data available has been rolled out in phases since July 2020 but open banking is still considered to be in it’s infancy.

An important milestone will occur this month when joint accounts are brought under the scope of CDR. As you can imagine this represents a huge change for the mortgage industry where a significant proportion of loans are held in joint names.

From November 2022 energy companies will also need to provide customers with access to their usage and connection data. This will kickstart a future where comparing energy providers based specifically on your usage can be performed at the click of a button. It also gives future providers the opportunity to tailor your energy charges specifically for you.

As the number of data sources increase the consumer will progressively see the benefit but until then, with many data sources such as superannuation and investment accounts still unavailable, companies utilising the data will typically operate under a hybrid model combining open banking and traditional sources of information.