Rehda finds hope in housing market outlook despite negatives

Tuesday September 27, 2011

Rehda finds hope in housing market outlook despite negatives
By FINTAN NG
fintan@thestar.com.my



KUALA LUMPUR: The Real Estate and Housing Developers' Association Malaysia (Rehda) is “cautiously optimistic” of the housing market outlook in the first half of next year despite a marked increase in building material and labour costs as well as a slowdown in economic activity.

A Rehda survey found that 41% of the developers who responded were optimistic of the first six months of 2012 compared with the second half of this year, where 48% said they were optimistic.

Most respondents in the survey said prices would likely rise by up to 20% in the second half of this year, with 47% of respondents planning to increase selling prices by at least 15%. The survey showed that launches in the period were equally split between strata-titled and landed properties.

Speakers at the Rehda update on the property market for the first half of the year said a number of factors, including government policies and the overall volatility of global capital markets, made developers cautious of the outlook.


Yam: ‘We appeal to the Government not to tinker too much with regulations concerning the industry as this will cause more uncertainty.’
The briefing also included the participation of RAM Holdings Bhd group chief economist Yeah Kim Leng, who gave an overall view of the global and local economies.

Rehda president Datuk Seri Michael Yam said the industry was concerned about how the local economy would be affected by external forces including the pressure on the sovereign debt ratings of Malaysia's developed market trading partners.

He said there were also concerns about the proposal to assess housing loans based on net income rather than gross income.

“We appeal to the Government not to tinker too much with regulations concerning the industry as this will cause more uncertainty,” Yam said.

Rehda KL chairman N.K. Tong said the more cautious outlook could be due to the timing as developers could not tell that far ahead how the property market would be performing.

“There's more uncertainty, so the respondents are not as optimistic compared with the second half of 2011, with the percentage of those who responded they were neutral on the outlook for the first half of 2012 rising to 39%,” he said.

Yam said that based on the survey findings, property launches of the second half of the year so far remained “business as usual” compared with the first half of the year where launches continued to be healthy with encouraging demand.

“Property prices have been rising partly due to the roll-out of Economic Transformation Programme projects,” he said, adding that the costs of building materials and labour continued to be major challenges for the industry.

Yam said although the 70% loan-to-value ratio for a third residential property purchase had had minimal impact, it was now taking from nine to 12 months to sell up to 70% of launched properties compared with before the imposition of the ruling.

Meanwhile, Yeah said that despite the evidence of weaker forward economic indicators, the economy was facing a slowdown and not a recession.

“However, this is on a baseline assumption that there will be no synchronised slowdown in the developed economies. If only one or two regions face a slowdown then the local economy will be able to sustain growth at the lower end of the Government's 5%-6% target,” he said.

Yeah said there would likely be more volatile fluctuations in the commodities and capital markets. “It will be prudent to factor into corporate planning that growth in the developed economies will be slow in the next three to five years while Asian economies will still be growing although growth have been revised downwards,” he added.

Yeah said that while banks had not tightened sufficiently in lending, there were expectations that they would be more selective going forward. “A few indicators suggest that we're still relatively resilient in terms of consumption with non-residential loans still very strong,” he said.

Yeah said rising household debt levels remained a concern as it could expose households to further shocks and systemic problems.

Tuesday June 14, 2011

Property at ‘upper band’

By Jagdev Singh Sidhu
jagdev@thestar.com.my

Local property stocks trading at higher valuations against regional peers

KUALA LUMPUR: Property companies on Bursa Malaysia, which have lagged behind the performance of the broader market in the past month, are trading at valuations that put such counters at the upper band against its regional peers.

Some analysts admit the valuations of the larger property companies are frothy but say there are reasons why such stocks are seeing such valuation differences from property companies in Singapore, Hong Kong or Indonesia.

“They have a premium because of execution, a track record and branding,” said HwangDBS Vickers Research analyst Yee Mei Hui, when comparing SP Setia Bhd, the country's top property company, with companies from other countries.

The regional comparison, which was made by CIMB after SP Setia released its second quarter results, showed the biggest property companies on Bursa Malaysia are generally trading at a slim discount to their share price as compared with the regional peers on a revalued net asset value (RNAV) basis.

The RNAV is what analysts think the market value of land and assets on a company's books amounted to compared with the book value of such land.

