Mortgage lenders in Australia rarely deal with brokers that cannot submit a high volume of successful home loan applications to them each month. For example, a particular bank or non-bank lending institution might refuse to deal with an entity that cannot close at least one million dollars worth of mortgages with them on a monthly basis.

For most mortgage brokers this may not seem like a daunting task. One million dollars worth or home loans may constitute anywhere between one and five successful applications. Most brokers would be able to close at least that much business each month and would therefore be able to do business with the particular lender.

However a problem arises when the scope of the mortgage broker business model is considered in full. Brokers are in business to offer choice to their customers. In Australia, brokers offer mortgage products to their clients from up to around thirty different lenders. It is this choice that attracts customers to brokers instead of applying directly with a lender. A problem arises when each of the thirty lenders demand that at least one million dollars worth of business is closed with them each month. This would mean that in order for the broker to maintain a business relationship with all thirty lenders, they would need to close over thirty million dollars worth of home loans each month, evenly spread between each lender. This is an impossible task for even the best mortgage broker to achieve.

Aggregators solve this problem by acting as an entity between the lenders and brokers. An aggregator will have several brokers working for them – perhaps hundreds – and will allow them to submit their home loan applications through them. The aggregator will in turn send the applications on to the lenders. This business model ensures that more than enough applications are sent to each lender each month to maintain the relationships. The final result is that each broker working for the aggregator will be able to offer home loan products from the full range of lenders.

Mortgage aggregators are often found in the form of franchisors. The franchisor can have up to several hundred franchisees working for them. The franchisees will use the brand name of the master franchise and will often receive benefits such as training and software. It should be noted that while the franchise model is popular with mortgage brokers in Australia, not all aggregators are master franchises.

Because mortgage brokers receive their income by way of commissions awarded by lenders for successful home loan applications, it follows that aggregators receive a portion of the commissions for all loan applications put through them. Brokers therefore surrender part of their commission in return for the benefit of using an aggregator. There may be additional franchise fees payable if the broker is a franchisee, although this arrangement will vary from franchise to franchise.

Do All Mortgage Holders Benefit?

Australia’s Reserve Bank, like so many around the world, has been cutting interest rates for months and in December 2008, the country’s official interest rate was reduced to its lowest level since May 2002.

It is understandable that mortgage holders might rejoice at the news, but not all of the big banks pass on the full cuts to their variable mortgage rates. And just a very few of the top non-bank lenders pass on the full rate cuts.

Such actions by the banks are not restricted to Australia and mortgage owners throughout the western world struggle to grasp with their banks unwillingness to give them a break. Each time the Reserve Bank makes an interest rate cut announcement, Australia’s politicians implore the banks to allow struggling home owners to benefit by passing on the rate cuts in full.

Home Loans

The rate cuts are welcomed, understandably, by housing lobby groups. They say that a 1% or 100 basis point cut reduces by around $220, the monthly repayment on a $350,000 mortgage – a big saving for young Australian families.

Housing industry experts believe that rate cuts not only provide mortgage relief to existing home owners, but importantly they help more first home buyers purchase a home of their own.

Substantial drops in interest rates increase the borrowing capacity of entry level buyers.

Refinancing

Borrowers who are locked in to a fixed-rate mortgage however, may not be celebrating during times of lowering interest rates. When looking to refinance, they face a difficult choice: continue to pay a higher interest rate, or incur what is often thousands of dollars in penalty fees in order to break their current fixed contract.

They need to consider more than the interest rate – there can be a plethora of conditions attached to exit fees. For instance major banks charge upfront exit fees ranging from hundreds to over a thousand dollars. Charges can also be levied by the new lender.

While fees vary, a borrower who cancels his loan within the fixed period will usually be forced to compensate their mortgage provider for the “economic cost” of breaking their contract. As interest rates fall, this cost becomes greater, and it may already be too late for fixed borrowers to save by refinancing.

Such fees can often come as a shock to people who are on a fixed-term mortgage. They can be very are surprised when they hear what the break free cost is – often it can be far higher than people expect.

Let’s take a closer look at this phenomena and how and why it affects millions of people worldwide. An interest is accumulated when you borrow money from a bank, a lending institution or a building society. The amount you borrow is called the principal. But because you are using somebody else’s money to grow your assets, you will incur interest on the lending amount.

The rule of 72, often used in periodic compounding calculations, can also indicate of when our principal amount gets doubled by interest rates. Let’s say that (k) is the number of years it takes for your principal loan amount to double. Then take (m) to be the interest rate per annum. K * m = 72. Therefore if the annual interest rate is 3% it will take 24 years for your principal loan amount to double.

Interest Rates are calculated daily, but every first Wednesday of the month the board of the Federal Reserve Bank of Australia (RBA) is deciding on whether we are due for a rise. Sometimes they will also lower the interest rates.

These decisions are influenced by our markets and the economy. Huge events like a stock market crash can significantly influence interest rates. However the main economic factor which decides on our interest rates is the inflation. The definition of inflation means the rise in the cost of our goods and services. The RBA is generally aiming at an inflation target of between 2% and 3 %. In recent months we have touched the 3% barrier and therefore the interest rates have increased. Another key influence on the inflation is our labour market. This means the cost of wages and the employment situation in the market place.

When you borrow money, you are entering a contract with your borrowing institution. You can then elect the length of your loan and whether you desire to pay back the interest only or principal and interest. This will greatly influence the length of your loan and the amount of money you have for play. The longer you are paying interest only, the more your loan will grow. Over a 30-year period this will most likely double your initial loan amount. At present the interest rates are at 7.37% p.a.

