Interest Cut No Fall At All
Sydney Morning Herald
Tuesday July 4, 1995
WHEN is a home loan interest rate cut not a home loan interest rate cut?
As borrowers with the ever-burgeoning mortgage originators are starting to find out, it depends on what class of customer you are.
While the standard variable interest rate cited by the banks, credit unions and building societies is a standard rate applying to all borrowers (except those on a special discounted introductory offer), the so-called standard variable offered by some of the new mortgage originators is not standard at all.
Money first became aware of this discrepancy when a reader phoned to complain about Aussie Home Loans' latest interest rate reduction.
Aussie Home Loans said it had reduced its standard variable rate to 9.25 per cent, but this borrower said his standard variable rate had not fallen into line with the announcement.
AHL's managing director, Mr John Symond, says the problem arises because AHL signed up about 1,000 borrowers on variable rate loans with finance provided by institutions such as the Bank of Adelaide before it become involved in mortgage securitisation through PUMA.
This means there are effectively two groups of borrowers - the newer ones who pay AHL's flagship variable rate and the older borrowers who pay a rate dictated by the institution which initially provided the funds.
While it has written new loans worth $1.5 billion in the "new" loans in the past 10 months, and all of these customers will be paying 9.25 per cent from July 1, the older borrowers are still paying closer to bank rates.
Mr Symond says AHL has written to the "old" customers offering them the chance to transfer to the "new" loan for $300. He says this fee covers the cost of paying the bank out: AHL itself will meet all valuation, stamp duty and legal costs for the transfer.
In another case, Austral Mortgage Corp has launched a "new" loan - Austral 2000 - with a standard variable rate of 9.25 per cent and a guarantee that this rate won't exceed the 90-day bank bill rate by more than 2.12 per cent before 2001.
But Austral says existing borrowers will keep paying their old standard variable rates - generally 9.95 per cent.
In both cases, the discrepancies have come about because the originator has accessed a new pool of money - effectively creating a new product for a new group of borrowers.
That's probably fair enough as far as it goes. But is it a coincidence that the loans being offered to new borrowers benefit from the rate fall while customers who are already locked in receive no benefit? (A parallel occurs here with the inequity of so-called honeymoon rates which are offered to entice new borrowers.)
While there is probably a longer-term incentive to keep the rates for existing borrowers reasonably competitive, there is not the same pressure as there is to offer a good rate to make new loans.
As today's new customer is tomorrow's old customer, it's a thought well worth bearing in mind.
THE AHL 9.25 per cent variable rate has now been matched by BMC, FAI First Mortgage and Austral on its new loan.
While the banks are sitting steady on their variable rates, and unlikely to budge, the Greater Permanent Building Society has also reduced its variable rate - to 10 per cent as of August 1.
But borrowers should take into account exit costs as well as interest rates in doing their sums - particularly if they want to leave the way clear to refinance later if their current lender's rates become uncompetitive.
Interest rate research group Cannex says most of the mortgage originators charge exit fees, which are generally one to two months' interest.
Austral is trumpeting the fact that its new Austral 2001 loan has no exit penalty, while FAI is hoping the absence of an upfront fee will entice borrowers to sign up or switch.
This fee is usually about $500, although Austral is also offering a reduced fee of $295 on its new product.
Cannex says FAI and Aussie Home Loans both charge a one-month interest penalty for early termination of their loans while BMC charges a penalty of one month's instalment.
WITH June 30 behind us for another year, Perpetual Trustees has reminded us of one of the nicer outcomes of the Budget.
As of July 1, the capital gains tax (CGT) thresholds on personal use assets have been lifted - which means you can now spend more on these luxuries without being hit by CGT when you sell.
The threshold for "listed" assets such as paintings, antiques, coins and jewellery has risen to $500 and the threshold for "non-listed" assets such as boats, furniture and so on has risen to $10,000.
The bad news is that most industry players say precious few people are keeping the necessary records for CGT.
If you have bought any asset since 1985 which may be subject to CGT on disposal, it is essential to keep records of the purchase, any costs incurred since then and ultimately the sale.
ONE of the nastier aspects of the growth in compulsory superannuation has been the gradual erosion of tax benefits for people who want to make their own contributions.
Valued employees - usually the more highly paid - can generally incorporate additional super benefits into their package through the use of salary sacrifice payments (that is, the employer makes deductible contributions on your behalf in lieu of a higher take-home pay).
Meanwhile, the self-employed are entitled to a deduction on contributions of $3,000 (plus 75 per cent of the excess up to the Government's age-based limits).
But an employee receiving minimum support from his employer and unable to package extra benefits has to make his contributions from after-tax income or not at all.
Under current rules, says the accountancy firm Mann Judd, employees earning less than $27,000 a year are entitled to a tax rebate on contributions of up to $1,000. But as the maximum amount of this rebate is only $100, it is of limited appeal.
It says self-employed individuals who earn more than 10 per cent from an employer are also hit hard by the rules.
If self-employed people earn more than 10 per cent of their income from an employer, says Mann Judd, they are not entitled to any deduction on their own super contributions.
Deloitte Touche Tohmatsu is suggesting clients in this situation look at restructuring their affairs so that they take this income in the form of a fringe benefit or super contributions rather than employment income to preserve the right to claim a deduction on their own contributions.
© 1995 Sydney Morning Herald