Cairns Lockie Mortgage Commentary 26 Sept 2008
Cairns Lockie Mortgage Commentary
Issue 2008 / 17 26 September 2008
Welcome to the seventeenth fortnightly Cairns Lockie Mortgage Commentary for 2008. We aim to keep you informed on developments at Cairns Lockie, Home Loans and the mortgage market in general. Previous issues of this commentary can be found on our website http://www.emortgage.co.nz/newsletters.htm
The Money Market
This morning (8 am on 26 September 2008) the money markets were at the following levels:
Official cash rate
90 day bill rate 8.07 (up from 7.82)
1 year swap rate 7.28 (down from 7.30)
3 year swap rate 6.95 (up from 6.88)
10 year bond rate 5.65 (down from 5.80)
Kiwi dollar 0.6804 (up from 0.6525)
New Zealand Not Immune
New Zealand does not have any main stream banks that appear vulnerable to the world wide credit crunch. We do not have any domestic large scale investment banks such as Lehman Brothers. Certainly our finance and mortgage trust sectors have been hit. We will as a country be hit by the secondary effects of all this. We are dependent on offshore capital flows which will mean our lending criteria, particularly business lending, will become tighter and margins will widen. We are lucky that the Reserve Bank has the ability to drastically cut interest rates which to a certain extent will offset this. The increase in unemployment overseas and reduction in incomes will certainly affect the number of tourists coming here, which will flow on to the accommodation and tourist sectors. On top of the credit crunch, food items, fuel and utilities are continuing to rise. This will reduce the level of discretionary expenditure here which will affect the retail and food sectors. The secondary effects will be felt.
More Interest Rate Cuts Likely
Earlier this month the Reserve Bank cut the wholesale interest rates by 50 basis points. There are two more rate reviews this year, with the next one being on 23 October, and it is expected the Governor will cut interest rates on both occasions. Market sources are suggesting that if the present market crisis becomes any worse, there may well be a third rate cut. Borrowers will not receive all the benefits of these cuts, as lenders are paying more for the cost of their funds, i.e. the actual cost of credit is rising, as money becomes more scarce. For homeowners mortgage rates have peaked and a downward trend is emerging - but it will probably be a bit slower than borrowers would like.
Mortgages are Harder to Get
Credit tightening is now occurring across the financial markets. It is now becoming harder to get finance. Mortgage lenders are starting to scale back their loan to value ratios - 100% mortgages are all but gone, and 90-95% mortgages are harder to obtain. The days have gone when the banks will give you yearly increases in your credit card limits. Business finance is becoming more difficult to obtain, lenders are requesting principal components with commercial property loans, whereas two years ago, interest-only was fine. Plant and equipment finance, the domain of the finance companies, has dried up. Those looking for finance must realise that the rules have changed and lenders are imposing more stringent conditions. Expect further tightening in credit conditions.
Small is Not Necessarily Bad
Some self-appointed market commentators on finance companies have been saying that the bigger the finance company, the safer it is. This has proved to be complete nonsense. All the recent high profile collapses and moratoria - Dominion Finance, Hanover, St Laurence, Strategic, Dorchester, and Bridgecorp - have been larger finance companies. Size is completely irrelevant - what determines the success of a finance company is the quality of its lending, liquidity management and the quality of its directors and staff. If someone said the best wines only come from the biggest vineyards this would be laughed at. At General Finance we are a smaller finance company and we operate in a well defined niche that we understand - that is residential property. This sector is the most liquid part of the property market and this together with our management skills, rather than our size, should give our investors the comfort they are rightly seeking.
Our current mortgage interest rates are as follows:
Variable rate 10.15%
Lo Doc Home Loan 11.05
One-year fixed rate 9.03
Two-year fixed rate -
Three-year fixed rate -
Five-year fixed rate -
Line of credit facility 10.25