April 15, 2008 7:17am CST
I am attempting to get on the property ladder and am dsgusted that most lenders have chosen not to pass on the interest rate cuts to borrowers. In fact many have increased their rates on fixed rate mortgages. Times are hard for first time buyers in the UK. Do you have a house and do you find it hard to keep up with mortgage repayments? If you bought a house recently, how did you find it?
15 Apr 08
Times are hard in Australia for first time home buyers as well, and it is made harder still by Australia's increasing interest rates. I understand where you are coming from, but think of it this way. When the fixed rate for loans go up, it gives you an indication of where the banks think rates are going to be in the coming few years. Banks, although I agree are greedy, do have their reasons for raising interest rates on fixed loan products. They base this on their own research. If it was based purely on greed, they are better off raising rates on their standard variable rather than the fixed products. The reason for this is because a part of their client base is already on variable loan products which mean that a change in the rate will affect these clients (allowing them to make their extra money). However a change to the fixed rate does not actually affect their bottom line as no client are on it yet ... those who already have fixed rates, are not affected by the new change and the only people affected are those who are not locked in yet and DO still have the choice of not locking in (therefore, no client is affected and no money is made). See how much easier it is to make money by increasing the rate on the variable rates than on the fixed rates if it was all due only to greed? One way to take advantage of this is as follows - if medium to long term rates are being raised, it shows that the banks are expecting the central/reserve bank to raise the rate at which banks borrow money (the one that that usually has a more direct correlation with your varibale rates). They will be expecting this because their analysis shows that the economy is going to heat up (in simplistic terms, the central/reserve bank raises rates to slow down the economy to prevent inflation). If the banks' think that the economy is heating up, then this tells you that this is a good time to invest, either in stocks or in real estate. Usually the stocks will go up first, which will allow people to purchase bigger, more opulent and more expensive homes thereby driving up property prices. This is a VERY SIMPLISTIC read (as I do not know the exact situation in the UK so I can't comment exactly). However, economic fundamentals are essentially the same the world over. AND keeping in mind that banks have a much larger team of analyst working for them than most of us, so their analysis tends to be correct more often than ours! Sorry for going off track ... back on track now - I have investment properties, but I still rent my home. The reason? The investment properties make me money, and if I had my own house, it will only stiffle my cash flow which would in turn reduce my capacity to both borrow more to fund more investment properties and also prevent me being able to maintain more properties. I don't find it hard to keep up with mortgage payments even though the rates here are now above 9% because my renters help me to pay my mortgages (and most also give me a positive cashflow too)! Which won't happen if I was paying off my own house (in which case, I would have to pay the whole mortgage interest by myself!). I find my properties by looking on the internet for properties which fit my requirements. :-) Good luck on your search!
15 Apr 08
Thanks for your post, yes I guess I never thought of it from the banks perspective. However I do know the government is concerned that banks have not taken the interst cuts on board and want to do something about it. It remains to see if anything changes!
15 Apr 08
That sounds like the bank has not reduced their variable rates to keep in line with the reserve bank's cut. This is probably the banks trying to make more profit as they see their australian counterparts doing a similar thing. Australian banks have lately been raising their rates independently of the reserve bank's rate and also when following the reserve bank's rates, they will jack up the rate higher than the reserve's rise! And they wonder why we hate banks so much! lol