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Australian Tracker Mortgages

Are Tracker Mortgages Coming Back To Australia?

 Reserve Bank Of Australia brass plaqueA tracker mortgage or rate tracker home loan gives homeowners the possibility to obtain a loan that is linked to the cash rate set by the Reserve Bank of Australia. The interest rate of the rate tracker home loan follows the movements of the interest rate set by the RBA, whether it increases or decreases.

The cash rate has actually been reduced twelve times since November 2011 and tracker mortgages are seen as the best way to encourage banking institutions to remain transparent in these times of loose monetary policies and low interest rates. The RBA set a lower interest rate in August but the major banks did not follow and failed to cut interest rates by 25 points, which lead to a lot of backlash.

Tracker Mortgages Are Coming Back

ASIC, the main banking regulator in Australia announced to the standing committee on economics created by the House of Representatives that it fully supported the decision to bring back tracker mortgages. These mortgages are available in Europe, in the UK and in other countries but were previously unavailable to Australian homeowners. Auswide Bank is now offering tracker mortgages, even though it isn’t a major lender on the Australian market.

There are a few requirements homeowners have to meet to obtain a tracker mortgage. These loans are available on new owner-occupied homes. The LVR has to be of 80% or under and the value of the home loan has to be at least $150,000. The current variable interest rate is of 3.99% and will change within two working days of the RBA adjusting the cash rate.

There is a floor rate for the loan. If the RBA were to set the cash rate at 0% or below, homeowners would still have to pay the fixed margin on their home loan.

Martin Barrett, the Auswide Bank Managing Director explained that the parliament standing committee looked into bringing back tracker mortgages in Australia. These loans would be a good match for homeowners who need a variable rate and who want transparency from financial institutions. Tracker mortgages make it easy for homeowners to understand exactly how much they will pay for their home loan and how the interest rate will change.

Tracker mortgages used to be available in the past but they didn’t stay around for very long. Bankwest, a subsidiary of the Commonweatlh Bank, offered rate tracker mortgages in 2008 and in 2008. These mortgages had variable interest rates tracked against the rates of the four major banks. QT Mutual Bank, a mutual lender based in Queensland, proposed a tracker mortgage linked to the rate set by the RBA in 2011 but these loans were discontinued last year.

According to News Corp Australia, Martin Barrett sees tracker mortgages as a way to make Auswide Bank a more transparent institution.

What Should Homeowners Expect From Tracker Mortgages?

Major banks do not see passing on cash rate cuts as an ideal option and so far tracker mortgages are not seen in a positive light in the banking industry.

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Graeme Salt is a mortgage gage for Origin Finance in Sydney. He believes that tracker mortgages will not live up to what homeowners are expecting from these loans. He explains that it is easier for homeowners to save money if they go through the right mortgage broker. He adds that the RBA could cut the cash rate again.

Steven Münchenberg is the CEO of the Australian Bankers Association and explains that these mortgages will not have the desired results for homeowners. Münchenberg and the ABA believe that these mortgages could actually be harmful for the banking system.

Münchenberg explains that the cash rate set by the RBA is one factor among many. There are other factors that influence the cost of providing mortgages for financial institutions. Offshore costs will change regardless of what happens with the cash rate set by the RBA. Banks will have to protect themselves from this possibility by setting higher buffers. This could result in homeowners spending more on their home loans due to these factors that are difficult to predict.

Most banks get funding from overseas in Australia. Münchenberg explains that offering loans based on the cash rate set by the RBA would represent a real risk for banking institutions since this rate is independent from overseas funding.

What Are Other Banks Saying?

Some reports from News.com.au contacted different major banks to find out what they thought of the tracker mortgage offered by Auswide Bank. Most major banks responded that these mortgages were not an ideal option and that they did not believe it would be best for the parliament to require banks to offer this type of financing.

Green Money with wings flies fast over a green globeBrian Hartzer, the CEO of Westpac, said that these mortgages represent a real risk. Tracker mortgages are a good option when the economy is doing well. These mortgages would become a real problem if things were to become unstable. Banks could find themselves dealing with a sharp increase in the cost of funds while being unable to reflect this in the interest rates.

Brian Hartzer talked to the Standing Committee on Economics appointed by the House of Representatives according to the APP. The position remains the same now that some non-major lending institutions are starting to offer tracker mortgages so they can compete with larger banks. The Commonwealth Bank and Westpac support the comments made by the ABA and did not wish to give more details on their position to news.com.au. NAB had not made any comments at the time of publication.

ANZ has a different position since this bank said that they might offer tracker mortgages in the future if there is a market for it. This bank is currently looking at how these mortgages would be structured and priced and is also analyzing possible demand according to what a spokesperson told news.com.au.

It is very likely that the three other major banks would start offering tracker mortgages if ANZ were to adopt this product.

About About Dave Fleming

Dave is enthusiastic and fascinated by the digital and social media worlds. He is passionate and enjoys entrepreneurial pursuits, wealth creation financial strategies, health, fitness as well as cooking. Dave is the webmaster at www.mastermortgagebrokersydney.com.au, which is an information website pertaining to loans. He has a deep commitment towards writing about and helping people understand the basics of how the financial world works.

