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.

Tips For Getting the Lowest Mortgage Rate

If you are in the market for a mortgage, getting the best mortgage rate is essential to your financial security and well-being. You absolutely must do your research before settling on a mortgage, as there may be a lower rate out there. If you do not research the lowest mortgage rates and go with the first mortgage company and rate you come across, you may deeply regret your decision later on down the road. Here are some tips that will help you research the lowest mortgage rates out there.

Check Mortgage Rates Daily

Regardless of industry, interest rates fluctuate frequently, sometimes on a daily basis. Because of this fluctuation, it is wise to check the mortgage rates on a daily basis. If you want just a day or two before locking in your mortgage, you may end up saving yourself a ton of money in interest each month. The less interest you pay on your mortgage the less you end up paying annually; this is money that can be put into savings accounts, investments, or household maintenance.

Check Mortgage Company Policy

Some mortgage companies will allow you to lock in a lower interest rate once you have already committed to working with them. For example, if the interest rates drop more than half a point within thirty days of locking in your rate, some companies will allow for the lower rate on your mortgage. Other mortgage companies are not so lenient. Therefore, research the company policy before you commit to working with them.

Shop Around

There are plenty of lenders and mortgage brokers out there, so do your homework and shop around. Comparing loan offers from these different companies will help you find the most competitive rates, and the best option for your finances. When shopping around, be sure to look at more than just one Annual Percentage Rate (APR) or interest rate. And remember, you will need to compare all aspects of the mortgage offers, including closing costs, lender fees, and any other hidden charges.

Avoid Paying Points

Try to avoid paying points on your mortgage. Initially, paying points may seem appealing, but can end up costing you more in the long run. Remember, paying points means that you are just paying more upfront on your mortgage, which reduces the amount of your down payment. Avoid points if you are planning to stay in your home for only a short amount of time as well. Talk to your mortgage broker about this upfront.

Fixed vs. Adjustable Mortgage Rates

Make sure that you look into the options you have when it comes to fixed versus adjustable mortgage rates. You should not automatically expect your mortgage rate and payment to go up in a few years. Stick with a fixed rate mortgage and you will not only save money, but you will also be able to plan for your budget long-term.

Improve Your Credit Score

Your credit score will directly affect the mortgage rate you will end up getting, so be aware of what your credit rating and score is. The better your score the lower the mortgage rate will be because you are less of a risk to the lender. If you have some negative marks on your credit report, you should repair that before buying a home, if possible. This may delay your purchase, but will help you in the long run.

Put More Money Down

As you research mortgage rates and fees, you will quickly pick up on the idea that if you put more money into the down payment of your home, the less your monthly payment will be. Now, this will not necessarily help your mortgage rate become lower, but it will help your monthly payment. The ideal amount for a down payment is at least 20% and if you don’t have that, you may be forced to pay Private Mortgage Insurance (PMI). This is an additional fee that goes right to the bank.

Buy a Home During Economic Turmoil

During times of economic turmoil, mortgage rates tend to drop. This is a great time to buy a home, if you are able to, because the real estate industry is struggling. The lower your mortgage rate is, the less interest you will pay and the lower your monthly payments will be. This may be an ideal time to buy a first home, if you can afford it.

Buying a home is an exciting adventure, but should only be taken on if you can actually afford it. If you cannot afford the home, or purchase one outside of your means, you may quickly find yourself in a downward spiral of debt and uncertainty. Always do a bit of research before choosing a mortgage company and settling on a particular interest rate.

How You Can Learn to Predict Mortgage Rates, Too

How you can learn to predict mortgage rates, too.

Many people, particularly, first-home buyers, tend to shop around for the cheapest mortgage rate that they see not knowing, or understanding, that these rates dip and fall. If you get an understanding of how mortgage rates work, you will be in a far better position to land one that really works for you and may even be cheaper than the one you’re ready to commit to, say, today.

Here’s how mortgage rates work.

The firs thing you should know about these rates is that they are unpredictable. They change. A high rate today may be low tomorrow. At one time, these rates were more stable. They were set by the bank. But since the 1950s, Wall Street took over and adjusted them according to supply and demand. Or more accurately, Wall Street linked them to bonds. So that when bonds – that are bought and sold on Wall Street – drop, mortgage rates do, too.