The small discount is more pronounced for the country's largest property counter by market-capitalisation terms - UEM Land Holdings Bhd, which has a market capitalisation of US$3.8bil - as the counter is trading at about a 9% discount to the stock's RNAV. SP Setia was trading at about 2% as of last week.

In comparison, the larger property companies, such as CapitaLand in Singapore and China Overseas Land & Investments Ltd, are trading at a much steeper discount to their RNAV.

One analyst thinks the difference in pricing compared with Singapore and Hong Kong is down to the mechanics of the markets there.

“Property prices there are volatile and investors who buy such stocks can overshoot in either way,” said ECM Libra Investment Bank Bhdresearch head Bernard Ching.

He said the land value in Malaysia was not as volatile and tended to rise on a gradual basis.

Concerns over a property bubble in Hong Kong and Singapore has also led to investors taking a much more cautious view of the value of property stocks in those countries in relation to their RNAV.

Some analysts feel the reason why Malaysian property counters have a higher valuation than regional companies was also down to a few factors.

Concentration of Malaysia-based funds seeking investments in Malaysia has seen a lot of money chasing a few quality companies and the bigger the stock, the better their following is.

“Property development is a medium term business and it's not solely about land value,” explained an analyst. He said investors generally want to look at stocks that generate a return on the value of the land the companies own and explained that companies that generally sit on large land reserves with little activity often see bigger discounts to their RNAV.

That argument has been used to explain Mah Sing Group Bhd's share price that is trading close to the company's estimated RNAV.

“Mah Sing works on a fast turnaround model and does not have a lot of landbank,” said an analyst.

Although property stock valuations were high, analysts said the divergence of the property index and that of the FTSE Bursa Malaysia KLCI (FBM KLCI) was down to investors chasing after the more liquid blue chip counters.

“The property index has a big number of mid and small cap stocks,” said an analyst.

“When the market turns south, buying will concentrate on the large, blue chip stocks.”

Property companies on Bursa Malaysia still, on average, attract “buy” calls with analysts saying the prospects of choice developers are still bright.

By Story and photos by ELAN PERUMAL| Apr 22, 2011
elan@thestar.com.my

Numerous housing projects abandoned in Jenjarom

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Wasted: The property is nearing completion only to be abandoned by its developer.

Kampung  Batu 9 Kebun Baru near Jenjarom in the Kuala Langat district is surrounded with abandoned housing projects and its villagers are fed up.

Over 10 years, the area between Jalan Kebun in Klang and Jenjarom, has attracted numerous development projects; sadly, most of these projects have been left unfinished.

Villagers said they kept stumbling upon new housing projects which were eventually abandoned after a period of time.

As for the village itself, they said, it had not seen much development.

A check by StarMetro showed the village has several abandoned housing projects especially along the branch roads leading to Jenjarom.

The projects ranged from as small as 30 units to over 100 houses and the prices were between RM100,000 and RM300,000.

Most of the projects comprised single-storey terrace houses while some were single-storey semi-detached houses.

A number of the projects were 50% and 70% completed while others were abandoned after some structural works.

Some projects had notice boards with information of the proposed development.

Villager Azman Yusof, 39, said the village had more abandoned houses compared with the number of occupied houses.

He said there were too many abandoned projects in the village and the residents had become fed up of seeing such projects in the area.

“The abandoned projects have become part of our village’s identity and this is not good for our image,” he said.

Another resident Sani Ahmad, 40, said most of the house buyers were from outside the village.

In the past, he said the village used to attract a lot of people during the weekends.

“The house buyers used to visit the projects to see the progress of the development, but they gradually stopped coming after realising work on their houses had been abandoned.

“Most of the projects took off in the mid 90’s and some in the beginning of 2000. Except for a few, the rest have not been completed,” he said.

Sani added most of the projects were carried out by individual landowners through joint ventures with developers.

He said it was sad that hundreds of house buyers had been left feeling cheated as they had not only paid huge sums on deposits but also forced to service monthly bank instalments.

“I hope the government can do something to revive the projects in order to help the victims,” he added.

State housing, building development and squatters committee chairman Iskandar Abdul Samad confirmed there were eight abandoned projects in the area.

He said the state had placed several of the projects under its Abandoned Project Task Force.

“Work on some of the projects have started and we are still involved in negotiations with a few of the developers.

“We are also faced with the challenge of not being able to locate the developers in most of the cases,” he added.

