MARKET UPDATE – FEBRUARY 2022

Home & Residential Investment Loans: Variable Rate or Fixed Rate?

Interest Rates:

Home and residential investment loans continue to be in high demand with many of our clients considering whether to fix their loans or keep them variable.

What we have been seeing is fixed rates being increased consistently by most lenders almost on a weekly basis. Safe to say that the fixed rate trend is upwards.

The question is when will variable rates follow? The opinions on this matter vary from bank to bank, economist to economist. However, the consensus seems to point to a variable rate hike sometime after the impending federal election, which must be held on or before 21 May 2022.

Westpac economist Bill Evans, is predicting the first rate rise to occur “in August 2022 to a peak of 1.75 per cent in March 2024.” Mr Evans suggests that this will occur as a result of strong inflationary pressures that will force the Reserve Bank of Australia’s hand in bringing forward rate increases earlier than the RBA has been indicating and that “[h]ouse prices will fall 14 per cent over 2023 and 2024” as a result of the projected rate increases (source: https://www.afr.com/policy/economy/house-prices-to-fall-14-per-cent-westpac-20220211-p59vt8).

Despite the above and the news around interest rates and property prices, we are still seeing good demand in purchase activity and intent to purchase from owner occupiers, however we have also found that demand from first home buyers has cooled somewhat from last year.

As to the eternal question i.e. whether to fix your home and or residential investment loan rate, well that always depends on your current circumstances that is, whether you’re looking to sell the property or pay down debt rapidly etc. However, if we are talking about rates in isolation, then it may be a good time to fix your loan rates as the trend does indicate that fixed rates will keep going up and that variable rates might follow in the not too distant future.

Refinances:

Aside from purchase activity, we are seeing refinances ramping up also. It seems that due to the changing interest rate environment, more and more borrowers are looking to ensure that they have a competitive loan arrangement.

We are finding that our clients are interested in ensuring that they not only have competitive rates, but are also seemingly becoming more interested in fixing their interest rates to ensure certainty of repayments whilst rates are so low.

Further to this, lenders are keeping this space extremely competitive and they are still trying to win market share by offering cash back incentives, sometimes up to $4,000. Note, we do not typically advocate refinancing purely for the cash back incentive, there should be more than that on offer and the loan arrangement should complement your overall circumstances and strategy. But in some cases, it’s the cherry on the cake and let’s be honest, who would say no to a $4K bonus all things being equal?

*The above is based on our observations only.

Commercial Loans:

Commercial finance is fast becoming a highly competitive space with lenders drawing the battle lines in an attempt to secure more market share.

Here are some unique propositions we are finding from lenders at present, specifically for commercial property and business lending.

Lease Doc

We have lenders (majors included) that will consider commercial property loan applications with servicing solely completed based on the existing lease associated with the commercial property.

This may assist investors looking to purchase standard commercial property or those wishing to refinance and/or cash out against an existing commercial property.

The basic eligibility criteria and terms for such loans are as follows:

  • Maximum loan limit: Up to $3M
  • Borrowing structure: Borrower must be non-trading entity with structure either being a company or company as a trustee for a trust
  • Maximum interest only period: The lesser of 5 years or lease expiry (including options to renew)
  • Loan term: Up to 25 years
  • Product: Variable and fixed interest rate Business Loans
  • Loan purpose: Refinance or purchase of a commercial investment property which can include cash out for business purposes
  • Property type & LVR:
    • Non-specialised commercial properties (up to 65%)
    • Predominately commercial mixed-use properties (up to 65%)
    • Predominately residential mixed-use properties (up to 60%)
    • Strata complex (up to 80%)
    • Property must be tenanted with an arms-length lease
  • Credit history: Clear credit file report with no adverse listings
  • Tax position: All statutory payments up to date with no outstanding and/or payment plans
  • Security:
    • Directors guarantees
    • First registered mortgage over property offered as security
    • Other supporting security as needed
    • General Security Agreement (where applicable)

*Further terms & conditions and lending limits may apply.

Rapid Refinance

If you have a business term loan that is secured by property (residential or commercial) you may qualify for a rapid refinance which is basically assessed by your self-declared income and your loan account conduct.

