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Empower Wealth Blog post by Empower Wealth

2016 Mortgage and Lending Outlook

Here are the other parts of the 2016 Outlook:

Australian Property Market Outlook:

Part 1: Sydney & Regional NSW
Part 2: Melbourne & Regional VIC
Part 3: Queensland, Australian Capital Territory and South Australia
Part 4: Northern Territory, Western Australia and Tasmania

Global Economy and Equity Market Outlook

Part 1: United States Economy
Part 2: Asian and European Economy
Part 3: Commodities Market
Part 4: Australian Economy


Ben Kingsley: So hi. Ben Kingsley here with Simon. We’re here to talk about the mortgage and lending outlook for 2016. Simon, would you like to introduce yourself?

Simon Gillespie: Simon Gillespie, one of the senior finance advisers at Empower Wealth working very closely with Ben and Ben we were talking earlier about well, some significant changes that have been happening over the previous months and maybe you would like to expand on that.

Ben Kingsley: Yeah, sure. I mean obviously we saw the big change was the APRA intervention into the marketplace. So part of that was twofold. One, we saw them wanting to slow down the investment lending. So we wanted to see that we’re basically looking at how much investment lending can happen. And then two, we started to see them, so how are they handling serviceability, didn’t we?

Simon Gillespie: Most definitely.

Ben Kingsley: Then finally, what happened was we started to see an out-of-rate cycle rise by the banks which was a little bit surprising and maybe a little bit of a margin growth. But the reason I think behind that is the banks obviously need to shore up their capital and that’s probably part of that process. So as we move into 2016, what do you see as some of the trends happening in the mortgage market?

Simon Gillespie: Well, I think that we may continue to see some of those changes in interest rates, whether it’s in-cycle or out of cycle. Who knows what – you can call it what you like. But I do expect that there are going to be some variable changes and I think there may – whether it’s this year or moving forward, maybe even just a further gap between that cost of owner-occupied debt versus investment debt as we move forward.

Ben Kingsley: So in your view, maybe 10 to 20 basis points.

Simon Gillespie: I’m not going to say the number. It’s – yeah, I don’t have that mirror ball but it’s just an expectation that there have been changes. It has obviously made a difference but we may continue to see more of that change. So it just comes into my thinking when I look at structuring a long term planning that these changes could come to fruition.

Ben Kingsley: Yeah. Look, I agree. I definitely think that we’re going to see – I will put a number. I reckon 10 to 20 basis points and I think we’re almost seeing at the media right now a bit of a conversation around it. So it’s almost like we’re getting prepped for this out-of-cycle rate move and we’re just going to have to bear it. It’s like all things. The costs always get passed on to the end consumer. So we’re going to see that happen. Outside of that, what do you see are some of the other trends in 2016?

Simon Gillespie: Well, I think they’re going to be a bit more – with these changes, the banks have really – they’ve made a big shift and it has had an impact and we may start to see some movement back around cost of lending. You know, what they’re willing to offer to generate business.

So whether that’s – we’re still seeing – I imagine continue to see cash payments for refinances. We’re getting updates on discounted life of loan rates for certain clients. So I think we’re going to see a bit more of that moving forward where banks are trying to get back some of the business that they’ve lost.

Ben Kingsley: Yeah, I agree. It’s like mortgage. Is it going to go on sale? I think there’s going to be more of a commodity type arrangement where – because effectively you can refinance a mortgage, can’t you? I mean there’s no great cost anymore.

Simon Gillespie: Day after.

Ben Kingsley: Yeah. You can do it the day after. So I think with that type of mentality, I think there’s – the banks are going to be, yeah, going on sale or a little bit more. Moving on to other areas, in terms of fixed rates, do you have any views on fixed rates?

Simon Gillespie: For our clients, where we are dealing with long term investors who are creating wealth through property and planning and we’re going to be taking on significant debts. So fixed rates, I mean they are very well-priced at the moment and actually what I haven’t seen well until recently was actually pricing on fixed rates, so actually reducing the fixed rates.

