RMBS and the quest for higher yields

Supported by a combination of record-low interest rates and government support programs, the house price surge is set to continue until the rest of the Australian economy recovers to pre-COVID levels. With the widespread prevalence of this fact, we see home lending levels driven to record highs. In March alone there were over 64,300 mortgages issued for both owner-occupiers and investors, averaging more than 2,000 a day. The increase in lending is further highlighted when compared to May last year, during the height of the pandemic, with NSW seeing a 72 percent increase, Victoria 60 percent and Western Australia seeing an increase of 664 percent compared to the number of first-home buyer loans in May last year.

However, despite high levels of activity in the residential mortgage sector, the rest of the Australian economy and furthermore the global economy continues to experience a rocky road to economic recovery. Consequently, the combination of low benchmark interest rates, coupled with comparatively weak economic activity in other sectors, have lead many investors to be actively search for higher yields. Many investors ended up turning to Residential Mortgage Backed Securities(RMBS) as a means of securing higher yield by leveraging the booming residential market without directly participating in the housing market. In the Australian market RMBS were initially introduced as an alternative to bank deposits as a source of funding for residential mortgages. Consequently, it enabled smaller authorized deposit-taking institutions or institutions with limited access to deposit funding to compete in the market. However, its popularity plummeted alongside the confidence in it’s asset class following the GFC, despite low levels of mortgage default in Australia.

RMBS’ newfound popularity is evident over the last couple weeks, with a slew of non-bank institution increasing their RMBS issuance size, such as Firstmac’s initial $1 billion increased to $2 billion, Resimac planning an additional $1 billion offering, following its $1.5 billion offering in March, which was the company’s biggest since the financial crisis and La Trobe Financial has priced a $1.25-billion residential mortgage-backed securities (RMBS) issuance. Closer inspection of investor reception to these offering, further emphasize the popularity of the RMBS in the current economic climate. James Austin, chief financial officer for Firstmac, said six of the 29 backers of the deal were investing in non-bank Australian RMBS for the first time, a sign of the intense pressure on fixed-income investors. La Trobe Financial’s issuance revealed that 65 percent of transactions were with institutional investors and 71 percent was placed with international investors.

However RMBS is not the only option for high yield securities in the current economic climate, as their exists alternatives with slightly different characteristics, potentially being more suitable for certain investors. At it’s base level, RMBS is a form of Pooled Mortgage Schemes, which benefits from spreading risk over a pool of loans and is suitable for passive investors. However, downsides to this are investors not possessing direct control over where the funds are being invested, alongside higher management fees as the funds manager has to compare and juggle a large variety of loans. The other main form of mortgage scheme is contributory mortgage fund which is often called direct mortgage fund because its pools investment capital until it is able to take mortgage security of a single asset. As it is only targeted towards a single asset, investors possess far greater control over their investment choice, enabling more active investors to assess individual mortgage investments against their own risk profile, thereby determining suitability with their own financial goals and situation. Traditionally only utilized for large commercial projects, contributory mortgage schemes are becoming more popular for funding small residential projects, especially since the main drawbacks for lack of diversification are reduced as an individual property’s downside risk are low during a booming house market.

At KBRZ we strive to provide products that best suit the needs of our clients, contact us today to find out more about financial products that may be more suitable for you than RMBS.


Home Loan Terminology Explained

Offset Account
An offset account is a savings account related to your home loan. It ‘offsets’ the principal of your loan so that the interest payable on the loan is reduced. For example, if the balance on your home loan is $250,000 and at the same time you have $10,000 on your offset account. Assuming an interest rate of 6%, then you would only need to pay interest of (250,000-10,000)*6% = $14,400. In other words, you only pay interest for the $240,000 borrowed.

Redraw facility
A redraw facility is usually attached to flexible rate loans and some fixed rate loans. The redraw facility allows access to the extra repayments that you have made on your loan above the required minimum repayments.
For instance, if the monthly minimum repayment on your loan is $700, but your actual monthly repayment amounted to $900, then after 12 months your additional repayments will sum to (900-700)*12 = $2,400. The redraw facility allows you to access the $2,400.

Loan to Value Ratio
The loan to value ratio is commonly referred to as LVR. As its name suggests, it is the ratio of the loan amount and the value of your property. LVR for a first mortgage is usually 70-80%.

