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Big Change On The Horizon

There is much speculation about how banks will respond with changes in lending restrictions, writes Kris Pedersen.

By: Kris Pedersen

1 May 2020

At face value it seems like not much has changed in the world, if comparing rates in this magazine with last month’s issue – however we all know it has. The Reserve Bank has launched a $33 billion quantitative easing programme with estimates that it may double this over time.

This provides more liquidity into the system, which is a positive, as while everyone keeps an eye on rates this is probably a larger concern. It also drives down longer-term wholesale interest rates, so there doesn’t appear much of a need at present to look to fix “long” to lock in certainty, especially when there is circa 80 basis points (0.8%) difference between most one-year and five-year rates offered.

Another point of interest is there is some commentary about the Reserve Bank taking the official cash rate (OCR) negative. Currently they have only reduced it by 75 basis points because of how low it already is and that some of the banks systems are not adequately set up to deal with a negative OCR. We saw the Reserve Bank reduce by 600 basis points through a 10-month period in the midst of the global financial crisis but there was obviously a lot more headroom to do so as we were coming from the highest point it had been when they started to reduce. Dominick Stephens, who is chief economist at Westpac is predicting that they may look to do this in November this year as this would give the banks time to adjust their systems to cope. He also commented that the lower the OCR goes, the less an effect it actually has on mortgage rates and that he has no expectation that actual rates paid by households or businesses would actually go negative.

Outside of the banks, we have been keeping a close eye on the non-bank market and it has been heartening to see a lender such as Resimac also come to the party with a decrease in rates with their two-year rate sitting competitively against the main banks at 3.39% for their prime product. There is likely to be larger demand in this part of the market, especially as non-bank lenders have specialist mortgage products designed for the self-employed 4.19market, which is a segment that may struggle initially with main bank documentation requirements.

Obviously the other big news – especially from a property investors point of view – is the Reserve Bank’s intention to remove the loan-to-value ratio rules. These were originally implemented as another tool they could use to control the housing market rather than just relying on interest rates. Note that while the restriction may be lifted, banks can still apply their own rules and low equity fees will still stay in place in the above 80% bracket. It will be interesting to see if lenders charge any margin in the investment space at all. ■

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