Property lessons from the UK’s busted boom

Property lessons from the UK’s busted boom

Greg Hoffman

November 29, 2010 - 3:08PM

In the UK after a breathtaking boom, property owners have watched prices fall 10 per cent since the third quarter of 2007. Those less fortunate have experienced declines of 20 per cent or more (especially in the north).

Swingeing government budget cuts are yet to hit an economy already lacking confidence and there’s no shortage of fear-inspiring newspaper articles. Gloomy times indeed.

“North may never escape negative equity,” shouted one headline in The Times earlier this month. The paper cited a study by Standard and Poor’s that showed, “One in ten homeowners in the North West is in negative equity, trapped in properties worth less than the amount they owe and vulnerable to repossession as the public sector sheds jobs.”

Advertisement: Story continues below

But what really caught my eye, particularly in light of my April column, Property valued properly, was the following (italics are mine):

“Savills, the estate agency, argues that in a new era where mortgage finance remains perhaps permanently constrained, some low-grade properties in the North may never recover, whatever the direction of prices elsewhere. Such dwellings may be valued only on the rental income they offer to landlords, as the would-be owner-occupiers of such homes will be denied finance.”

The notion that properties may be valued “only on the rental income they offer” is presented as something of a revelation. To me, this is indicative of an asset class where prices have (or had) broken free of economic reality. Now they are returning to it.

At universities all over the world, finance students are taught that the value of any asset is the stream of future income it will provide, discounted back into today’s dollars. Most professional sharemarket and bond investors would concur with this rule.

Even industrial and commercial property investors recognise that the income stream is of supreme importance. But when it comes to residential property, the same rules seem not to apply.

Without rehashing the arguments for and against Australian residential property being an exception to the laws of finance, to me the UK provides an interesting case study. Three and a half years ago, many Britons were as adamant as Australians are today that “property never falls”.

On a recent trip I was assured that “property in the south-eastnever falls” (my italics); an illustration of how hard it is to escape from dogma once it becomes entrenched in people’s minds.

The Australian property price debate is divisive and emotionally-charged but, whatever your view, it’s foolhardy not to acknowledge the possibility that capital gains may not always be counted on to bridge the gap between the rental income (or rent saved) and a fair return on your capital.

In many cases, those who bought during the UK boom, accepting low yields in the hope of future capital growth, are now living with the consequences of “negative gearing” and nasty capital losses. It’s not a pleasant combination.

My advice is not necessarily to avoid the property market altogether but to ensure that any debt you take on (as an owner-occupier or investor) can be easily serviced should economic conditions deteriorate. As my old scoutmaster used to say, it’s best to “be prepared”.

This article contains general investment advice only (under AFSL 282288).

Greg Hoffman is research director of The Intelligent Investor. 
For more Intelligent Investor articlesclick here.

http://www.brisbanetimes.com.au/business/property-lessons-from-the-uks-busted-boom-20101129-18dju.html

Vietnam: High grade apartment prices going down on profuse supply

Last update 08/11/2010 04:29:23 PM (GMT+7)

High grade apartment prices going down on profuse supply

VietNamNet Bridge – The more profuse supply and the lack of investment capital both have forced real estate developers to ease sale prices to attract more buyers.

Real estate developers have to slash sale prices

FLC Company has announced the plan to put apartments at FLC Landmark Tower project on Le Duc Tho Road in Tu Liem District on sale for the second phase. The apartments are being offered at 28 million dong per square metre. The registrations to buy the apartments should be made from November 1, 2010 to November 15, 2010.

According to FLC, the price of 28 million dong per square metre has been kept unchanged if compared with the price set for the second phase of sale, even though the prices of construction materials, and the prices of gold and dollar have increased sharply. Meanwhile, buyers would get the credit support from the Bank for Investment and Development of Vietnam (BIDV) and Techcombank. The two banks promise to give the loans worth up to 85 percent of the values of the apartments.

The fact that the prices remain unchanged – though in fact, if set against the dollar and gold prices, they have even decreased – shows the difficulties currently faced by real estate developers.

Not only the developer of FLC Landmark Tower decides to keep the sale prices unchanged. Other developers have also been trying to attract customers by launching promotion campaigns and offering other discounts to buyers.

Capitaland Ha Thanh, for example, the developer of Mulberry Lane project in Mo Lao town in Ha Dong District, has decided to offer the price discount of 10 percent to  thouse who buy two apartments at the same time.

Besides, buyers will be able to borrow money from VIBank to purchase the apartments. The values of the loans could reach 65 percent of the values in the contracts, if borrowers mortgage the apartments. The values of loans could even reach 90 percent of the values of contracts, if borrowers mortgage other kinds of assets for the loans.

