Interest Rate Prediction

Discussion in 'Loans & Mortgage Brokers' started by MJS1034, 8th Mar, 2019.

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  1. MJS1034

    MJS1034 Well-Known Member

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    After reading the RBA’s announcement from their Tuesday meeting there seems to Be a high chance of a rate cut coming up this year - have seen this mentioned on here too!

    As a Broker I know how tight lending is with assessments rates sitting at 7.25%+. If there is a rate cut (passed on) it would seem logical to also cut assessment rates. Thoughts?

    Longer term, there is a lot of talk that interest rates will remain quite low for the next 10-20 years. Obviously it’s hard to predict that far into the future but do you think APRA will loosen their view of assesment rates to allow them to be droppen to say 6%?

    I’ve seen first hand how the 7.25% assessment rates are affecting first home buyers. Especially when those first home buyers may not ever see rates of 7.25% for their initial loan term. These assessment rates are certainly needed without a doubt but I believe 7.25% is just way too high.

    Would love everyone’s thoughts on it?
     
  2. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Snowballs chance on a Mt isa summers day

    we may see some playing at the edges ..... but that would be back to "irresponsible" lending days, to increase borrow cap by that level

    remember that most peops are supposedly already beyond comfort now.

    ta
    rolf
     
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  3. euro73

    euro73 Well-Known Member Business Member

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    @Redom and I have at various times over the past year or so discussed the possibility of a modest reduction to assessment rates... we both believe it could help cushion the massive P&I migration APRA is engineering without adding any risk to the system.... in my view it could in fact help keep the risk of increased delinquencies at bay and add value to the system..... but APRA's chairman has said as recently as last month that current assessment rates are here to stay ...so for the time being it would appear you need to refer to @Rolf Latham and his comments about snowballs and Mt Isa :)
     
  4. Redom

    Redom Finance Strategist Business Member

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    Changing the floor assessment rate would be a massive massive move. It’s a fundamental structural change in one of our key pillars of financial stability. It’s also a signal to the broader market about the neutral level of interest rates over the cycle.

    I’ve commented on it before, I think it would be in their toolkit of options, but only pulled out if it got really really dire. They’d much rather talk to lenders and get them making decisions quicker, better, more efficiently, etc. They’ll do what’s required here to open credit flows before drastic changes like this.
     
  5. euro73

    euro73 Well-Known Member Business Member

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    Unfortunately credit flows won’t assist borrowing capacity. Sydney and Melbourne - which represent a massive chunk of the national markets in volume and even more in dollar value , won’t stop correcting if loans get approved in 3 days instead of 10 days.

    So while I agree that a reduction to assessment rates is unlikely .... I must admit that recently I’m beginning to think that maybe - just maybe - they may have to start considering having a chat with their pals over at APRA.

    What’s making me start to think about that is the worrying picture forming month in and month out around falling retail spending and new car sales . car sales are declining almost as quickly as house prices .... it’s been quite a big drop off . We are also seeing house and land sales fall off a cliff in both major cities ..... and I really do mean a cliff. So that’s going to flow through to a lot of lost jobs at some point .... and it’s potentially going to get even worse when all those tradies working on apartments have their work dry up when the apartment cycle runs it’s course ... which ain’t that far away ...

    So they may just have to do something about assessment rates .... but yes I agree it would be a big move .
     
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  6. Rex

    Rex Well-Known Member

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    I don't understand why the major banks have not at least dropped their assessment floor down to 7% as per bare minimum set out in APG223 if my memory serves. Or has this happened and i just haven't heard?
     
  7. MC1

    MC1 Well-Known Member

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    Posted this 4 months or so back along with another post re RBA at least cutting twice in 2019 and car sales off a cliff. So in the last 4,5,6 months the RBA has sat on their hands painting a pretty picture about the economy only now to say the economy is not doing as well as we thought.
    How is it that having your ear to the ground these days is more valuable than what these book worm economists put out?

    Melbourne price correction - post example
     
  8. Harry30

    Harry30 Well-Known Member

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    If the RBA cuts interest rates (and bank interest rates follow), does the chance of APRA dropping assessment rates also increase? An assessment rate stuck on ~7% is much harsher in an environment when actual interest rates are 3.5% compared with 4.5%.
     
