Mortgage Cliff?

[Sean K]

A senior banker / financial planner friend of mine who knows his stuff was telling me he was quite concerned about a looming mortgage cliff approaching when extremely low rates converted to the currently increasing variables in the coming months. The banks test borrowing capacity to +3% ish so there's some leeway, but the Fed also said they weren't going to increase rates for another couple of years, so some people are probably going to be in a pickle. Just how much of a pickle is the question. It's not a US housing collapse / CDO / GFC type situation, but I do wonder if it's going to play a role in any economic recovery this year. Or, is within our capacity to navigate through this easily?

 

[waterbottle]

Depends on how much further interest rates raise.

The danger issue applies to the UK which I think has already had 20% falls thanks to hikes alone. Sydney has had 15%. Some Sydney commentators believe that if the RBA peaks at 3% then we should avoid further falls but I think the only people that would know are the banks and possibly AHPRA.

 

[divs4ever]

It's not a US housing collapse / CDO / GFC type situation,

can we be certain of that , i did hear of a vehicle called CLO ( Collateralized Loan Obligations ) which hints at loans in general ( possibly including motor vehicles )

Collateralized Loan Obligation (CLO) Structure, Benefits, and Risks​

Collateralized Loan Obligation (CLO) Structure, Benefits, and Risks

Collateralized loan obligations (CLO) are securities backed by a pool of debt, usually loans to corporations with low credit ratings or private equity firms.

www.investopedia.com

AND

What Is a Collateralized Mortgage Obligation (CMO)?​

What Is a Collateralized Mortgage Obligation (CMO)?

A collateralized mortgage obligation is a mortgage-backed security where principal repayments are organized by maturity and level of risk.

www.investopedia.com

maybe it is the cynic in me , but the financial guys seemed to have doubled down

 

[Tyre Kicker]

A senior banker / financial planner friend of mine who knows his stuff was telling me he was quite concerned about a looming mortgage cliff approaching when extremely low rates converted to the currently increasing variables in the coming months. The banks test borrowing capacity to +3% ish so there's some leeway, but the Fed also said they weren't going to increase rates for another couple of years, so some people are probably going to be in a pickle. Just how much of a pickle is the question. It's not a US housing collapse / CDO / GFC type situation, but I do wonder if it's going to play a role in any economic recovery this year. Or, is within our capacity to navigate through this easily?

View attachment 151446

View attachment 151447

Housing market could fall another 15% and it is still overvalued imo.

I don’t have much sympathy for those who borrowed insane $$$ at ridiculously low rates ( never seen before) and were naive enough to think rates would never return to normal levels.

Fixing at those low rates was a big punt… and it was inevitable they would be faced with a much higher rate when the period ended.

 

[againsthegrain]

Housing market could fall another 15% and it is still overvalued imo.

I don’t have much sympathy for those who borrowed insane $$$ at ridiculously low rates ( never seen before) and were naive enough to think rates would never return to normal levels.

Fixing at those low rates was a big punt… and it was inevitable they would be faced with a much higher rate when the period ended.

housing market is still in the green from pre covid, nothing to see here

 

[Garpal Gumnut]

A senior banker / financial planner friend of mine who knows his stuff was telling me he was quite concerned about a looming mortgage cliff approaching when extremely low rates converted to the currently increasing variables in the coming months. The banks test borrowing capacity to +3% ish so there's some leeway, but the Fed also said they weren't going to increase rates for another couple of years, so some people are probably going to be in a pickle. Just how much of a pickle is the question. It's not a US housing collapse / CDO / GFC type situation, but I do wonder if it's going to play a role in any economic recovery this year. Or, is within our capacity to navigate through this easily?

View attachment 151446

View attachment 151447

Thanks Sean,

The real significance I see with the cliff, apart from the tragedy of young homeowners, is the effect on the big four banks.

They have encouraged home owners to follow the real estate spruikers and the investing negative gearers to a a situation where movement in one factor ( interest rates ) will wreck the whole algorithm ( buy now and sell to the next mug in 12 mo. time. )

CBA, WBC, ANZ and NAB will have to offer more and more incentives to borrowers at a huge cost to themselves to not fall off the cliff with their debtors.

Their share price I predict will be at least half, if not less than half, their present valuations by the end of the calendar year. The only other alternative is to foreclose and be left with falling assets on their books as house prices plummet.

Parliament will intervene at some stage as the lardarses there have an average of 5 negatively geared houses each, and as we know from experience once legislators interfere the whole shebang goes to ****.

gg

 

[Tyre Kicker]

WBC, ANZ at $10 or so … somehow I don’t see that happening gg.

 

[Rabbithop]

Not

Housing market could fall another 15% and it is still overvalued imo.

