All Ords Report 17 March 2017
Borrowers are being offered what on the surface looks like a sweet deal, but is it?
Many of you may have been following the banking enquiry, and will have heard commentary about banking or bank staff practices, so your opinion of banks may not be good. Perhaps you’ve never trusted them, and were not surprised by the news?
A couple of days after hearing a debate about whether or not bank employees, who have been found to have done the wrong thing, ought to be named and shamed, I wondered what the banks could do to repair customer perceptions. Then I hear that at least one of the banks has reportedly offered property investor borrowers what appears to be a sweet deal. Borrowers may have the opportunity to keep their current lending rate on an interest only loan, provided they change to principal and interest.
Is this an effort to look after customers, or are banks helping themselves?
While in theory paying something off the principal each fortnight or month reduces the total borrowing costs over the life of the loan, and saves you money, it also places a restriction on your cash flow, or ability to borrow for other investments.
Property investors know how important this is. Say you currently pay $2,500 a month in interest, you may be paying $3,500 on a principal and interest loan. That is $1,000 a month that you don’t have to fund the purchase of another investment property, or to save for shares. Some people are yet to learn how to invest safely in the market and so they have a large exposure to direct property and not enough in shares.
Now back to cash flow….
Remember, banks don’t care if you have a sizeable sum in your bank account that could be used to fund the loan payments, as it could be there one day and gone the next. Your capacity to pay will be considered based on your income and expenses, including existing loans.
Speak to your bank and check a mortgage calculator before making a decision. Consider what the extra sum represents, and how far the interest only loan rate would have to rise before it impacts your cash flow by the same amount.
What do we expect in the market?
The All Ordinaries Index (XAO) received a boost yesterday from overseas markets, gaining 14 points or 0.24 per cent to close at 5827.5 points. Initially, the market was up by around 27 points, however, news of a higher unemployment rate in Australia softened the rise.
Should the market fall below 5724 points over the coming two weeks, it is likely to soften slightly further before finding support for the next rise. However, I see a move in either direction at this point as positive. When the market eventually trades above the high of 5881 points in February 2017 this will indicate that the market is on track to reach the target zone and challenge the all-time high in 2018. Either way, I remain bullish on the Australian market, as despite what you may hear, it is behaving in a ‘normal’ fashion.
Looking overseas, the US market has softened over the past week, however, it enjoyed buyer support on Wednesday evening following the announcement by the FED to lift rates. However, it appears that the boost in US equities may have been more to do with the FED’s commentary not changing markedly from the “steady as she goes” approach. We are likely to see at least one more rise from the FED this year.
Interestingly, with all of the discussions about Brexit, the UK market has remained incredibly strong, having pushed through past resistance to a new all-time high last year. All markets have been pushing higher, including the German market, the DAX, which is about to challenge its all-time high. So the big money markets, including the US, are either trading in blue sky (and making new all-time highs, or are close to breaking into blue sky territory, except for the Asian markets, particularly the Hang Seng (HSI) and the Shanghai Composite Index (SSEC), which are currently in the order of 25% and 47% below their all-time highs, respectively. And, our market, being in the Asian region, is also well below the high.
This global momentum to new highs means our market is lagging, and will eventually break through its high. My analyst team believe there is a reasonable probability of a new all-time high (6873 points) being achieved during the next 12 to 18 months (at the latter end of this period) and this is our current target for the medium term. The previous medium term target between 6200 to 6400 points, or 6% to 10% above the current level, is now the short term target.
Dale Gillham is Chief Analyst at Wealth Within