How can I know today’s bonds rates?

It sounds simple: let’s keep up with the prices of bonds and we’ll know when to shop for our mortgage. Unfortunately, only Wall Street has access to this knowledge (called “mortgage-backed securities” (MBS) data). And they pay tens of thousands of dollars for access to it in real-time.

Here’s how you can make an educated guess:

Calculate according to, what’s called, the Thirty-year mortgage rates.

These are the events that lower rates in any given 30 years:

  • Falling inflation rates, because low inflation increases demand for mortgage bonds
  • Weaker-than-expected economic data, because a weak economy increases demand for mortgage bonds
  • War, disaster and calamity, because “uncertainty” increases demand for mortgage bonds

Conversely, rising inflation rates; stronger-than-expected economic data; and the “calming down” of a geopolitical situation tend to elevate rates.

The most common mortgages and mortgage rates

You’ll also find that mortgages vary according to the level of your credit rating. The higher your credit score, the more likely you are to win a lower mortgage rate.

Mortgage rates also vary by loan type.

There are four main loan types each of which has a different level of interest. In each case, this level of interest hinges on mortgage-secured bonds. The four loan types together make up 90 percent of mortgage loans doled out to US consumers.

Which mortgage loan do you want?

Here is the list:

1. Conventional Mortgages – These loans are backed by Fannie Mae or Freddie Mac who have set regulations and requirements for their procedures. The Fannie Mae mortgage-backed bond is linked to mortgage interest rates via Fannie Mae. The Freddie Mac mortgage-backed bond is linked to mortgage-backed bonds via Freddie Mac.

Mortgage programs that use conventional mortgage interest rates include the “standard” 30-year fixed-rate mortgage rate for borrowers who make a 20% downpayment or more; the HARP loan for underwater borrowers; the Fannie Mae HomePath mortgage for buyers of foreclosed properties; and, the equity-replacing Delayed Financing loan for buyers who pay cash for a home.

2. FHA mortgage – These are mortgage rates given by the Federal Housing Administration (FHA). The upside of these loans is that you have the possibility of a very low downpayment – just 3.5%. They are, therefore, popular and used in all 50 states. The downside is that the premium is split in two parts.

FHA mortgage interest rates are based on mortgage bonds issued by the Government National Mortgage Association (GNMA). Investors, by the way, tend to call GNMA, “Ginnie Mae”. As Ginnie Mae bond prices rise, the interest rates for FHA mortgage plans drop. These plans include the standard FHA loan, as well as FHA specialty products which include the 203k construction bond; the $100-down Good Neighbor Next Door program; and the FHA Back to Work loan for homeowners who recently lost their home in a short sale or foreclosure.

3. VA mortgage interest rates – VA mortgage interest rates are also controlled by GMA bonds which is why FHA and VA mortgage bonds often move in tandem with both controlled by fluctuations from the same source. It is also why both move differently than conventional rates. So, some days will see high rates for conventional plans and low rates for VA/ FHA; as well as the reverse.

VA mortgage interest rates are used for loans guaranteed by the Department of Veterans Affairs such as the standard VA loan for military borrowers; the VA Energy Efficiency Loan; and the VA Streamline Refinance. VA mortgages also offer 100% financing to U.S. veterans and active service members, with no requirement for mortgage insurance.

USDA mortgage interest rates – USDA mortgage interest rates are also linked to Ginnie Mae secured-bonds (just as FHA and VA mortgage rates are). Of the three, however, USDA rates are often lowest because they are guaranteed by the government and backed by a small mortgage insurance requirement. USDA loans are available in rural and suburban neighborhoods nationwide. The program provides no-money-down financing to U.S. buyers at very low mortgage rates.

Mortgage rates predictions for 2016

Wondering what your chances are for getting a mortgage for a good rate the coming year? Wonder no further.

Here are the predictions for the 30-year trajectory:

  • Fannie Mae mortgage rate forecast: 4.4% in 2016)
  • Freddie Mac forecast: 4.7% Q1 2016, 4.9% Q2 in 2016
  • Mortgage Bankers Association (MBA) forecast: 5.2% in 2016
  • National Association of Realtors (NAR) forecast: 6% in 2016.

In other words, mortgage rates are projected to rise slightly in 2016.