Australian Bond Market

After the recent subprime issues and global capital markets events flow on effects exerted increasing pressure on interest rates for housing loans in Australia. The fund holders are nervous and increase the cost of funds to cover their investments. So try to understand where the Australian capital markets are in progress with interest rates is a bit of a minefield at the moment.

The initial problem ...

It seems that many different but related factors came together to create this catastrophe. A U.S. housing boom that has made homeownership difficult was facilitated by subprime lenders freely extending substantial levels of credit to people who really had no ability to repay loans. These people may or may not have had a bad credit record, but which lacks the ability to repay large amounts LVR than they borrowed. These people were offered loans to start low interest rates to 1 or 2% per year, either. rate honeymoon, returning to normal levels after a few years. All these loans were to return at a rate of around score of 3 to 4% but recent impacts of interest rate rises take six U.S. current rates of around 7% per year significantly affected the ability of borrowers to repay the loan and created the present crisis default.

Traffic on the effects ...

Why did it affect us in Australia where we do not have a problem by default? Without going into the complexity of capital markets, global lenders to Australian banks and non banks have been frightened by the problems in the U.S. and are therefore either require greater "risk" premium as a rate of higher interest rates or no loans at all. Particularly in a climate of fear and loss that is easier and safer to park money in cash or government bonds and wait.

What does this mean for interest rates in Australia and the availability of loans? Non-bank lenders are more susceptible to market pressure due to seek funding from the United States and Global Market on a securitization of 90 days. Most banks were not forced to raise their rates above the rate of the Reserve Bank increased by 0.4% from 1% to their investors tighten.

Traditional banks were not affected to the same degree, but are not immune to the pressures and it is suspected they will also increase the rate above the rate of increase in recent Reserve Bank.
That investors and lenders become more nervous about the market, the credit policy has strengthened in recent times and discounts on loan to value ratios and higher maintenance tests were implemented to reduce risks and increase liquidity. Very few lenders are policies outside these days, looking for loans with vanilla or adjustment of the guidelines or "find the attitude of another lender is being displayed by most lenders .

Non-conforming borrowers have benefited from a period of competitive interest rates, but should expect further rate increases that reflect their current position. All loans will be affected, but more pressure is exerted on the Home loans low doc.

Institutions have also been slow to ensure lenders have sufficient funds to meet their amenities. Some lenders have reduced the number of brokers who can sell their products to compensate for the shortage of funds.

Interesting times are ahead for the Australian mortgage market, so fasten your seatbelts, I think we are for a good ride.

Āc Rob Donald, November 20th 2007 Altrust Group Finance
www.altrust.com.au