Most recently, Lam Vien Company also announced that the actual sale prices of the high grade apartments at Richland Southern will be five percent lower than the initially announced prices. Moreover, buyers will also have the right to delay the process of making payment and be exempted from the management fee for the first two years.

Last week, a transaction selling a 170 square metre apartment at TSQ project in Ha Dong District was successfully carried out. The apartment was sold for $1150 per square metre, what real estate brokers in Hanoi consider as the lowest price among all the projects in the last six months (the project is expected to be completed in June 2011).

The gap between the original prices (the prices at which real estate developers sell apartments to buyers in the primary market) and the prices in the secondary market (the prices at which the buyers sell to other buyers in the secondary market) has narrowed by more than 50 percent. For example, the original price of a 104-square metre apartment at Usilk project is $850 per square metre. Previously, the gap between the prices was just 350-500 million dong, while now the gap has reduced to 150-160 million dong ($80 per square metre)

In the golden age of the high grade apartments ( in 2007 and first half of 2008), real estate developers announced new sale prices once every three months, and the new prices were always higher than the previous ones. By doing so, analysts say, they made people think that the prices would increase further in the future, thus prompting them to rush to buy apartments.

However, they have to change their strategy now, when the market has cooled down due to the global economic recession.

According to CBRE, a real estate service provider, in the second half of 2010, 10,000 new apartments in Hanoi were put on sale, raising the total number of new apartments on the primary market to 20,000. CBRE believes that the profuse supply will keep the apartment sale prices stable from now to early 2011.

P.V

http://english.vietnamnet.vn/en/business/1223/high-grade-apartment-prices-going-down-on-profuse-supply.html

Overseas Property Investments: Do your homework

Do your homework — Png Poh Soon
November 12, 2010

NOV 12 — Signs of a slowdown in Singapore home sales showed in both the number of primary and secondary transactions following the government’s announcement of property market cooling measures on August 30.

The number of developers’ sales, subsales and resales fell by about 28 per cent, 52 per cent and 42 per cent, respectively, in September from the previous month.

While there has been a decrease in property transactions within Singapore, there has been a pickup in marketing efforts for overseas properties from as near as Malaysia to as far as the United Kingdom. There has been an increase in the number of advertisements in recent weeks inviting Singapore investors to exhibitions and road shows for overseas properties.

Investors here are increasingly attracted by potential opportunities overseas as the local market takes a breather. With the current low savings rates, they are looking for better yielding assets to park their money. Potential price appreciation, income guarantees, low mortgage rates and favourable exchange rates are some of the main factors attracting investors to foreign markets.

Based on recent Knight Frank research, Singapore investors formed the third-largest group of buyers from Asia, after those from China and Hong Kong, of prime London properties from July last year to June this year.

Before jumping on the bandwagon, potential buyers should not assume that the same institutional and legal framework that is applicable in Singapore will apply in other countries.

What should buyers look out for when investing in overseas properties? What are the risks and who should they consult?

Many often buy properties in countries that they are familiar with. Some might have studied in a particular country and have developed a fondness for it. Others feel safer if their investment is closer to home and, therefore, prefer to buy a property in neighbouring countries.

From experience, up to 20 per cent of buyers who purchased foreign properties during exhibitions had not visited the city and up to 70 per cent of buyers had not inspected the project site. As environments change and cities evolve, it is prudent to re-visit the site and not to rely solely on memories or gut feel.

For completed overseas properties, it is also advisable to seek an independent professional valuation. One may want to reconsider the purchase if there is a big difference between the asking price and the valuation. In any case, if bank financing is required, a valuation will be carried out by the bank. It may also be worthwhile to get a structural survey done, too. If significant problems are highlighted, one can either forgo the purchase or negotiate a lower price to account for the rectification cost.

Some projects offer purchasers rental guarantees, some as high as 8 per cent. A rental guarantee is a contract between the granter, usually the developer or the vendor and the buyer, where the latter is paid a fixed income based on a guaranteed rate on the purchase price.

For example, a guaranteed rental of 6 per cent on an apartment bought for £250,000 (RM1.25 million) in London amounts to £15,000 per year.

Most rental guarantees are on a gross basis where the buyer is still required to pay all outgoings, such as maintenance costs and property taxes. Because of this, the net return will be lower.