Ben Kingsley: Yeah.

Simon Gillespie: Still looking at around the mid-fours for five years and when you’re talking long term property portfolio planning clients who can lock in that cost for that period of time, well the portfolio increases in value. The rent picks up. It’s just – I see that it’s a good way to control the cash flow.

Ben Kingsley: Yeah, and cash flow is king. We’re big on that here at Empower Wealth. You know that. I tend to agree. I think that given that you’ve got out-of-rate cycle increases coming through and it might be more than 20 basis points over the next 12 to 18 months, 24 months, then having that surety around locking a portion of your money into a fixed period is not a bad idea. In terms of strategy and structuring, are we going to make any fundamental changes in 2016 to the way in which we’ve gone about it in the past?

Simon Gillespie: No real fundamental changes. We’re still doing – you know, property is self-secured and across securitisation. I suppose part of what has happened there is a bit more fixing involved now.

Ben Kingsley: Yeah.

Simon Gillespie: Again for the reasons that we’ve just mentioned. But also I do – with my view on let’s say the assessment of what has changed, what may continue to change around investor lending which is obviously important. If you can’t borrow money, you can’t buy property. So equity is critical and I do have the view if you do have equity, you can access it. I do have the view of park it there for when you need it. So if something changes and you can’t get it, well, you’re stuck. Once you’ve got it, you can control it and use it when required.

Ben Kingsley: That’s true. I mean we’ve seen obviously with these changes that borrowing power has been affected. So we know that our borrowers can’t borrow as much as they’ve been able to in the past because of this tightening of these credit policies. So that is going to be a challenge for 2016. I mean we might have had clients that expected that they were going to be able to borrow more and they can’t. So we need to obviously look at the way in which we put lenders together and bunch them up with one lender or maybe a couple of lenders.

Simon Gillespie: We will see a lot more of that actually where you may have your prime lender but as time goes by and things changing, you need to look at alternatives where you’re able to continue to build that portfolio. So it’s not now uncommon to have not even two but maybe three – don’t see a lot of four but three may not be uncommon.

Ben Kingsley: Three lenders that is. So that’s really important. So nothing really changes in terms of we’re still big believers around – it’s almost mortgage planning. I mean that’s exactly what it is. I mean strategically we want to get the money for the client so they have the opportunity to invest both obviously in their own home but also invest into a portfolio of properties that I can build passive income for life.

Simon Gillespie: Great.

Ben Kingsley: And the other thing that I wanted to just mention, interest rates. Do you have any views on where interest rates are going to be throughout the year 2016?

Simon Gillespie: Maybe some variability but not high one way or the other. So I think it might stay relatively flat for a good couple of years, with some minor fluctuations in between, but yeah.

Ben Kingsley: Yeah, lower for longer. I mean ultimately it’s probably lower for longer. I suspect that if the banks do do these out-of-cycle rates, it does give the RBA some capacity to maybe drop rates and we saw in the minutes – not in the minutes but in the commentary just released in the first board meeting around that, that they’re sort of saying – they’ve put a comment in there, a paragraph in there around we have the ability to drop rates.

So you might see this out of cycle but they will like, well, wait a minute. That’s going to slow down to consumer confidence and consumer spending. So we will drop one in there, which will hopefully offset some of that sort of out-of-cycle movements that we might see from the banks.

Simon Gillespie: Yeah, definitely.

Ben Kingsley: So there you have it. I mean there’s our wrap. It’s obviously a game. It’s about getting great advice and planning out not just the next step but the step ahead in terms of what you’re looking to do. Banks are changing the way in which they operate. It’s a bit of a fluid environment.

We certainly think that there will be more banks on sale in 2016. We think that fixing a portion of your loan is prudent in terms of what that looks like and the strategy and structuring work that we’re asking the clients to do through working with professionals like ourselves is the best way to move forward. Thanks for watching our 2016 Mortgage and Lending Outlook.

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