Mortgage Rates: Why Refinancing to a Non Bank Home Loan Is a Good Idea Right Now for Homeowners

As Mr Mortgage predicted last month, the Central Bank did not raise interest rates in October. He is now saying its time to move away from the big four banks, and to a non bank securitised mortgage lender if you want to have lower mortgage rates over the next twelve months. Here’s why.

The big banks are itching to raise mortgage rates above official cash rates

The big banks were all set to jack rates up on you under the cover an official rate rise. So this would mean that you would get two mortgage rate rises at the same time. Can you afford that? I don’t think so.

Central bank interest rates “talk up” outsmarts the financial markets and the banks

The Reserve Bank likes to outsmart the financial markets every so often, and it did in October. It made noises that sounded like a rate rise was coming the Aussie dollar went up, and the reasons for the rate rise were out weighed by the reasons to hold on an interest rates rise.

In effect the RBA board figures if by talking about a rate rise can do the job of an actual rate rise, its done it’s job of controlling inflation and keeping unemployment low, so no rate rise is necessary. Am I the only one that figured this out? No, but the vast majority of economic experts believe their own spin.

Reserve Bank interest rate talk up creates a gain without the pain of increased mortgage repayments.

The other benefit that the RBA has in employing the talk rates up is, that it still has the interest rate card to play if home buyers and consumers stop listening to the messenger of doom. So the reserve Bank has stretched the value of a rate rise and reduced the pain of the real thing. I like it.

In the game of chess the threat of doing something can be more powerful than actually making the move. This is the smart game that the Reserve Bank is playing where ever it can, because they are persuading people to do what the want, without actually inflicting the pain of a mortgage rate rise.

Why you should move your home loan away from the big banks if you are worried about increasing mortgage rates.

Based on their own assumptions,the major banks made deep losses betting the wrong way. I am talking millions of dollars in a few weeks from each banks bottom line.

The major banks tippied that the RBA would raise the official cash rate by 25 basis points to 4.75 per cent.

Not only that, they have been raising hundreds of millions of dollars in short-term funds based on pricing that factored in a higher cash rate. Hmmm? I wonder where they will be getting the money from to fill that hole?

These banks are believed to be sitting on these big losses and are now looking for someone to milk it from. Don’t let that be you. Move your loan account now.

Mortgage rates: Lessons learned.

The major banks will have to raise mortgage interest rates, without the Reserve Bank moving interest rates sooner or later, and the RBA knows this.

The RBA can now sit back and watch the major banks squirm, knowing they’re under pressure to raise interest rates themselves out of cycle with the Central bank. This tension will create more uncertainty of a rate rise in coming months and by then the banks will have to move on mortgage rates even if the RBA sits on its hands.

Result? The RBA can leave interest rates as is because the major banks will do its job for them. That is, if cooling the housing markets further and moderating consumer spending before the holidays are its aims.

Are you worried about a mortgage interest rate hike?

If you are worried about rising mortgage rates I suggest that you start shopping for a “non bank mortgage lender”. They have lower interest rates, lower or no ongoing fees and charges and they need your business right now, so they will look after you better.

How Are Mortgage Rates Determined?

How mortgage loan rates are determined and what causes them to move is an absolute mystery to most folks – and those who think they know are usually wrong. As a former mortgage banker I can tell you that a lot of people in the mortgage industry can’t even give you an accurate answer to that question. So what’s the mystery and misinformation all about? Let’s take a simple look, in plain English, at what moves mortgage rates and (just as importantly) what does not.

Ask a bunch of your friends what mortgage rates are based on and they will tell you they are not sure but it has something to do with Ben Bernanke and the Federal Reserve. Some of your more financially savvy friends may tell you that rates are based on the 10 year treasury yield. Both answers are incorrect. The simple truth is that mortgage rates are based on the mortgage backed securities (MBS) market. I know – this is starting to sound scary. I promise to keep it simple – here’s a quick explanation of what a mortgage backed security is. Banks and mortgage lenders take large bundles of their mortgage loans and pool them together to be sold as investments. These debt obligations trade as bonds (mortgage backed securities). An investor can invest in a pool of mortgage loans and receive income based on how those loans perform (do they pay on time etc…). The mortgage backed securities market is a segment of the overall bond market. The MBS market reacts and moves based on economic news and indicators similar to how the overall bond market works.