Properties with rental guarantees often also come at a higher price to compensate the granter for bearing the risk of not earning an income when tenants cannot be secured in time or higher vacancies during off-peak holiday periods. Buyers should note that the rent collected may drop significantly after the guarantee period.

It is important to engage reliable managing agents to look for tenants, to collect rent and to look after general repairs. Usually they charge a fee of 5 to 10 per cent of the monthly rent. An agent’s commission for securing a tenant is usually the equivalent of one month’s rent for a two-year lease, similar to the practice in Singapore. Total outgoings average between about 10 and 20 per cent of gross rental income per year.

There are other miscellaneous costs such as legal fees, stamp duties, valuation fees and bank processing fees. The amounts vary across countries and the prospective buyer should seek professional advice.

Potential buyers should also be aware of tax regulations, especially for mature markets such as the United States and Australia. In many instances, rental income is taxed at the progressive personal income tax scale in the country where the income is sourced. While capital gains tax does not apply in Singapore, it may be applicable in other countries. Buyers should consult tax advisers to ensure they understand all tax issues.

To guard against poor workmanship, the sale and purchase agreement should provide for a two- to six-month liability period for the developer to rectify the faults. In instances where there are delays in the completion, purchasers should be compensated or can opt to rescind the purchase with the money refunded.

The types of legal recourse available are subject to the terms and conditions in the sale and purchase agreement. Buyers are advised to read the document carefully before signing and paying the initial reservation fee, which is often non-refundable. They can engage lawyers to advise them on their rights if things go awry.

If a developer goes bankrupt during the construction stage, any monies paid directly to the developer rather than to a trust fund are usually not recoverable. Hence when buying properties off-the-plan or under construction, one should look at the developer’s reputation, track record and financial standing to reduce the risk of potential losses.

There are also other legal considerations to note. Some countries have laws that restrict resale property ownership. For example, in Australia, residential properties can be resold only to Australian citizens, permanent residents and foreign students or foreign companies that have obtained the Foreign Investment Review Board’s approval to buy for owner occupation.

In Malaysia, the government’s consent is required for the sale of freehold landed properties to non-citizens. In some instances, the property can only be sold to Bumiputeras.

In a nutshell, while there are many success stories, buying that overseas property is not as simple as some may think. One needs to look beyond the glossy brochures and the glitzy displays. Engaging competent and experienced advisers will help the process but at the end of the day, it is still caveat emptor (buyer beware). — Today

* The writer is senior manager, Consultancy and Research, at Knight Frank.

* This is the personal opinion of the writer or the publication. The Malaysian Insider does not endorse the view unless specified.

http://www.themalaysianinsider.com/breakingviews/article/do-your-homework-png-poh-soon/

Tips for first-time house buyers: Key Issue is Affordability

By EDY SARIF edy@thestar.com.my | Oct 16, 2010

Tips for first-time house buyers

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BUYING a house for the first time is like getting married. You need to be level headed, think wisely, plan well and eliminate the chances of regretting the decision later.

For first-time house buyers, scouring the market for a suitable property can be exhilarating but it can also be frustrating if you don’t find “the one” or you do but it comes with a bust-your-budget price tag.

There are a few factors to consider in the pursuit of buying your first dream house. Firstly, a prospective house buyer should ascertain how much upfront money he or she can fork out, says SK Brothers Realty Sdn Bhd general manager Chan Ai Cheng.

“This is important. There are heavy upfront costs depending on what you buy, including transfer cost, legal fees and so forth,” she says.

Secondly, the prospective buyer needs to check with the bank on the amount of loan that can be secured based on the income level. “At the same time, try to have savings amounting to at least three to six months of loan instalments plus household expenses as reserve fund, in case of an emergency,” Chan says.

In short, if you want to buy a house, you need to figure out your affordability – how much you can afford.

A real estate agent tells StarBizWeek that the rule of thumb is that monthly loan repayments should not exceed one third of the gross monthly income.

“In assessing your repayment capability, the financial institution would also take into account your other debt repayments such as car loan, personal loan and credit cards,” he says.

He adds that the margin of financing can go as high as 95%.

“The higher the margin, the higher you will have to pay per instalment. Plus, at a given rate, a shorter tenure will require you to pay higher instalment,” he says.

He adds that after you have set your finances right, make a list of features you are looking for in a house.

“Be sure that the house you are buying is big enough to meet all your future needs, in case you have additional members in the family,” he says.