Interest Only
An ‘interest-only’ home loan means that a borrower only pays the interest component of the loan. The principal (original borrowed amount) of the loan will be repaid in a lump sum at the end of the home loan period or when the property is sold. Interest-only loans can, and often, revert to a principal-and-interest loan after an initial set period.

Refinancing basically refers to when you take out a new mortgage to repay an existing loan. The new borrowing can be with the same lender for your existing loan, or it can be with a different lender, depending on your needs and purpose to refinance. Reasons to refinance can include to cash out, to consolidate debt, or to obtain a lower interest rate.

Stamp Duty
Stamp duty is a State Government charge that relates to the transfer of property. The amount varies between the states.

Interested in obtaining a loan?
If this is the case, a good first step is to speak to our team at KBRZ to assess your options. With our extensive network and years of experience in the industry, our team at KBRZ can provide tailored loan solutions that will allow you to maximize your wealth regardless of your circumstances.

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Should you BUY or RENT a house in the current housing market?

While it may feel like property prices are skyrocketing out of reach, the majority of Australian homes are actually cheaper to buy than rent over the next decade. The latest REA Insight Report reveals it is cheaper to buy than rent for approximately 57% of properties across Australia, based on a housing price growth rate of 3% per year over the next decade.

Why is it cheaper to buy than rent?
Record-low mortgage interest rates in the current property market is the main driver for favourable buying conditions.
Interest rates can currently be fixed below 2% per year and the Reserve Bank of Australia has committed to maintaining low interest rates until at least 2024. This certainty that mortgage costs are not going to increase rapidly provides comfort for buyers that are borrowing large amounts.

Given these low-interest expenses, property price growth will likely offset the additional costs of owning a property, such as stamp duty and maintenance costs.

State Breakdown
Below is the REA’s state-by-state breakdown showing the percentage of suburbs for each state where it is cheaper to buy than rent (For Houses with 3 bedrooms and Units with 2 bedrooms).

Australia: 4,561 (59.1%) for houses, 2,666 (83.8%) for units
NSW: 966 (41.3%) for houses, 695 (69.1%) for units
Victoria: 728 (42.2%) for houses, 384 (67.6%) for units
Queensland: 1,427 (85.4%) for houses, 627 (98.4%) for units
South Australia: 495 (73.6%) for houses, 363 (98.4%) for units
Western Australia: 434 (69.7%) for houses, 314 (98.4%) for units
Tasmania: 363 (73.2%) for houses, 137 (100%) for units
Northern Territory: 81 (97.6%) for houses, 55 (100%) for units
ACT: 76 (65.7%) for houses, 91 (100%) for units

The analysis assumes that buyers already have access to a 20% deposit. However, saving up for a deposit still remains as the biggest challenge for many buyers as prices have risen – particularly for those entering the market for the first time.

How we can help you start buying.
Saving for a house deposit is the biggest hurdle for many buyers – especially for first home buyers as prices continue to rise in the current housing market. However there is good news. Our team at KBRZ has several potential options to help you get a foot on the property ladder quicker.

A good first step is to speak to our team at KBRZ to assess your options. If you are currently interested in purchasing a property, or if you have any further questions, please feel free to contact us today. With our extensive network and years of experience in the industry, our team at KBRZ can provide tailored investment loan solutions that will allow you to maximize your wealth regardless of your circumstances.


Why Invest in Australian Property?

Due to COVID-19, Australia experienced its first recession in over 30 years. While much of the globe has faced substantial losses in overall property value, the real estate markets in major Australian cities have bounced back. And Australian property has once again proven its strength. As people now seek to find a safe place to invest, few opportunities can compete with Australian real estate market. So, why investors favor Australian property? 

Low Interest Rates

Back in November, the Reserve Bank has further cut the interest rates from historic low of 0.25 percent to record-low of 0.1 percent to stimulate Australian economic growth. Thanks to the recession, mortgage rates are also lowered and for the first time in Australian history, investors can pay off the loans with such incredibly low costs.

At KBRZ, we can offer interest rates from 1.79% for first and second mortgage. You may check more information here. If you have any questions, please feel free to contact us

Government Incentives

We saw a drop in property prices in 2020, yet prices have been bouncing back quickly. Other than the record-low interest rates, government also published several incentives to help eligible buyers to get their first property.

