Using property as collateral is generally the best way to get lower rates. I'm starting down that path now.
Provided your cashflow is under control, it doesn't really matter what you use as security. When it comes to default, Australian law allows creditors to chase you to bankruptcy anyway, so might as well get the best deal you can.
What the law allows banks to do and the reality of what they will do are generally two different things.
If it gets to the point that they reposess the security, alot of banks will just call it a day at that point, mark your credit and walk away. Unless of course you have a lot of other property WITH equity, that they know about. Debts have to generally be beyond 20 grand, more likely 30 grand for any creditor to actually want to bankrupt somebody. And you have to remember that if you have 100k in equity, if they have to mortgagee sale a property it might only be 20k at the end of the day, and they know this.
No bank will spend 20 grand on solicitors, to collect 20 grand, but they will spend 20 grand to collect 50 grand. Going after somebodys other assets, especially when they are security to other lenders can be quite difficult and very expensive for the creditor.
Best way to avoid things like this, is stay well and truly cash positive, and use different mortgage companies as often as you can etc.
Well thank you for correcting me. So, if I understand what you are telling me, most people on variable rates don't pay down their principal faster when their variable mortgage rate goes down? That is, as soon as their rate drops, they immediately go into the bank to adjust their repayment schedule?
The repayment amount is automatically adjusted by the bank when the rate goes up/down with variable rate loans.
So when rates go down people won't be paying principal down any faster. But, almost all loans are set up with an offset account which should retain the difference thereby effectively reducing principal.
That's quite rare. Most here when proven incorrect just keep boxing themselves into a corner. Well done for admitting that you could be wrong.
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So, if I understand what you are telling me, most people on variable rates don't pay down their principal faster when their variable mortgage rate goes down? That is, as soon as their rate drops, they immediately go into the bank to adjust their repayment schedule?
I don't think Syd was saying anything of the sort.
I suspect (but have no data) that most on variable rate loans continue to pay the higher repayments (paying down principal faster) when IRs drop. It's certainly what I, and people I know do.
K-town
27 Jul 2014, 11:07 AM
But,
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The repayment amount is automatically adjusted by the bank when the rate goes up/down with variable rate loans.
My employer pays my repayments direct to the bank (instead of paying into my savings account). Only I can instruct my employer to change the repayment rate, it's not automatic.
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So when rates go down people won't be paying principal down any faster.
Not in my, and I suspect many peoples cases.
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almost all loans are set up with an offset account which should retain the difference thereby effectively reducing principal.
The repayment amount is automatically adjusted by the bank when the rate goes up/down with variable rate loans.
So when rates go down people won't be paying principal down any faster.
Oh, that wasn't my understanding. Do you have any references for this?
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But, almost all loans are set up with an offset account which should retain the difference thereby effectively reducing principal.
Almost all? OK. I did a quick search on google to see if I could find anything to verify that and came up short. Do you have any numbers for this?
Anyway, if what you say is true, and the offset account effectively adds to equity/reduces principal, doesn't that mean that when the mortgage rates drop, the book value of the banks mortgage assets drop also?
zaph
27 Jul 2014, 11:38 AM
I don't think Syd was saying anything of the sort.
I suspect (but have no data) that most on variable rate loans continue to pay the higher repayments (paying down principal faster) when IRs drop. It's certainly what I, and people I know do.
So, to reiterate, does that mean when mortgage rates drop, the book value of the bank's mortgages also drop?
But if the borrower locked in a rate, the book value of the mortgage asset would actually increase as the overnight cash rate went down?
I think ....
Edit: I should also say that I agree with what Sydneyite said with regards to new business that the bank writes for fixed rate mortgages, I may have misunderstood the original article, but I thought the author was referring to existing borrowers.
Oh, that wasn't my understanding. Do you have any references for this?
My reference for this is having variable loans on eight properties with six different lenders over 15 years. They have all worked that way by default.
o2sd
27 Jul 2014, 12:27 PM
Almost all? OK. I did a quick search on google to see if I could find anything to verify that and came up short. Do you have any numbers for this?
You could research bank lenders variable products and see how many have offset accounts. Almost all.
o2sd
27 Jul 2014, 12:27 PM
Anyway, if what you say is true, and the offset account effectively adds to equity/reduces principal, doesn't that mean that when the mortgage rates drop, the book value of the banks mortgage assets drop also?
My reference for this is having variable loans on eight properties with six different lenders over 15 years. They have all worked that way by default.
Fair enough. So you would say as interest rates have gone down, it hasn't led to Australians deleveraging faster?
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You could research bank lenders variable products and see how many have offset accounts. Almost all.
Not sure if that will tell me how many existing loans are written that way, but it is interesting that most new loans are offered with it standard now.
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Effectively. Not actually.