“Take good note of the area and the neighbourhood as these aspects will play a crucial role in determining the price of the house in case you want to sell it in future,” he adds.

In terms of financing, buyers have a wide array to choose from be it conventional or Islamic.

Under the conventional financing, one’s outstanding loan consists of principal plus the interest charged.

“The interest is actually the financial institution’s cost in obtaining the funds. Islamic financing works on the concept of buying and selling where the financial institution purchases the property and subsequently sells it to you above the purchase price,” says a banker.

As for the loan tenure, it can range from anything up to 30 years or until the borrower reaches the age of 65, whichever is earlier.

She also advises that it’s better to buy than to rent a home as the latter is largely expense without equity.

Furthermore, she says: “When you invest in a home, it offers the possibility for appreciation in value. At the same time, the equity becomes yours when you’re still paying off your mortgage. You even get to live in it while your investment matures.”

Still, the key determinant ought to always be keeping within the budget.

“That’s most important. It’s easy to be swayed into wanting a bigger home or a bungalow just because your friends or someone else has one. This is nice to wish for but definitely not practical if it’s way out of your budget. Be realistic,” the banker says.

Ask on the “right” timing to buy a house, she says there is no “right” time to buy or sell anymore.

“If you find a home now, don’t try to second-guess the interest rates or the housing market by waiting. Changes do not usually occur fast enough to make that much difference in price and a good home will not stay on the market long,” she says.

Other News:

• Nine things to consider before buying a home
• Should I buy or rent?

http://www.starproperty.my/PropertyScene/TheStarOnlineHighlightBox/7669/0/0

Is there a property bubble? As prices of properties climb, there is a problem of affordability.
Here is a problem faced by a first time buyer.

Oct 21, 2010
Q&A: Should we buy now or should we just wait?
Dear Azizi Ali,

I have recently just got married and wish to start a family by buying our first property. As you know, housing prices in Klang Valley are rocket high. Even if both my husband and I can afford to down for a new house or second hand, the monthly instalments will take up a big portion of our net disposable income (which puts a strain on us). We are now looking at an area known as Bukit Subang (next to Denai Alam). The price is half of Denai's (same size). We want a house that will have reasonable appreciation as a form of future investment and for current purpose, for own stay.

However, we are receiving opinions that we should delay the purchase as the property bubble may burst. Reason being, that a lot of executives whose monthly salary is in the region of RM5,000 to RM6,000 are buying houses that are worth almost a million for investment and when it’s time to start paying the instalment, defaults will begin and foreclosure will kick in. At the same time, supply is more than genuine demand (i.e. investor demand is more than genuine purchase).

Do you think we should buy in that area? Should we buy now or should we just wait? If we do buy, do you think that it is wise to stretch ourselves (i.e. instead of buying Bukit Subang, we buy in Denai Alam?)

Advice and opinions are appreciated.

Regards,
Aquila


http://www.starproperty.my/PropertyGuide/Finance/7698/0/0

Property stocks

http://www.btimes.com.my/Current_News/BTIMES/articles/proper02/Article/index_html

Most houseowners unaware of impact of interest rate rise

Three-quarters of home owners do not know what impact an interest rate rise would have on them, a survey has indicated.

 Published: 12:30PM BST 07 Jul 2010

Around 74pc of people with a mortgage admitted they did not know how a 1 percentage point rise in the Bank of England base rate would affect their monthly outgoings, according to the newly formed Consumer Financial Education Body (CFEB).

More worryingly, 15pc of people do not even know what type of mortgage they have, such as whether it is a fixed-rate deal, which would make them unaffected by an interest rate rise, or whether it is a variable-rate one, meaning their monthly payments would go up.

A further 15pc also do not know when their current mortgage deal comes to an end. The lack of awareness comes despite the fact that 51pc of people with a mortgage expect interest rates to rise during the coming nine months. 

Just over half of people said they had no plans to review their mortgage, or would leave doing so until just before their existing deal expired, while 14pc admitted they did not know what they would cut back on if their mortgage repayments rose by £200 a month. 

Tony Hobman, chief executive of the CFEB, said: "Interest rates have been at record lows for some while now. Although there is uncertainty about when this will change, it is clear from our research that many people with mortgages haven't thought about what it would mean for their monthly payments, or where they would find the extra money in their household budget if their mortgage rate was to go up. 

"Lack of time means many of us often put off reviewing our finances, but it doesn't have to be time consuming to keep on top of your money matters." 