Are You Mortgage Smart, Or Just Another One Of The Banks Sheep?

How did we get into this Mess Anyway?

man clutches his head in panic as stock market crashesIt’s been over eight years (how time flies) since the Global Financial Crisis made its presence felt. Initially Australia looked like it was going to be immune to its effects, or so a lot of people thought. However, we all now know that’s not the real world we live in. The real world we’re now living in here in Australia is a world that has been economically affected by the financial status of the countries we trade with.

In simplistic terms if people in America aren’t buying new houses then they’re also not buying all the furnishings that go with those houses, such as white goods etc. If they’re not buying those then manufacturers are not making them. I think you get the gist of what I’m trying to say.

If people in first world countries are not buying, then the economies of manufacturing countries like China, Japan and India go backwards. When they start going backwards they stop buying coal and other resources like iron ore.

Why Have the Banks Been Immune to all of this?

That’s why we had a two speed economy that everyone marveledcartoon of greedy banking grabbing lots of bank notes at. Fast and average were the two speeds we had. What we have currently is average and slow. Now the mining boom is over for the time being our economy is going to continue to struggle until the global economy starts to hum again.

It seems the only industry that is not bemoaning its fate is the banking industry in Australia. They continue to make record profits off of the back of hard working Australians. The four major banks in Australia continue to make record profits year after year.

Even though the Government outlawed exit fees on home loans, lenders have come up with new and innovative ways to ensure that their profits continue to increase. These strategies include increasing interest rates out of sync. This means, when the Reserve Bank of Australia’s (RBA) rate increases, the banks have in some instances increased their rates even more and also have not been passing on all of the rate cuts when announced to maintaining ridiculously high credit card interest rates.

When does the Rip Off Stop?

Their ongoing justification for this outrageous profit plundering is that Australia needs a profitable banking system to maintain a strong balanced economy. Well, how much is enough? When does this flagrant profit gouging stop.

At the moment the Federal Government has been a running a ‘Show Tribunal’. They lined up the boss’s of the big four banks and then fired some tepid questions at them, which made a couple of them squirm uncomfortably a little bit in their seats. What’s going to come out of that, not much? We may see one or two minor concessions, but that won’t slow the banks profit increases down.

What can You do About it?

Unlock your potential sign in rainbow coloursUnless we take personal responsibility for our own finances, we are always going to be stressed out with the banking system and trying to pay off our mortgages.

In the current market interest rates are at an all time low and some economists are predicting they could even go lower. Some say as soon as next month. In this financial environment it behooves anyone who wants to get ahead financially to start working their finances a lot smarter.

The principal and interest repayments on a 3.64% (yes you can get an owner occupied home loan (<80% LVR) with an offset account at 3.64%) $500,000 30 year owner occupied home loan are $2,284 a month. We all know that the majority of that repayment amount for the first 15 years is going to go to the bank in interest. Did you also know that over the last 30-40 years home loan interest rates have averaged around 7.5% to 8.5%? Many current older home owners will remember back to the late eighties and early nineties when home loan rates were 17.5 – 19.5%.

Which Would You Prefer – pay Yourself or Pay the Bank?

So, what I’m saying is home loan rates will inevitably raise again. However, when they get to 7.64% the majority of that payment will be going to the bank. If you allow that to happen, you will always be at the beck and call of the banks.

What we’re suggesting is that you tighten your mortgage belt, get the budget spreadsheet out and (I know, it’s a pain, but there is no other way) start figuring out how you can fit a 7.5% principal and interest mortgage repayment into your budget.

A 7.5% principal and interest mortgage repayment on a $500,000 home loan would amount to $3,578 a month. Yes that’s about $1,200 a month more than you’re paying now. The real decision is, do you pay yourself now or pay the bank later?

Because, inevitably interest rates will rise and when they do you will be forced to pay those amounts. Notwithstanding when it does most of the repayment will be going into the banks back pocket.

How Well Could You do?

The good news is, if you do activate this strategy you will pay your thirty year mortgage off in 15 years and two months. In other words youStep out of your comfort zone sign would lop off an enormous 14 years and two months off your 30 year mortgage and in the process save an astounding potential $170,986 in interest.

Imagine, if fifteen years from now you didn’t have a mortgage as opposed to being locked into the bank for the rest of your life. The choice is, you either pay now or you pay later.

There’s an old saying that says ‘You Should Never Look A Gift Horse In The Mouth’. What does that mean, I really don’t know. I think it has something to do with not being ungrateful when you’re handed a gift.

Nonetheless, the point is interest rates are at historic lows which provides an opportunity that may never been seen again. Or, if it does come again it will probably be a long time coming.

If you want information on more strategies that will help you pay your mortgage off faster or to create more wealth through mortgages and property, please get in contact.

If you don’t have a 3 in front of your owner occupied home loan interest rate these days, then you’re paying too much for your home loan.

About About Dave Fleming

Dave is enthusiastic and fascinated by the digital and social media worlds. He is passionate and enjoys entrepreneurial pursuits, wealth creation financial strategies, health, fitness as well as cooking. Dave is the webmaster at www.mastermortgagebrokersydney.com.au, which is an information website pertaining to loans. He has a deep commitment towards writing about and helping people understand the basics of how the financial world works.

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