Not sure what you mean by that. Are the bank's interest receipts declining with each drop in rates or not?
Fair enough. So you would say as interest rates have gone down, it hasn't led to Australians deleveraging faster?
Yes absolutely it has. To evidence that, whilst lending is very strong at the moment, the net lending growth figure is only about 5% because so many are taking advantage of the low rates to pay down debt.
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Not sure if that will tell me how many existing loans are written that way, but it is interesting that most new loans are offered with it standard now.
Most lenders offer offsets but not on every product. A lot of people use the redraw facility which is as good if there are no tax complications.
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Not sure what you mean by that. Are the bank's interest receipts declining with each drop in rates or not?
Their profitability is based on their "cost of funds" which is not their term deposit rate, it's far lower. There is a lot of money sitting in accounts that don't earn any interest. The value of a loan book is based on profitability, but it's irrelevant those books are not for sale.
I think that I can safely say that banks discount their rates to attract business, not to cannibalise their lending income. When they discount, that discount only applies to new lending not old lending, although existing borrowers can switch, but few do. Banks have everything calculated to the cent, they know exactly what they are doing with their earnings. They increase their discount for new business, but don't drop the SVR. When it comes to accounting, there are few better.
Any expressed market opinion is my own and is not to be taken as financial advice
Thanks for replying, although your post has left me a little confused.
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Yes absolutely it has. To evidence that, whilst lending is very strong at the moment, the net lending growth figure is only about 5% because so many are taking advantage of the low rates to pay down debt.
OK, so am I right in saying that the principal of the loan declines, so does the interest income?
For example, if there is no pre-payment, on a 25 year loan, 35% of the interest income the bank will receive will happen in the first 5 years, and 63% in the first 10 years. So the asset's value and it's profitability is very sensitive to changes in the principal in the first 5-10 years of the loan. If the bank can encourage borrowers to lock in a rate for 5 years, the risk to that profitability goes down?.
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Their profitability is based on their "cost of funds" which is not their term deposit rate, it's far lower. There is a lot of money sitting in accounts that don't earn any interest.
Oh. I thought profits were volume times margin, not just margin.
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The value of a loan book is based on profitability, but it's irrelevant those books are not for sale.
I see. They are not securitised?
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I think that I can safely say that banks discount their rates to attract business, not to cannibalise their lending income. When they discount, that discount only applies to new lending not old lending, although existing borrowers can switch, but few do.
I am not sure what you are saying here, but is sounds like you are saying that a variable rate is not actually variable, which it would seem would defeat the purpose of taking a variable rate.
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Banks have everything calculated to the cent, they know exactly what they are doing with their earnings. They increase their discount for new business, but don't drop the SVR. When it comes to accounting, there are few better.
So when banks realise that falling interest rates cause their assets to lose value, they do everything in their power to encourage borrowers to fix their rates, including making predictions about imminent rate rises? That's what I would do if I was the world's best accountant.
Thanks for replying, although your post has left me a little confused.
OK, so am I right in saying that the principal of the loan declines, so does the interest income?
For example, if there is no pre-payment, on a 25 year loan, 35% of the interest income the bank will receive will happen in the first 5 years, and 63% in the first 10 years. So the asset's value and it's profitability is very sensitive to changes in the principal in the first 5-10 years of the loan. If the bank can encourage borrowers to lock in a rate for 5 years, the risk to that profitability goes down?.
Oh. I thought profits were volume times margin, not just margin.
I see. They are not securitised?
I am not sure what you are saying here, but is sounds like you are saying that a variable rate is not actually variable, which it would seem would defeat the purpose of taking a variable rate.
So when banks realise that falling interest rates cause their assets to lose value, they do everything in their power to encourage borrowers to fix their rates, including making predictions about imminent rate rises? That's what I would do if I was the world's best accountant.
I believe that you are now deliberately misinterpreting what I have said.
I just don't have the time for that.
Any expressed market opinion is my own and is not to be taken as financial advice
Just on this, the vast bulk of Australian residential mortgages are not securitised. Ie, securitised loans represent only a few % of the total aggregate "mortgages outstanding" number.
Re your other points, I see you are now contending that banks might profit if they shift existing variable rate customers to fixed rate loans, thus removing the possibility of them paying down principle faster as interest rate falls. I suppose this may have some validity to it - ie a fixed rate loans also "fixes" the banks profit over the term, whereas a variable rate loan profit is not fixed if principle is paid down faster than schedule.
Re offset accounts etc, I have no hard data to prove it, but I believe their use is very widespread nowadays.
Re what happens to scheduled payments when interest rates fall - with most of the loan products I have had over the years I have had to take some action if I wanted to reduce my payment accordingly - which I normally never did. So I suspect some banks / products may automatically adjust the payment down, while many others do not.
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