The organisation is urging people to stay on top of their mortgage, and is offering help and guidance on how to prepare for when interest rates do rise. 

It advises people to look at the Keyfacts document they were given when they took out their mortgage, as this shows what their current interest rate is and when their deal expires. 

The CFEB has set up a mortgage calculator so that people can see what impact interest rate rises would have on their monthly repayments, while it also provides impartial mortgage comparison tables to help people find the best deal. Its mortgage toolkit can be found at www.moneymadeclear.org.uk/mortgages

 

The body was set up in April by the Financial Services Authority to take over responsibility for consumer financial education. 

http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/7876910/Most-home-owners-unaware-of-impact-of-interest-rate-rise.html

Fixed-rate mortgage offers a safe haven

JOHN KAVANAGH

June 23, 2010

Best 1 year fixed rate loans.

As the Reserve Bank eyes the possibility of further rises in interest rates, John Kavanagh examines the pros and cons of fixing a home-loan rate.

Interest rates on a number of fixed-rate home loans are currently lower than the variable rates of about 7.4 per cent that are being offered by many lenders.

With the prospect that interest rates will go higher over the next 18 months, the question of whether to fix all or some of the borrowing should be accorded serious consideration.

Source: InfoChoice.

With signs of mortgage stress growing, borrowers need to make sure they are taking every opportunity to manage their debt burden efficiently.

Right now the best opportunity may lie in taking advantage of highly competitive fixed rates.

The financial services analyst for Infochoice, David Lalich, says most of the changes are to two- and three-year rates.

Sharer...Jacqui Booth. Photo: Stuart Quinn

The best two-year fixed rates are below 7.2 per cent, which is competitive with a number of lenders' variable rates. The most competitive are RAMS, the Bank of Queensland, HSBC, Nationwide Mortgage and Commonwealth Bank.

Borrowers can have three-year rates below 7.5 per cent from RAMS, Heritage Building Society, Westpac, National Australia Bank, Better Option Home Loans and Greater Building Society.

Fixed-rate loans usually cost more than variable rates because the borrower is paying a premium for certainty.

It is like an insurance policy, whereby the borrower pays the bank for taking over the interest rate risk.

At the moment, that premium is very low, which reduces the chances of becoming locked into a rate that could very well become unattractive a couple of years down the track.

Part of the fixed-or-variable debate has to be a consideration of where interest rates are headed.

The Reserve Bank's decision to hold off on a rate rise this month, combined with concerns that the European sovereign debt crisis is the beginning of GFC II, might lead people to think that the Reserve has taken further rate increases off its agenda.

Bank economists say it would be a mistake to think that way. All of them are forecasting higher rates later this year and throughout 2011.

ANZ forecasts that the official cash rate will rise from its current level of 4.5 per cent to 4.75 per cent in the September quarter and then to 5 per cent by the end of the year.

It expects the Reserve to have pushed cash rates to 5.5 per cent by June next year. Westpac's latest forecast is for the cash rate to hit 5 per cent by the end of the year and to reach 5.5 per cent by September next year.

The Commonwealth Bank is more bearish. It expects the cash rate to be 5 per cent by the end of the year and 6 per cent by the end of 2011. Its view is that the strength of the Asian economy is the real determining factor for Australian monetary policy, not what is happening in Europe.

The National Australia Bank has a similar view. It is forecasting a cash rate of 5.25 per cent by the end of the year and 6 per cent by the end of 2011.

Its latest commentary says: "The key driver of our upward forecast is the additional income generated by sharply higher forecasts for the terms of trade - up 18 per cent over 2010. That, in turn, flows over into additional investment, profits and consumption."

Mortgage market data from a number of sources over the past couple of weeks shows an increase in the take-up of fixed-rate home loans.

Such loans made up 3.26 per cent of the Mortgage Choice approvals in May, compared with 1.77 per cent in April.

The Australian Bureau of Statistics' housing finance data shows fixed-rate loans dropped from a peak of 8 per cent of all dwellings financed in June last year to a low of 2.1 per cent in February and March. There was a pick-up to 2.4 per cent in April.

The head of macro markets at AMP Capital Investors, Simon Warner, says fixed-rate loans are at attractive levels: "Some of them are lower now than when the Reserve Bank started putting rates up last year. This is definitely an opportunity for borrowers," he says.

"It is hard to see them going any lower than they are now. Some big economic issue would have to come into play for that to happen. If I were a risk-averse borrower, I would be locking in."