I don’t have much sympathy for those who borrowed insane $$$ at ridiculously low rates ( never seen before) and were naive enough to think rates would never return to normal levels.

Fixing at those low rates was a big punt… and it was inevitable they would be faced with a much higher rate when the period ended.

Agree with don't have much sympathy for those NAIVE pple that borrowed $$$ at LOW rate but not all borrowers are naive.
There are others that borrow heaps n have don't their research, in this case, it's great that they seized this once life time opportunity to step up weath ladder. Speaking as a property investors n had even experienced at 18% interest on residential bank loan.
My son had decided to put his spare savings into his first property investment after years of advising him to do it. One of my few tips for him is to think, is the job security, ability to service the loan if interest hits 15%.

 

[tech/a]

Not going to happen in my view.
There will be mortgage stress but not to the entire mortgage population.

They will find a way as we did.

Second or third job. Over time asking and in most cases getting a wage rise.
If they are smart all of the above.

 

[UMike]

Not meaning to dis your friend but my experience getting a Loan (that I didn't need) for an apartment was that the Proof and paperwork was very thorough. Banks will be OK.
Maybe future lending opportunities will be harder to come by as I am sure there will be less demand for the loans with the higher interest rate.

I am noticing mid range rental Propeties are harder to sell. So there is a possibility house prices have father to fall

 

[againsthegrain]

time to rip out a 100k first home owners grant ?

 

[Sean K]

I'm on the fence with how this will play out. Probably because we don't know how high rates are going to go. But, if you entered a fixed loan for 3 years at 3% and at the end of the year you have to pay 7% +, that's quite a hike. Possibly a couple of grand extra each month. This is not just one or two analysts coming up with a thought bubble. Google 'fixed rate mortgage cliff'. I think there's real risk here but I'm sure our banks and government will find a way through the mess.

 

[UMike]

I read ya.
Friends that invest in Property have lamenting for years the "scaremongering" of certain "analysts".
I also sit on the fence never having invested in property before a couple of months ago.

But 3 years @ 3% they'd have been fools not to be far ahead of the minimum Morgage repayments.
I paid all but $50k of mine as to not pay excess interest. I can of course always redraw.

 

[divs4ever]

WBC, ANZ at $10 or so … somehow I don’t see that happening gg.

i bought WBC as low as $19.90 in August 2011 , and $16.60 in August 2020 so $10 is not totally impossible

i have held ANZ in the past as well but the prices weren't that exciting

but by the same token i wouldn't hold my breath waiting

 

[frugal.rock]

The negative loan to value ratio LVR category is the category of longest arrears and highest delinquencies.
With values dropping, that band is increasing.
Early 2000's NSW was in the lead there, but it's now WA and NT by a long shot.

It's going to get bumpy like a corrugated road, but cliff? No. The start for Aus is something like March or April.

If clowns haven't tightened their belt's yet.... Then buying opportunities for property investors will rise this year and with values currently down and impending population growth, well, properties won't stay delinquent long.

The long and short of it, ultimately bank profits will be eaten into, but heck, as stated by @UMike , the banks got tough on request by the grubberment with lending requirements. I believe that got backed off a bit, but my own refinance application took forever even after required documents all supplied. They went through it all with a fine tooth comb...

 

[Sean K]

If clowns haven't tightened their belt's yet.... Then buying opportunities for property investors will rise this year and with values currently down and impending population growth, well, properties won't stay delinquent long.

Yes, could be a great opportunity later in the year if you're wanting to get into the market and have some powder dry, or enough equity.

 

[tech/a]

Housing market could fall another 15% and it is still overvalued imo.

I don’t have much sympathy for those who borrowed insane $$$ at ridiculously low rates ( never seen before) and were naive enough to think rates would never return to normal levels.

Fixing at those low rates was a big punt… and it was inevitable they would be faced with a much higher rate when the period ended.

I'm not of that opinion.
don't think it's a punt at all.

At the time they locked down the latest Price hike wasn't in effect for Many if not most of these purchasers.
So having say 3 years at great interest rates means they are likely to have purchased at between 10-30% better than
they can today and paid 3 years at a great discount rate.
So
They aren't paying the new improved rents that have just come along. All in all they aren't as badly off as any other alternative
and I'd be very surprised if they didn't have a fair increase in equity 10-30%

The alternative IE no home and you need one ---looking back 3 years Im sure if you had the chance youd do it.

Makes perfect sense to me.

 

[JohnDe]

Opportunity for some, just need to look and assess.

Cash-back offers the sweetener as banks seek to cash in on the approaching mortgage ‘cliff’

Competition in the home loan market is intensifying as banks and other lenders jostle to benefit from a mega-refinancing boom, and borrowers facing a mortgage cliff shop around for better offers.

