The lending year that was in 2021
2021 was another crazy year in every sense of the word. Of course there was the pandemic, which put a stamp on us all for the second year running, with the Delta variant first becoming the dominant strain of Covid, followed by Omicron at the end of the year.
But economically speaking, it has been a year of trade sanctions and stand-offs, political uncertainty, continuing rock bottom interest rates and, importantly, the first shoots of inflation beginning to be apparent.
The lending space was especially marked by uncertainty. Here are some key moments in lending that marked 2021.
Fixed rate rises
Early in the year, it seemed as if the banks were racing towards negative interest rates in their bid to attract customers. Variable loan percentages beginning with a ‘1’ were beginning to seem common, while attractive fixed rates tempted borrowers into locking in loans for three to five years.
On top of this, a number of lenders were offering cashback deals for customers to switch from another bank via a refinance.
Then, around the end of the March quarter, talk began to emerge about future rate rises. The RBA had committed to keeping rates on hold until 2024, but economists and the media began to apply pressure, suggesting the central bank must move earlier than that.
Around this time, lenders began to increase the interest rates on their long term fixed rate loan products, mostly for four and five-year terms. Throughout the year, the trend gathered pace and by the end of 2021, lenders were hiking fixed rates repeatedly, even on one, two and three-year products. Some big four banks were increasing rates more than once a month.
Variable rates, however, continued to come down as the fight for customers continued. It will be interesting to see what transpires in this space in 2022, though you can only assume lenders will increase rates wherever they are able.
Family home guarantee
The Federal government introduced 2% deposit home loans for single parents in a bid to help them provide a home for their dependants.
With saving for a deposit a major hurdle, the family home guarantee saw 10,000 spaces made available over the next four financial years, beginning on July 1. Those eligible could obtain a home loan from one of 27 participating lenders, with a deposit of just 2% of the property’s value. The government would then guarantee the other 18% of the deposit so that the borrower would not be subject to lenders mortgage insurance (LMI).
The RBA has repeatedly stated that it would not seek to control the nation’s housing markets through decisions made at its monthly meetings. However, the Australian Prudential Regulation Authority (APRA), has been known to step in when it deems values to be headed towards bubble territory.
And in October, APRA did just that, instructing banks to now assess a borrower’s serviceability, using a mortgage repayment buffer of 3% rather than 2.5%. Basically, this means that formerly, when you applied for a loan, a lender would need to assess that you could handle a 2.5% increase to the interest on your repayments, in order to mitigate risk. From October onwards however, it would be assessed at 3%. And something that people on fixed rates might need to consider: the 3% is added to the rate that their loan reverts to at the end of the fixed rate period, which is generally higher in this kind of environment.
The move was designed to stop people from overstretching themselves and also take a bit of competition out of the market. By year’s end, there were more listings and property prices had settled somewhat, but it’s not certain how much APRA had to do with this.
A huge couple of years of borrower demand have exposed some shortcomings in the turnaround times for loan applications through some of the major lenders.
A number of loans with attractive interest rates and great features actually missed out on business because the lenders were unable to process loan applications in time. Approval time is something that mortgage brokers monitor. They can then let their customers know which banks are actually likely to settle their finance in time.
And the stakes are high for borrowers, because there’s nothing worse than getting a deposit, getting finance approved, house hunting for months, finally winning a bid on a property and then the bank’s slow administration process means you miss settlement, can’t buy your property and in some cases, lose your deposit.
As a result, a lot of smaller lenders with better technology for loan processing won a lot of business. Already, some of the biggest banks have recognised their shortcomings here and begun to unveil new tech to fix the glitches.
This coming year will be an interesting one to watch.
To find out more on how you can take advantage of what’s been mentioned, book an appointment with our Zinger Finance Mortgage Brokers to see how we can help you.