First home buyers can take advantage of those incentives to significantly lower the amount of funds required to obtain their dream home. However, there are some eligibility requirements, such as you must be an individual, over 18, and an Australian citizen or permanent resident. Here, we provide a brief overview of some benefits provided in NSW.

First Home Buyers Assistance Scheme
As a first home buyer in NSW, you may be eligible for a full or partial exemption on transfer duty depending on the value and type of the property.

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First Home Owner Grant (New Home)
In addition to the First Home Buyers Assistance Scheme, if you are buying a new home that no-one has lived in before and it worth no more than $750,000, you may be eligible for a $10,000 grant.

First Home Loan Deposit Scheme
Normally, borrowing a home loan requires 20% deposit of the value of the purchased property or you will need to purchase lenders mortgage insurance if your deposit is less than 20%. The First Home Loan Deposit Scheme allows first home buyers to purchase their properties with deposit as low as 5% without additional cost. However, this scheme is usually limited to 10,000 borrowers in a financial year and has several eligibility requirements, such as applicants must be current Australian citizens, prospective owner-occupier and earn less than $125,000 annually if single, or less than $200,000 a year for couples.

Potential Growth & Returns

Australian property, especially in major cities such as Sydney and Melbourne, has always been extremely enticing for international investors. Over the last ten years, the average property value in Australia has doubled and many buyers have benefited a lot from the capital gain.

Other than the capital gain from selling the property, you may also get constant returns through rental if you do not live inside. If these returns are high enough, they can be used to cover the repayments for the home loan and the property may potentially pay off the mortgage itself. Investors can benefit significantly from this, especially interest rates are record-low for now. 


The security of Australian property is well-noticed around the world and it is one of the key reasons why investors jump into Australian real estate market. Unlike the high risk and volatility of stock markets, investment in property is more secured with a relatively fixed return and actual property asset. Back in 2009, most other modernized market experienced a significant drop, yet the pricing for Australian properties did not fluctuate much. Last year’s volatile market due to COVID-19 once again proved that investing in property is a sage decision. Australian property has shown its ability to continue growing in value and maintaining a stable market. Once the border is open, it is quite clear that both the real estate and rental market will pick up and demands will increase. 

When it comes to making the decision to invest in property, the key, like any large financial decision, is to do your research thoroughly, consider your unique circumstances, and find the best property that is right for you.


Refinance & Second Mortgage

Every time you make a mortgage payment, you gain some equity in your property. You may already know you can use this equity to borrow some money by taking a refinance or a second mortgage. But what are the differences?


Refinancing is the process of replacing your primary mortgage with an entirely new loan that pays off the existing mortgage. Homeowners often refinance a mortgage to obtain a lower interest rate, change the loan term or get some cash out. And no doubt, there are two common types of refinances, rate and term refinance and cash-out refinance.

A rate-and-term refinance allows you to change your loan setup without affecting your principal balance. It allows you to lower your monthly payments by taking a longer term or save on interest with a shorter term. You can also refinance to a lower interest rate if the market rates are lower. However, do note there will be some costs associated with closing and funds from the new loan paying off the old loan.

On the other hand, cash-out refinance allows you to take out some cash from the home equity by taking a new loan with a higher principal. For example, if you currently have a loan with a $100,000 principal balance and you need $50,000 cash for other uses. You can apply for a new loan valued at $150,000 and emerge with $50,000 cash and a new mortgage with a $150,000 principal.

Second Mortgage

You can also take out a second mortgage to obtain some extra money. Unlike a cash-out refinance, you will get a separate mortgage that stands alone from the original home loan. The second mortgage is also secured by the property but is subordinate to the first mortgage. If the homeowner defaults on the loans, lender holding the first mortgage has priority to proceeds from a sale or foreclosure. Therefore, the second mortgage lender carries more risk and often requires a higher interest rate.

Refinance and second mortgage can benefit homeowners if they are used correctly. When it comes to deciding the best move for you, consider your financial needs, equity available and current market situation. If current interest rates are lower, refinance may be the better choice because you will get a lower rate on your entire loan and cash out if needed. If rates have gone up, taking out a second mortgage may make more sense than refinancing the whole loan at a higher rate.

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