To take this one step further, here’s the technical explanation for those of you who are knowledgeable in matters of finance. MBS rates, and consequently mortgage rates, are directly determined by variances (or spreads) between it (MBS Rates) and a financial derivative instrument called interest rate swaps. These swaps are used by investors to manage, hedge, or speculate on risk. The rate on a swap rate is a fixed interest rate that one would receive in exchange for the uncertainty of having to pay the short-term LIBOR (London Interbank Offered Rate) rate over time. Additionally, mortgage rates are influenced by relative spreads between interest rate swaps and treasury notes.

So why does everyone think that the Federal Reserve controls mortgage rates? Your guess is as good as mine. The most likely cause is that misinformed people in the media just keep talking about the fact that the fed lowered interest rates and mortgage rates will follow suit – and we keep listening. The fact of the matter is that the actions of the Federal Reserve do have an impact on mortgage rates but it is indirect and often extremely delayed. When the fed announces that they are lowering short term interest rates, this has an immediate impact on some types of consumer loans such as home equity loans and credit cards. It also has a negative affect on the interest rates on saving vehicles like money market accounts and certificates of deposit (because those rates go down as well). It does not however, have an immediate or direct impact on mortgage rates. The indirect impact on mortgage rates of the fed easing (lowering) short term rates is that it causes investors to flee investments like money markets and CDs and put more money into the stock and bond markets. When people buy more bonds (including mortgage backed securities) this causes bond prices to rise. When bond prices rise, the yields of those bonds go down. Lower yields on mortgage backed securities equal lower rates. This chain of events that started with the fed lowering rates and ended with mortgage rates going down could take months to unfold and dozens of other economic events could intervene and keep that chain of events from happening as predicted.

The other common misconception is that mortgage rates are tied to the long term Treasury notes. Not true. If you look at long term charts for mortgage rates and long term treasuries side by side you will see that they trend together over a long period of time. As mentioned above, the spread between interest rate swaps and treasury notes do influence mortgage rates – but it is inaccurate to say that there is a direct link between the two.

We’ve just covered the basics on how long term mortgage loan rates such as the 30 year fixed rate are determined. Short term mortgages like 5 year ARMs and 7 year ARMs can be based on a number of different indices.

Mortgage Rates – Types of Mortgage Rates and Which is the Best

For a layman like me, all this financial talk seems to confuse me even more. Unfortunately, mortgages are not something we can just forget exists, because at the end of the day, we will all need to live, and in order to live, we need a place to live in, and that is where mortgages come in. So what is a mortgage? A mortgage is a security in estate by a lender as a security for a debt. So what are rates? It is the rate or rate of interest applied to the loan as to be paid by the debtor. So let’s take a look at the different types of mortgage rates.

The first type would be fixed rate mortgage. I presume that a fixed rate is the most well known of all mortgages purely because it covers a property for a long term, and the rates are fixed throughout the term. There are four types of fixed rate, the first being 30 year fixed rate, the second being 15 year fixed rate mortgages, the third being biweekly mortgages and the last, “convertible” Mortgages. Although the best thing about a fixed rate mortgage is not having to worry that your interest rate would increase throughout the term, there is still the price factor in which the amount charged is higher compared with fluctuating interest rates because you will be paying extra for that “security”, of knowing that your payments will never change.

Another one is called a premium mortgage rate. This type is a hybrid of a fixed rate and an adjustable rate mortgage. This usually allows the buyer to experience the secured payment like with a fixed rate for a certain period of time, say 10 years, and then the rate is expected to fluctuate according to the variable conditions.

There are also adjustable mortgage rates. An adjustable rate is a mortgage whereby the rate of payment changes depending on variable indices. Some common indices in the United States would be the National Average Contract and the 12-month Treasury Average Index (MTA). These kind of mortgage is best for those not intending to keep a property for a long period of time, for example someone who is planning to move to another location after some time. So among these mortgage rates, which would you pick? It entirely depends on what you need at the time and your ability to pay as well to find the best mortgage for you.