Most borrowers do take a risk-averse approach to their borrowings.

The deputy governor of the Reserve Bank, Ric Battellino, said in a speech in Sydney this month that half of all home loan borrowers have been ahead of schedule on loan repayments in recent months.

He says the current arrears rate on home loans is 0.7 per cent, which has increased over the past couple of years but is one of the lowest levels of non-performing loans among the developed economies.

However, there is also plenty of evidence that borrowers are getting into trouble.

Westpac reported in May that the number of mortgage customers in its hardship assistance program (people who have approached the bank to have their repayment terms varied because they are in financial difficulty) had doubled since September.

According to the most recent Fujitsu Consulting Mortgage Stress-O-Meter, released in March, the number of severely stressed households (those facing a forced sale) has risen this year as a result of higher interest rates.

Borrowers tend to shy away from fixed rates for several reasons. They are inflexible, providing no opportunity for additional repayments, offsets or redraws.

Borrowers risk being locked into a rate that ends up being higher than the variable rate if rates start to fall; and if borrowers want to get out of a fixed-rate loan they are required to pay high break costs. Break fees are set as a percentage of the loan amount or several months' interest payments. Whichever way they are calculated, they can cost thousands of dollars.

The Reserve has reported that bank-fee income on home loans increased by 17 per cent last year. In its report on fees, the Reserve says: "The available information suggests that break fees on fixed-rate loans accounted for a significant proportion of the overall growth in fees."

One lender is hoping to offer the best of both worlds with the launch of a capped-rate loan.

Opportune Home Loans has a loan with a starting rate of 7.04 per cent and a cap of 7.49 per cent for the first two years. The managing director of Opportune, Paul Ryan, says borrowers are put off fixed-rate loans because they are inflexible. "A capped-rate loan gives borrowers that flexibility with some security," he says.

KEEPING IT ALL IN THE FAMILY MAKES SENSE

Jacqui and Anthony Booth both work in the property industry and, although only in their 20s, have long had a shared interest in property investment.

So it made sense to the brother and sister from Newcastle to pool their resources and apply jointly for a loan to buy their first property.

In March they settled on a four-bedroom house in Cardiff, in the Lake Macquarie district near Newcastle, and set up a shared house with a couple of friends. They had a 10 per cent deposit and borrowed from Bankwest, through a Mortgage Choice broker.

"No one thought it was strange that my brother and I were going into this together," Jacqui says. "Lots of people my age want to get into the market but they can't get in. It is too expensive. The thing people have been saying to us is that they would like to have someone to buy with."

According to a Mortgage Choice home buyer survey, conducted earlier this year, 3 per cent of first home buyers entered into a co-operative arrangement with a family member, friend or work colleague to buy a property. Two per cent used a gift from parents or had their parents act as guarantor.

Anthony, 28, is a quantity surveyor and Jacqui, 24, prepares depreciation schedules for property investors.

Neither is married but they have talked about how they will handle things when one or the other needs a family home.

Jacqui says: "We have an agreement so that things don't get messy when either of us gets married. We see this as the first of a number of properties in a portfolio. We will definitely be buying one more."

Stress test your home loan

Banks and other financial institutions are subjected to stress tests by their regulators every year or so to make sure they are in good shape to handle sudden downturns in economic and market conditions.

Why not apply stress tests to consumers, so they could get a picture of how interest rate rises, falling asset values or loss of income would affect them?

This proposal was put to last year's Parliamentary Joint Committee of Corporations and Financial Services inquiry into financial products and services, the Ripoll inquiry, by the Institute of Actuaries (IAA), which argued that personal stress tests should be compulsory for anyone entering into a major financial commitment.

A former president of the IAA and co-author of the Ripoll submission, Geoff Burgess, says the two main problems people face when they make financial commitments are borrowing too heavily and investing where there is insufficient diversification. Another problem is loss of income.

"What we proposed was a uniform set of scenarios, to be devised by a regulator such as the Australian Securities and Investments Commission, that would show people the financial outcomes of interest rates going up, asset prices falling and so on," he says.

Lenders usually look at how borrowers would cope with interest rates up 2 percentage points but interest rates have risen 1.5 percentage points since October and may go up that much again by the end of 2011.

A stress test would study the effect of a bigger rise — maybe 3 or 4 percentage points. When asset values are falling, lenders may require extra security or cash if maximum loan-to-valuation ratios are breached.