I just finished reading yet another article on why rates should fall. This got me thinking about some people that come to see us full of hope and want to borrow with either almost no equity or servicing that is very close. How would they have fared if we had been foolish enough to find them loans.
First a quick lesson on broking. If a client can’t afford the repayments we have to tell them and stop seeking funding for them. It’s a little more complicated than that (stress testing etc) but you get the idea. Surprisingly most clients are appreciative of the honesty and once they see the numbers in black and white and it’s explained to them in plain English, it dawns on them that we are acting for them.
Before you say that the banks will reject them anyway, there are lenders other than banks that will lend to non-conforming borrowers – but that’s another story.
Now, back to that article…Not all that long ago a rate cut of 25-50bps would not have made much difference. But if you fall into one of the following categories it could mean something:
1. A recent home buyer in one of the middle ring suburbs of Sydney
2. A recent home buyer in one of the inner ring suburbs of Sydney
3. A recent investor in 1 and/or 2
Generally, the purchase price for the above (assuming it’s a house) would be around $1.5M or above. If you’re an owner-occupier and you had equity of 20% (that’s $300,000), you would have borrowed around $1.2M (let’s ignore buying costs for now).
The difference (assuming all of any cut was passed on) in repayments to you would be as follows:
| Original Rate | Proposed Rate | Difference | |
|---|---|---|---|
| Principal | $1,200,000 | $1,200,000 | |
| Rate | 4.25% | 3.75% | |
| Term (years) | 30 | 30 | |
| Monthly Repayments | $5,903.28 | $5,557.39 | $345.89 |
$345.89 doesn’t sound like much does it? However, if you didn’t reduce your repayments you would be far better off. In fact around $218,421.31 better off and have your loan extinguished around September 2042 instead of October 2045.
If you’re an investor the above will simply reduce the gouge that banks inflicted on investors recently. Or you can just enjoy you life a little and hope that your income will go up at the same rate as Sydney property – which at some stage it will either have to or prices might come down (otherwise the workforce of Sydney will disappear up its own fundament due to lack of affordability).
On the flip side, if rates go up by 25-50 bps, the above numbers (or as close as makes no matter) will apply the other way.
It’s a case of that old school yard saying – heads I win, tails you lose.