Many home loan borrowers that locked in ultra-low rates during the depths of the pandemic are nearing the end of their fixed-rate terms and are confronting variable rates that are 3 per cent higher. That scenario is being referred to as a mortgage cliff.

The industry is part way through refinancing $500bn in mortgages and with home loan growth slowing, given the Reserve Bank has jacked up rates, lenders are fighting harder for refinancing and new business.

There are 34 lenders offering cash back in the mortgage market, according to RateCity, which is almost a record level.

That compares to about 29 lender cash-back offers available in July last year.

The majority of the current offers are aimed only at borrowers who are refinancing although AMP, Heritage Bank, Reduce Home Loans and National Australia Bank-owned ubank are also targeting cash back at those seeking new home loans.

AMP revised its cash-back offer on Monday.

The latest RBA data shows annual housing credit growth slowed to 6.9 per cent for the period ended November 30, down from 7.1 per cent in the same period a year earlier.

With further rate increases expected after 3 percentage points of rises in 2022, mortgage growth is tipped to markedly slow.

Bank investors are also readying for an increase in loan defaults and bad debts as interest rates continue to rise, following aggressive RBA rises from May through to 2022’s end.

Mortgage brokers canvassed by The Australian said competition was firing up in 2023 and cash-back offers were the battleground most lenders were focused on.

David Bailey, the chief executive at mortgage aggregator Australian Finance Group, said the home loan market was as competitive as he’d ever experienced.

“The number and volume of cash-back offers is just unprecedented and it seems to be the new norm,” Mr Bailey told The Australian.

“My view is that banks, rather than offering a cash back, should just put it into the rates to the customer,” he said.

“The refinance market is probably going to be the (most competitive) space until such time that house prices settle, bringing new customers back into the market again.”

ASX-listed AFG has more than 70 lenders on its panel.

Elite Finance Professionals principal David Ray noted some bank retention teams were fighting harder than others to keep customers, as competition was occurring in the refinance market.

“What we’re seeing now is there’s so much competition and volumes are starting to drop a little bit, and the purchases and listings are dropping. The banks are now looking for refinancers to be a big part of what they do to try and write business,” he said.

“Some retention teams at some banks are offering rebates (matching the cash back offer) to stay. They might not match the actual (interest) rate … but they’ll match the cash back.

“Cash backs are really the only way people are being rewarded now as opposed to frequent flyer points and so forth.”

Mr Ray said despite the sharp increase in rates he wasn’t seeing a lot of stress among customers.

“I’m not seeing people in trouble at all, I’m just seeing people looking to consider other options like moving some loans to interest only as opposed to having them all principal and interest,” he added.

“People are just seeing how they can rework their loans to make sure they are getting the best interest rate … and manage repayments.”

Ethical Partners Funds Management’s Nathan Parkin noted too much panic in the housing market. He cited fears in 2018 around a proportion of home loans moving from interest only to principal and interest, but said the situation was managed well by borrowers.

“It was going to be huge problem, and it just wasn’t,” he said.

Still, Mr Bailey highlighted that given how much rates had increased, some fixed-rate customers would not now meet loan serviceability requirements, meaning as they moved to a variable rate they may be forced to stay with their current bank or pay mortgage insurance to switch.

“That’s inevitable unfortunately and that might temper some of that refinance activity,” he said, noting that banks were benefiting from not passing on higher rates to savers which gave them a funding advantage.

“My gut feel is there is still another six months before that (bank) funding advantage around the deposit book becomes less of an advantage …That won’t happen until such time that customers start demanding higher deposit rates, and we are starting to see a little bit of that.”

As interest rates continue to rise banks are slowly starting to compete harder for deposits as savers search for better rates.

According to RateCity, the highest ongoing savings rates in the market – excluding honeymoon introduction offers – comes from Bank of Queensland. Its savings account for those aged between 14 and 35 pays 4.75 per cent annually, with stipulations around deposits and purchases, to qualify for that rate.

BOQ brand Virgin Money is in second place offering 4.6 per cent for savers aged 18 and over if they meet deposit and purchase thresholds.

An ING saving account rounds out the top three offering 4.55 per cent if customers meet deposit and purchase terms.

JOYCE MOULLAKIS SENIOR BANKING REPORTER

 

[Smurf1976]

Their share price I predict will be at least half, if not less than half, their present valuations by the end of the calendar year.

In the event this does occur then realistically it’s hard to see the average superannuation fund or market indices ending the year in positive territory

The banks themselves impact the index and any move on that scale would likely drag a lot of other stocks down with them.

So if it happens then it’ll have implications well beyond the banks themselves.

 

[Sean K]

Yikes!

“If the RBA hikes in line with markets, then the housing market will crash.”

I've got a feeling the RBA will back off fast rises to prevent this run off a cliff.