The type of loan you choose, when borrowing, greatly influences the amount of interest you will have to pay back during the course of the loan. Some loans allow you to pay any extra monies into your loan without penalties. This in turn will lower the term of your loan and therefore the interest rates paid in total.

If you don’t want to be caught short when choosing a loan, make sure you look closely at the product you are considering. It pays to shop around, as different loans affect the amount of interest rates you are set to pay. If you are not sure about it, don’t be afraid to consult a mortgage broker / financial advisor. They can point you in the right direction depending on your financial position. Interest rates will continue to influence many people’s lives and can make the difference of whether you are able to keep up your repayments or not.

After you have decided the home you want to buy, you will have to look for a loan to finance the buying of the home. This is the tricky part. There are different types of home loans available marketed by different banks and lenders and offering different interest rates and benefits.

So the first thing that you need to identify is the interest rate: should you go for a fixed home loan or a variable home loan? Both the loans have their own pros and cons. Once you have decided between fixed and variable, you can move ahead and choose the type of loan you want in that particular category.

The first thing you need to do is check which of these two are doing well in the market. The basic difference is that in a fixed rate home loan, you will be charged a flat interest rate through the entire period of the loan. In the variable rate home loan, the interest rate will change according to the market movement and sometimes you might pay a lower interest and in other times you might have to pay a higher rate of interest. The interest is charged in the monthly payments.

Fixed rate home loan

Fixed rate home loans are considered a safer bet by many industry experts due to the fixed interest rate that never changes throughout the life of the loan. The pros of a fixed rate home loan are:

• The interest rate will never change even when the market is volatile
• The payment amount, which includes the principal and the interest, will not be affected by the market conditions.
• There is a sense of security as well as the stability offered by fixed rate especially because you are aware of the amount you need to pay at the end of each month. This will help you to keep the amount aside each month out of your monthly budget.

Variable rate home loan

The variable rate home loan is more popular in Australia. This loan comes with a variable interest rate, which basically means that the interest you pay will be depend on the market condition. Interest rates in this type of loan can and will fluctuate. You will be charged an interest rate that is dependent on the financial index rate listed in the Reserve Bank of Australia. For example: If the current index is 3.5% then the lender will add another 0.5% to make the interest rate 4%.

All organizations in the mortgage industry require a prospective borrower to fulfill their selection criteria before they will approve a home loan. Traditional lenders tend to have more stringent criteria; the non-conforming lenders are a lot more flexible, and the mortgage managers are somewhere in between.

How interest rates are determined…

The Reserve Bank of Australia (RBA) sets the official interest rate, according to how the economy is performing at the time. In its monthly meetings, the RBA considers the inflation rate and such key economic indicators as unemployment, the consumer price index (CPI), producer price index (PPI) and retail sales. After analyzing this information, the board determines whether the existing rate should be held or changed.

The RBA sets the cash rate – the rate at which banks borrow money. Banks then add their own margin – the fee you pay for the use of the money – to set their mortgage rate.
The RBA uses interest rates as a tool for controlling monetary policy. For example, if economic activity is deemed too strong, it may try to slow things by raising the official cash rate. This flows on to higher mortgage rates and so higher repayments. More money repaying the mortgage means less to spend on other things, so economic activity slows.

Interest rates on home loans…

There are two types of interest rates that apply to home loans – variable and fixed. You can choose whether you’d like a variable or fixed-interest rate, or a combination of both, depending on the type of loan product you decide on.

Variable interest rates. The majority of home loans in Australia have been taken at a variable interest rate. As the name implies, variable loan rates will fluctuate with the market and the official cash rate. Therefore, if the official cash rate rises, your loan interest rate rises and so do your repayments, and vice versa. Loans with variable interest rates tend to offer more flexibility in payment options.

Fixed interest rates. This type of interest rate allows you to fix the interest rate you borrow at for a certain period within the overall loan term. Fixed terms tend to be from one to three years, however some lenders may offer 10-15 year terms. With a fixed interest rate you have the certainty of set monthly repayments, which are not affected by changes in the official cash rate. This works in your favor when the official cash rate rises because your repayments will not increase; but you cannot enjoy lower repayments when the official cash rate falls. With a fixed-interest rate, your loan provider is taking the risk on the market, which is based on their assumptions about future interest rate movements.

What’s been happening in the market?

Interest rates have been decreasing for more than a decade, and for the past few years Australians have enjoyed low interest rates. January 23, 1990, the official cash rate was 17-17.5%; on July 2, 2004, it was 5.25%. As a result, household borrowings are at a record high: in June 1997, Australians owed $202.8 billion in housing and in May 2004, this figure has increased to $577.1 billion.

What Interest Rate is best for you…?

• Your loan decision should be based on a mortgage product suited to your individual needs not on a type of interest rate.
• Do not borrow so much that a rise in interest rates would leave you in trouble. Factor in possible rises so you are not left short.
• You should be able to switch between interest rates over the loan term without having to refinance.

Speak to your mortgage provider, who should also be a member of the MFAA. Under of code of practice MFAA members are encouraged to continually improve their industry knowledge by keeping abreast of economic trends and undertaking MFAA-approved and run courses and industry seminars.

For more information on interest rates, most newspapers, television and radio news broadcasts contain information on interest rates, official cash rates and the housing market in their financial and property sections. Additional information can be found on banking and financial institution websites. You can also visit the Reserve Bank of Australia website at www.rba.gov.au and the Australian Bureau of Statistics website at www.abs.gov.au

Figures from the Australian Bureau of Statistics Website – www.rba.gov.au