The basic eligibility criteria and terms for such loans are as follows:

  • Maximum loan limit: Up to $1M
  • Purpose:
    • Refinance of term loan only i.e. currently no working capital facilities
    • Cash-out (as part of refinance) also acceptable.
    • Asset Finance Balloon or Asset Finance mid-contract.
    • Consolidation of existing business loans.
  • Eligibility:
    • Existing business lending facility has been established for a minimum of 12 months
    • Minimum repayments on new business lending facility will be less than or equal to the minimum repayments on the existing business lending facility
    • 12 months of loan statements showing no late repayments on existing business loan
    • Satisfactory credit check
  • Loan Term: up to 30 years (subject to approval)
  • Loan to Value Ration: Up to 80% on commercial property and 100% on residential property
  • Documentary Requirements:
    • Application form;
    • 12-month business loan statements

*Further terms & conditions and lending limits may apply.

Low Doc:

Residential & commercial low doc loans are still being offered within the market and are generally supported via a combination of BAS and bank statements or Accountants’ Declarations.

Major banks are still offering commercial loans on a low doc basis at competitive interest rates, however it is mainly the non-bank lenders that offer home and residential investment loans on a low doc basis.

The latter appear to be priced higher than normal residential rates, however this is understandable given they are pricing for risk and often have a higher cost base than the major banks.

Bridging Loans:

Bridging loans are generally required when you are purchasing a property but require the proceeds of sale of an existing property in order to fund your equity contribution (i.e. deposit plus stamp duty).

In this scenario, we have lenders that will provide you with the funds that you need to settle the purchase and allow you the time to sell the existing property. Some lenders will even allow you to capitalise the interest during the bridging period so that you do not have to make any repayments if cash flow is an issue (as long as you can evidence servicing for the residual debt)

The costs of such a loan may be higher, especially when capitalising the interest, however when the need arises, it is good to have this in your toolbox.

The basic eligibility criteria and terms for such loans are as follows:

Max LVR: Up to80% (depending on loan size)

Term: Up to2years (up to 30 years if residual debt)

Interest Only: Up to 2 years

Income Assessment: Full Doc or Low Doc available

*Further terms & conditions and lending limits may apply.

Private Lending:

We are currently seeing Private Lenders being flush with cash that they need to deploy.

As a result, this is putting downward pressure on their interest rates making their rates more palatable than in previous months. Notwithstanding, they can be considerably more expensive than traditional lenders, however they tend to have more flexibility in the way they approach loans and can be far quicker in instances of time sensitive applications.

Private lenders are typically asset based lenders which means they are more interested in the asset you are providing as security, the Loan to Value Ratio (LVR) and your exit strategy than they are about servicing. This means that if they are satisfied with the security and your exit strategy, they may not need any financial information (other than your asset & liability position) and may not even require any repayments as they may be happy to capitalise your repayments for the term of the loan.

Most commercial or business purposes may be acceptable, including property development and in some cases land-banking, however they typically only tend to lend to company and/or companies as trustees for a trust.

Key Points:

Whatever your loan requirement, chances are we have you covered.

The important thing to note is that early engagement is key. The sooner you engage with us, the better your chances are of achieving the right loan arrangement to suit your needs.

Whilst this may not be possible every time, we do have the lenders that can assist under pressure.

What you can do to stay ahead of the game:

  1. Regularly review your interest rates – if you haven’t done this in the last 2-3 years, chances are your interest rate is probably out of date, so let us know if you’d like us to review your loans and refinance to a more competitive lender if necessary;
  2. If you’re self-employed, stay on top of your business’ cash flow – we’re happy to discuss your business’ performance with you and your accountant so as to ensure we are all updated as to yours and your business’ borrowing capacity;
  3. Let us know what your borrowing intentions are over the next 12 months i.e. are you looking to buy a new home, an investment property, plant & equipment for your business etc – this will enable us to workshop future borrowing scenarios which may assist you with your business goal setting;
  4. Make sure you stay on top of your tax obligations – we are seeing more and more tax liabilities which in turn affect loan applications. So if you need to clear tax debt, reach out because we have lenders that may be able to assist with that also; and
  5. Don’t leave things till the last minute – if you know you need a loan in 6 months, let us know. However, life happens, and sometimes you cannot foresee an issue till it occurs. Again, in these instances, that’s ok as we have lenders that may be able to assist but let us know as soon as you know.

As always, if you have any questions, or need any finance help, please feel free to reach out, we’re here to help!

Disclaimer: The information provided herein is for general information purposes only and does not constitute specific advice. It should not be relied upon for the purposes of entering into any legal or financial commitments. Specific advice should be obtained from a suitably qualified professional before adopting any investment/financial strategy.