  9. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    because they too are concerned about extending too much debt to borrowers

    APRA is a very thght guideline, ASIC will chase a lender even though they may seem to be following generalist guidelines of APRA

    Just following APG 223 does not good risk management make.

    ta
    rolf
     
  10. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Firstly, bank rates WONT follow in step, if much at all - which is one reason why the RBA has been lax to move.

    that impotence disconnect has been around for a long while now............


    Secondlly, and just my view, Minimum Assess rates for APG 223 are based on LONG term averages and to win favour for stable consistent risk management for views like Basel IV, not weeny changes on the run, there is a much more global picture behind all this

    personally, we would be ok with our clients and a 6 % floor rate. Our portfolio arrears is half that of that of the national average, systemically though I cant see it happening -way too much risk for the average punter borrower.

    ta
    rolf
     
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  11. Harry30

    Harry30 Well-Known Member

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    Thanks Rolf,

    I understand there are some non bank lenders that take actual repayments on existing debt and don’t assess assuming ~7%. I think Pepper and Liberty may be in that category.
     
  12. euro73

    euro73 Well-Known Member Business Member

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    And I called 2019 rate cuts 18 months ago, when everyone was saying the RBA would raise rates .

    APRA had a difficult conundrum when they stepped in. They had to act to save the banks from themselves - but in doing so they have brought on some collateral damage . I think that was unavoidable given how far they let things get - although I would also say that this could have been avoided altogether had they and ASIC not been asleep at the wheel for so long RE living expenses and “actual” assessment rates . But they were - and the leash had to be pulled in

    If I had to choose whether APRA should have acted or not - I’d go with YES . Left unchecked we’d be in a whole lot more trouble now ... but I also think there’s definitely a growing consensus that the leash could do with a little slack, now ... just a bit .... if for no other reason that to act as a cushion effect to get the whole P&I migration completed and keep delinquencies at bay...

    Whether it will happen is a completely different conversation ... as @Redom has suggested , they are probably loathe to do so ...but I’m increasingly of the view that it’s starting to become something they should at least take a look at ... they can always lift it back to 7% in a few years time

    This way , they’d arrest price declines without adding to asset prices , and it should have flow through to things like car sales etc ....
     
    Last edited: 9th Mar, 2019
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  13. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    they do asses new lending at the 7 % mark..................

    while non banks generally dont have to follow APRA herd, they are still regulated by ASIC, and responsible lending practices -

    Objectively, WBC got into strife with ASIC for similar recently for loans originated pre APRA changes. assuming that the non banks can operate in this space for eva..........may be a risk

    ta
    rolf


    ta
    rolf
     
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  14. Harry30

    Harry30 Well-Known Member

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    What about existing lending? Is that assessed at 7%??
     
  15. Rex

    Rex Well-Known Member

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    But this conservatism really hurts the bottom line with credit flows as low as they are. The big 4 are itching to get more business through the door.

    I'd say that the looming 25 basis point drop in the cash rate will be used as justification for the banks to drop their minimum assessment rates down to 7%, being considered more representative of a long term average in this lower rate environment of late. Meanwhile only passing on maybe 20-30 points reduction to their SVR of course.
     
  16. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    generally no, in some cases the actual payment and a smallish margin, and in some cases with a 20 % loading.

    Some non banks apply a floor of near 7 % to 7.25 PI to all existing lending.

    Note typically, that for average PAYG borrowers, non banks dont have better serviceability for a single home buyer....... their main advantage is with those that have appropriately structured investment lending already.


    ta
    rolf
     
  17. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    3.5 % increase in borrow cap isnt going to do a whole lot to serviceability margins

    say a FHB in Brissie goes from 450 to 465.............

    I would esimate that other focus on Hems and actual expenses etc will have eaten probably 5 times that for many borrowers

    While lenders want to get more money out to work, they too want to do it in a generally reliable and responsible way


    ta
    rolf
     
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  18. Harry30

    Harry30 Well-Known Member

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    So, if existing debts are based on actual repayments (and not ~7%) that would mean a large increase in servicability for an investor with a large existing portfolio compared with using a mainstream bank.
     
  19. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Indeed.

    Be mindful that I cant think of any lender that takes actual.

    While the servicing calc looks that way most add some margin of 5 to 50 % to the repayment

    ta
    rolf
     
  20. Harry30

    Harry30 Well-Known Member

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    Thanks Rolf. Last time I did the calculation, I think 20% uplift on existing repayments was equivalent to about ~7% assessment rate on existing debts, so margin would need to be around 5-10% to give the borrowing some extra servicability v mainstream banks. Appreciate the response.