Interest Rates on Personal Loans Partly Fund Housing Credit

It seems that the global financial crisis has not discouraged people to apply for house loans despite higher interest rates and very strict lending standards. Obviously, the crisis has significantly affected the pricing and structure of the mortgage market in Australia. However, the quality of housing loans offered remains the same. In fact, during the critical period of economic downturn, housing finance has been made available to consumers who are prepared to take on the higher interest rates and the challenge of making payments amidst the soaring prices in basic goods and services. Housing credit has steadily grown about 8 percent every year.

Because money is tight, wholesale lenders have decreased considerably in numbers. The big banks took over in providing housing credit to consumers. Moreover, the relatively increased cost in funding housing has not been altogether imposed on the borrowers. Customers who applied for business and personal loans have partly born the housing finance cost through higher interest rates.

Looking at some statistics, the average variable rate of housing loans has rose to an estimated 110 basis points compared to the cash rate since the middle of the year 2007. This figure is actually below the 130 to 140 basis point increase in the overall funding costs of bank in this particular time. On the other hand, business and personal loans has multiplied more compared to the cash rate and significantly more than the increase in funding costs.

Moreover, mortgage rates have changed and affected the monetary policy discussions of the central bank. It is true that interest rates imposed on mortgages have rose compared to the cash rate. The Reserve Bank has noted these changes especially in deliberating and drawing up their policies. RBA still consider the cash rate as the major factor in the interest rate structure in Australia, not excluding the mortgage rates.

Small time players in the lending sector have experienced a better outlook since the middle of 2009 especially when the securitization market has gradually regaining its foothold. During this period, the long and short term cost of wholesale funding has lessened while deposit costs is still high. This is paralleled by the market shares of small lenders, which have increased a little over the last months. These will most likely remain as is and no signs yet of returning to its pre-crisis levels in the near future.

Practicing a more stringent lending standard has resulted in a few of the banks lessening their maximum loan with (LVR) valuation ratios of 95 to 97 percent. Back in 2009, LVR was at 90 percent. Some of the changes consist of increased interest rates buffers, more “genuine savings” requirements, and not so easy procedure in acquiring low doc and non-conforming loans. The end results is an lower LVR in the share of new owner-occupier housing loans by more than 90 percent decrease to 17 percent at the closing of the year 2009 as compared to 27 percent in the quarter of March. Moreover, the low doc loans share fell to approximately 7 percent. Clearly, the Australian mortgage credit will more or less remain sufficient given a marketplace that is still very competitive.